Subsidize the Poor, Soak the Rich

The Republicans are out with yet another tax reform plan. This time Senator Marco Rubio of Florida has joined with Senator Mike Lee of Utah to give us the “Economic Growth and Family Fairness Tax Reform Plan.” Although it is touted as a “pro-growth, pro-family tax reform plan” and contains many good features, it also subsidizes the poor and soaks the rich.

Rubio and Lee rightly say in their introduction that “our current system taxes too much, taxes unfairly, and stifles economic opportunity for American families, businesses, and individuals.” But because it is a tax reform plan rather than a tax relief plan, it is doomed from the very beginning to fall short.

The Rubio-Lee tax reform plan, as it has been called, has many commendable features. It simplifies the tax code, lowers the top tax rate, reduces the number of tax brackets from 10, 15, 25, 28, 33, 35, and 39.6 percent to 15 and 35 percent, eliminates the estate tax, eliminates the tax on capital gains and interest, ends double-taxation by eliminating the tax on dividends, eliminates the Alternative Minimum Tax, cuts the top corporate tax rate to 25 percent, lowers the marginal tax rate for pass-through business income to 25 percent, allows businesses to immediately write-off investments instead of requiring multi-year depreciation, and makes the corporate income tax territorial by exempting the active foreign income of multinational corporations.

So, what’s not to like?

If this was all the Rubio-Lee tax reform plan did then we could say that although it is not ideal in the libertarian sense since it does not eliminate the income tax altogether, it is certainly sound tax policy that is a step in the right direction. Reducing the number of tax brackets is always good because it makes the tax code less progressive. Cutting any tax rate and eliminating any tax are always good things because they allow taxpayers to keep more of their money in their pockets and out of the hands of Uncle Sam. Lowering the tax burden on businesses is always a good thing because that is reducing expenses that have to be built into the prices of the products we buy.

But the plan doesn’t stop there. It eliminates the head of household filing status. It raises the lowest tax bracket from 10 to 15 percent. It eliminates all itemized tax deductions except those for charitable giving and mortgage interest. Additionally, the mortgage interest deduction would be limited to interest on up to $300,000 of home mortgage debt, down from the current $1 million. This is the equivalent of raising tax rates. The standard deduction and personal exemption would be replaced with a new refundable personal credit of $2,000 for individuals and $4,000 for joint filers. The plan would also establish an additional child tax credit of $2,500—on top of the current $1,000 credit—that would be partly refundable and not phase out with rising income. The fully refundable Earned Income Tax Credit would be retained, but should be retooled “in coordination with means-tested welfare programs to create a welfare system that works better and removes poverty traps.” Perhaps the most troublesome provision of the Rubio-Lee plan is that the maximum tax rate of 35 percent is imposed on any taxable income over $75,000 for single taxpayers and $150,000 for joint filers. Currently, for tax year 2015, one has to earn over $411,500 to be in the 35 percent bracket.

Subsidize the poor, soak the rich.

The two fundamental flaws of the Rubio-Lee and all other Republican tax reform plans are: (1) They all maintain that the monstrosity known as the federal government needs to be funded. (2) They all assume that this government is entitled to a portion of every American’s income.

Republicans may differ among themselves and with Democrats on how many tax brackets there should be, what the tax rates should be, what activities should be taxed, what tax deductions and credits should be allowed, the amount and nature of any allowable tax deductions and credits, and to what extent businesses should be taxed, but all parties agree that the government knows best what to do with our money.

Rubio and Lee say in the introduction to their “Economic Growth and Family Fairness Tax Reform Plan” that they “invite constructive criticism and proposals to improve this plan.” I have offered some constructive criticism and will now offer my proposals to improve the plan: cut taxes, for everyone, and then cut them again.