The Lee-Rubio tax blueprint

Author: Allen B. West and Pam Villarreal

Source: The Washington Times

Republican Sens. Mike Lee of Utah and Marco Rubio of Florida have released a blueprint for federal tax reform called “The Economic Growth and Family Fairness Tax Plan.” First, we should not embrace the language of progressive socialism in believing tax reform should have as a goal to advance “family fairness.” The plan should simply be entitled “The American Growth and Opportunity Plan.” That said, the Lee-Rubio plan is a great improvement over the current system.

For the individual tax structure, the plan introduces a two-tier system to replace the current seven tax brackets. This plan moves America from a progressive tax structure to a bifurcated flat tax. All income earned up to $75,000 for singles and $150,000 for joint filers would be taxed at 15 percent. All income earned over those thresholds would be taxed at 35 percent. While a two-tiered system moves us closer to a flat tax, the 35 percent bracket could raise the tax burden for households earning less than $200,000 a year, compared to the current system. A top rate of 22 percent to 25 percent would be less burdensome.

The Lee-Rubio plan also proposes to increase the child tax credit to $2,500, up from $1,000. This is designed to eliminate the supposed bias against parents, who not only pay payroll taxes, but also pay to raise children who will eventually pay for future retirees through their own payroll taxes. However, if the child tax credit is to be expanded, the National Center for Policy Analysis (NCPA) recommends making it contingent on parents using it to provide health insurance for their children; or, if the children are otherwise covered, putting aside money in a Health Savings Account for the family’s future medical needs.

The Lee-Rubio plan keeps only two individual tax deductions — mortgage interest and charitable contributions. These two exemptions promote opportunities for homeownership — rather than government equality of outcomes programs — and the seminal premise of America, that we take care of our own. But continuing the mortgage interest deduction contradicts a premise of the Rubio-Lee plan — that interest on savings and investment should not be taxed and interest on borrowing should not be deductible.

For the corporate tax structure, the Lee-Rubio plan proposes a 25 percent tax rate — lower than the present 39.6 percent rate, which is the highest rate in the world. This rate could be lower. In an NCPA study, professor Larry Kotlikoff of Boston University estimated the federal government could raise the same amount of money as the current corporate tax with a tax rate of only 9 percent, and a transitional wage or consumption tax that would phase out over time.

The Lee-Rubio plan allows multinational firms to transition to a territorial tax system where income earned in a foreign country is subject to the income tax in that country. Tax policies and rates that are favorable to economic growth will inspire the return of capital to America, reducing corporate inversions — truly a market behavioral response to the coercive nature of the current administration’s philosophy on taxation. Lee-Rubio would also allow the nearly tax-free repatriation of the trillions of dollars of capital outside of America in order to spur domestic economic growth. After all, it is capital, not government spending or quantitative easing, that will reinvigorate production and manufacturing in America.

Other good policy aspects of the Lee-Rubio plan are the 100 percent deduction of capital investments in the same year they are made. Further, business income would be taxed only at the level of the business entity rather than as personal income, so that business owners and savers with a 401(k) or shares of stock aren’t taxed twice on the same income. This is a crucial step toward eliminating the double taxation of income and capital that is rampant in our tax code. The estate tax would be eliminated as well.

Of course, there are concerns that such a plan would increase the deficit; thus, this plan should be scored using a dynamic analytical model. However, this the real question that must be posed: Can tax reform policy done in a vacuum successfully restore economic growth in America?

We believe that not just tax reform but also government reform is required. The real behavior that has to be reformed, changed and modified is that of a federal government and its spending practices. First and foremost, the federal government must move away from baseline budgeting practices toward a zero-based budget system. The belief that we have made progress cutting wasteful government spending is actually a false narrative — we are merely cutting the rate of growth of spending. This is why there are programs, bureaucracies and agencies that consistently waste hard-earned American taxpayer dollars.

The Lee-Rubio plan is fundamentally sound and a great proposal — just drop the “fairness” tag. The greater reform and plan needed is how we can tackle the incessant lack of priority when it comes to federal government spending.