Bush Gets It Mostly Right on Taxes

Jeb Bush is calling for a reform that would make the tax code more pro-growth, reduce the distorting influence of tax breaks, offer tax relief far and wide, and swell the deficit. We give the plan two cheers, as we did for Mitt Romney’s tax plan in 2012.

Tax rates would drop a great deal: There would be four effective brackets, with rates of 0, 10, 25, and 28 percent. The standard deduction would increase, which both diminishes the tax burden for non-itemizers and, by reducing the incentive to itemize, diminishes the importance of tax breaks. The deduction for state and local taxes, which encourages governmental growth, would disappear. Childless people working for low wages would be eligible for a doubled earned-income tax credit, making them more likely to get and stay in the workforce. The estate tax and the alternative minimum tax would end, and taxes on capital gains and dividends would fall to 20 percent.

Businesses would be taxed more lightly and rationally. The tax code would no longer encourage them to seek financing through debt rather than equity. Corporate tax rates would fall to 20 percent, and non-corporate business-tax rates to 28 percent; taxes would be imposed on activity that takes place on U.S. soil, rather than punishing American businesses for investing overseas and then bringing the money home; and capital investments would be deductible immediately instead of over a long period of time.

There will be squawks on Wall Street over Bush’s decision to begin taxing carried interest at the rates of ordinary income rather than capital gains. But the difference between his plan and the status quo — carried interest is now taxed at 23.8 percent and he wants 28 percent — is too small for the rest of the world to have any reason to care either way.

#share#We have long favored the reduction of tax rates and tax bills, and so we like a lot of what Bush is offering. But we also have three concerns. The first is that the plan is likely to reduce federal revenues quite a lot. Some economists who support it say that it would reduce them by $3.4 trillion over ten years in the absence of higher growth. They expect tax and regulatory reform to produce that growth, but it cannot be counted on. If Bush offers spending cuts to match lost revenues, that’s fine. If not, then it seems imprudent, especially as the challenge of financing old-age entitlements gets ever harder.

Our second concern is that the tax cuts look top-heavy. While we await more definitive analyses, it seems likely that this plan will increase after-tax incomes by a much larger percentage for households making $500,000 a year than for ones making $50,000. The plan does very little to lighten the burden of payroll taxes, which are heavier than income taxes for most people. Republicans should be countering the caricature of themselves as slavishly devoted to the interests of rich people and corporations, not playing into it.

#related#And third, the plan taxes one-earner couples more heavily than two-earner couples that make the same income. Like President Obama, who offered a similar proposal, Bush wants to encourage wives who aren’t in the paid-labor force to join it. But the right way to do that is not to create a new homemaker penalty in the tax code (especially since federal policy already includes a bias against large families). George W. Bush made a similar proposal during the 2000 campaign but eventually dropped it; we hope his brother will follow suit.

All tax proposals change between their initial unveiling and their eventual signing, and we expect the same to happen should Bush become president. We take this plan not as the final word, but as a first word — and a pretty good one.