Ramesh and Yuval have done a thorough job of covering the basics of the new Lee-Rubio tax reform proposal, which has already attracted a great deal of favorable attention from the right and hostile attention from the left. Since Lee-Rubio is unlikely to become law in the next few years, you might be wondering why it matters at all. As Ramesh has argued, what’s really important about Lee-Rubio is not the specific tax rates it proposes but rather the basic political bargain it represents: conservatives should strive to make the tax code more growth-friendly, yet they should also seek middle-class tax relief. Conservatives don’t have to be persuaded of the virtues of a more growth-friendly code. They’re not put off by the idea of helping virtually everyone, including the already-rich, accumulate wealth. The case for middle-class tax relief, however, has proven more controversial, particularly in the form of the expanded child credit that is so central to Lee-Rubio’s political appeal. What conservative critics of the expanded child credit have missed is its potential role in restraining the growth of government. While raising taxes on high-income households is, whether conservatives like it or not, quite popular, raising them on middle-income households is profoundly unpopular. To put it crudely, tax cuts that primarily benefit small numbers of high-earners are always vulnerable to populists campaigning for their reversal. Tax cuts that primarily benefit large numbers of middle-earners, in contrast, are very hard to reverse, especially by those same populists. If your goal is to make it more difficult for future lawmakers to greatly increase federal expenditures, your best bet is to push for middle-class tax relief, a case Ramesh made quite convincingly in the pages of the Weekly Standard back in 2013. So Lee-Rubio is best understood not as a bill that Congress ought to pass tomorrow but as a blueprint for how conservatives should connect tax reform to middle-class aspiration.
There is another reason Lee-Rubio matters: it is a successful example of conservative political entrepreneurship, and as such it might inspire other conservatives to try their hand at advancing new ideas. The most successful entrepreneurs create new business models to capitalize on new markets and new appetites. Similarly, political entrepreneurs are sensitive to how the electorate is changing, and how new narratives or new policy ideas might tilt the political balance in their favor. But political entrepreneurship, like real entrepreneurship, can be risky. In reaching out to new constituencies, you might alienate old ones. Most elected officials are content to stick with what they know, which is why many of them get blindsided when the mood of the electorate abruptly shifts. The flipside is that successful political entrepreneurs win elections and advance their ideological goals. For whatever reason, Mike Lee and Marco Rubio have decided not to play it safe. If Lee and Rubio didn’t exist, conservatives would have to invent them.
How does this relate to the debate over taxes? For at least twenty years, the tax policy debate on the right has been stuck in a rut. The Bush-era tax cuts didn’t yield the political dividends that their champions might have hoped for, though the portion of them devoted to middle-class tax relief quickly became politically sacrosanct. (See? It’s hard to hike middle-class taxes.) Conservative activists have embraced consumption taxes like the Hall-Rabushka flat tax and the FairTax (and let’s never forget 9-9-9), but these ideas have met with resistance from the wider public, including from rank-and-file conservatives who fear that they go too far. Because of its generous exemption, the Hall-Rabuska flat tax is not exactly regressive, but it’s not terribly progressive either. The FairTax can be made less regressive through a system of universal rebates, leaving aside other concerns about its practicality. Both are far less progressive than most American voters would like their tax code to be. Consumption taxes aside, conservative activists have generally been keen on high-income rate reductions. Unfortunately, ordinary voters, including rank-and-file conservatives, have been less enthusiastic about the idea.
Lee and Rubio, to their great credit, identified an opportunity for growing the center-right coalition: recognizing the political appeal of meaningful middle-class tax relief, they’ve linked it to an ambitious shift towards the progressive taxation of consumption. They believe that this is a winning combination, and they may yet be proven right. For now, they’re succeeded in winning over conservative activists who might have been skeptical of middle-class tax relief on its own. This is no small feat. The next step is to take the same basic concept and make it more politically viable. This might prove more challenging, as some of the aspects of Lee-Rubio that appeal to conservative activists are likely to prove less appealing to swing voters, or for that matter conservatives who worry about its effect on the deficit. One of the reasons I’m so bullish on Lee-Rubio is that I can see a fairly straightforward path towards making it more palatable to skeptics who aren’t committed left-liberals. Instead of reducing the tax rate on capital gains, dividends, and interest to zero, for example, Lee-Rubio might instead adopt something like Canada’s Tax-Free Savings Accounts, which would move us in the same direction, albeit more gradually. That’s just one of many pay-fors that would address concerns about the deficit without compromising Lee-Rubio’s central virtues. Making Lee-Rubio more fiscally responsible is important, but it isn’t an insurmountable challenge.