The Corner

Politics & Policy

It Would Be an Improvement if Rubio and Lee Looked for New Pay-Fors for Their Amendment

In response to Roots Quest

Regular readers of the Corner have probably noticed that Ramesh and I disagree about family-oriented tax preferences. This is a friendly spat, since both of us would like to see lower corporate-tax rates and more tax relief for households. And we presumably both agree that we could achieve both goals if Republicans were willing to restrain spending.

But, in an imperfect world, we’re sometimes forced to pick and choose. At the risk of being presumptuous, part of our disagreement boils down to a difference between focusing on the short-run outlook and the long-run outlook.

Should we focus on more after-tax income now or more pre-tax income later?

I think Dan Mitchell summarized the issue very well back in 2014.

Which is why I, along with others, was so distressed yesterday about the amendment by Senators Rubio and Lee to expand, yet again, the child tax credit (CTC). Forget, for a moment, about the Rubio-Lee expansion of the Child Tax Credit, which is already doubled in the Senate bill. Forget about the impact on our nation’s finances, and forget about the additional level of spending this amendment would command. Forget about the fact that tax credits don’t produce economic growth and that they move us away from a better/fairer tax base. Forget about the fact that this amendment, by allowing the CTC to offset payroll taxes, will force general revenues to make up the difference and further the dangerous lack of transparency surrounding the Social Security Trust Fund.

At the heart of the massive conservative and free-market pushback to the Rubio-Lee amendment was the fact that they would have paid for the expansion of the CTC with an anti-growth policy: increasing the corporate income-tax rate (or by not lowering it to the full 20 percent as currently proposed). That’s right, they proposed an increase in spending paid for by forfeited growth due to a tax hike.

While many of us understand that compromises are necessary to get a good corporate tax reform, including the expansion of the CTC in both the House and the Senate bills, many also agree that not lowering the rate as low as possible is a good way to ruin good tax reform. Adam Michel at the Heritage Foundation lists the four ways to do just that. On the corporate rate he writes:

The single most important component of the current tax reform bill is the 20 percent corporate income tax rate. Any proposal to raise that rate above 20 percent decreases the economic growth, jobs, and wage increases the American people have been promised.

Most worrying is a proposal from Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, to increase the corporate tax rate to 22 percent to pay for an expansion of the refundable portion of the Child Tax Credit. The Senate tax bill already includes a doubling of the Child Tax Credit.

Raising the corporate tax rate to pay for an expanded child benefit would be counterproductive, as it would ultimately reduce the potential job opportunities and wage increase for working parents.

Ryan Ellis over at Forbes noted that raising the corporate rate for an extension of the CTC (a policy he personally supports) is a poison pill because of how it is paid for.

The pay-for is a poison pill. Hiking the corporate income tax rate from the Senate Finance bill unifies almost all Republicans in opposition to Rubio’s underlying amendment. The Leadership, the Committee, the great majority of Senator Rubio’s Republican colleagues, all Republican tax policy experts, and the entire business community will unite against this pay-for. It’s already been opposed by Grover Norquist’s Americans for Tax Reform, and much more opposition can be expected in the coming days.

Ellis was right, and the response from the conservative, business, and free-market community was large and loud. It was important enough that Rubio and Lee are rumored to introduce a new CTC-expansion amendment today with different pay-fors

If that’s the case, then good for them. I guess they may not have realized that their view on the matter wasn’t shared by most and that continuing in that direction would have a tremendous cost.

There are many ways to pay for the amendment, such as eliminating corporate SALT, play with various budget windows, adopting the House version of the mortgage-interest-deduction reform, eliminating the tax preferences ripe for termination listed here (some of which are in the House bill). But my favorite is, of course, to cut spending from the $48 trillion the federal government will spend during that period. I am sure, it won’t be hard for the senators to find ideas among their friends.

While I don’t support their amendment itself, it will be a relief if they move away from a proposal that would pay for the extension by giving up economic growth.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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