Since the fall of the Berlin Wall in 1989 eliminated the threat of global communism, the one glue that held together Republicans has been cutting top marginal tax rates to promote economic growth.
That Velcro is cracking.
The Republican presidential candidate Marco Rubio has proposed a huge tax cut. The centerpiece would be a new $2,500-per-child credit. This family-centric provision would amount to a $1.5 trillion tax reduction over 10 years. The top individual rate would be reduced to 35 percent from 39.6 percent, and it would kick in at a lower income level than the current 35 percent rate does.
The proposal, offered with the Florida senator’s colleague Mike Lee of Utah, reflects the thinking of the party’s “reform conservatives,” who believe Republican tax orthodoxy has focused too much on marginal cuts in the top rate and too little on struggling middle-class families. An intellectual leader of this group, Yuval Levin, editor of the influential policy journal “National Affairs,” insists the Lee-Rubio plan “is a very aggressive supply-side reform,” with “a change of emphasis.”
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Tax reform, he argues, “has to include tax relief for working families.”
Some adherents of supply-side economics, which has dominated Republican tax policy since Ronald Reagan was president, disagree. They are fine with the Rubio-Lee blueprint for corporate taxes – it reduces the top rate to 25 percent from 35 percent – but aren’t pleased that the top individual rate would be reduced by less than five percentage points.
“The reformocons’ view is the Reagan agenda is stale and we have to move to new ideas,” says Stephen Moore, an economist at the conservative Heritage Foundation. “The problem is the more you increase things like the child tax credit, the more you will move back to the 1960s and ’70s tax system with higher tax rates. Instead, we need much lower rates and a broader base.”
Several other Republican presidential candidates, including Senators Rand Paul and Ted Cruz, probably will adopt this view and embrace a so-called flat tax, with perhaps only a single rate and fewer deductions and credits.
In the middle will be Jeb Bush, whose tax cut plans – reductions are axiomatic for most Republican aspirants – are unclear. One of his chief advisers is Glenn Hubbard, who served as chairman of the Council of Economic Advisers in the George W. Bush administration, which lowered top rates sharply and enacted more modest credits.
This is miscast as a debate between the wealthy and the middle class. The Rubio proposal is a bonanza for the richest taxpayers.
He would eliminate the estate tax, which affects only one-fifth of the 1 percent of wealthiest U.S. estates. It also would eliminate taxes on capital gains and dividends, a move that would disproportionately benefit upper-income individuals. The Internal Revenue Service has reported that more than two-thirds of the income of the 400 wealthiest taxpayers comes from capital gains and dividends.
Then there is the deficit. Rubio, Paul and Cruz all support a constitutional amendment mandating a balanced budget. Yet almost every flat tax proposal that includes a politically attractive low rate would be a big revenue loser. An earlier, similar version of the Rubio plan, offered by Lee, would lose $2.4 trillion over a decade, according to the Tax Policy Center. Supporters of these measures suggest they would be offset by unspecified spending cuts.
That doesn’t impress Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “Promised future offsets don’t count unless they are specified,” she said
This is moot as long as Barack Obama in the White House. The current budgets from House and Senate Republicans avoid these choices, simply calling for big tax cuts.
If, however, Republicans win the White House and maintain control of Congress next year, a big tax cut would be a leading priority; the shape and size would be influenced by how this internal Republican debate plays out.
Albert R. Hunt is a Bloomberg columnist.