On Tax Day, Marco Rubio and Utah Republican U.S. Sen. Mike Lee appeared at the Heritage Foundation in Washington to discuss their much-hyped tax reform package, called the Economic Growth and Family Fairness Tax Reform Plan.
“This is not a middle-class tax hike, this is a middle-class tax cut,” Sen. Lee emphasized in his opening remarks, which were streamed via Heritage’s website.
But many organizations are claiming that’s not accurate.
The plan calls for collapsing the current rates for individuals from seven to two — at 15 and 35 percent. Lee and Rubio would eliminate head of household filing status, replace the standard deduction and personal exemption with a personal credit of $2,000 ($4,000 for joint filers), expand the child credit to up to $2,500 for some families, and repeal the Alternative Minimum Tax. They’d eliminate most itemized deductions but keep them for mortgage interest and charitable giving.
Investment income from capital gains, dividends, and interest would be tax free.
Rubio said the plan would cut taxes for more than 90 percent of America, and that nobody should determine how a plan works based on tax rates alone. He said it also included deductions that the plan allows “that are quite generous.”
But the Center on Budget and Policy Priorities takes exception to some of their claims. The D.C.-based group says that the child credit, for example, would exclude many working-class poor families. That’s because the new credit is refundable only up to the sum of total income and payroll taxes after applying all other credits, such as the Earned Income Tax Credit (EITC) and the existing Child Tax Credit. “After these credits, most low-income working families will have no net federal income and payroll tax liability and consequently won’t qualify for the new CTC. In other words, its design excludes most low-income working families,” writes Chuck Marr, director of Federal Tax Policy at the Center on Budget and Policy Priorities.
Although liberal economists have taken shots at the plan, conservatives in the audience at Heritage also noted how much they didn’t approve of expanding the child tax credit.
“What we’re saying is that families that are raising future American taxpayers should not be penalized for having those additional costs,” Rubio responded. “And so for them, they’re going to send less money to Washington than they otherwise would, because they’re making an extraordinary contribution to America’s future, by raising the people who are going to grow up one day, innovate, invest and fund the entitlement programs that are so critical to our seniors and retirees.”
Rubio later added that it was not a redistribution to add to the child tax credit. “What we are recognizing is that in our tax code there is a penalty for those who are raising children.”
Under current law, the 35 percent tax bracket doesn’t kick in until income exceeds $411,500; under the Rubio-Lee proposal, it would take effect at only $75,000 for single taxpayers and $150,000 for married filing jointly. This means that middle-class taxpayers currently paying tax at a top rate of 25%, 28 percent or 33 percent will see their marginal rate rise.
There has also been criticism that the plan would increase the deficit over $2.4 trillion over a decade.
Lee said in fact the plan would help the economy, but he didn’t think the public would complain about having their taxes cut. He admitted that it would be “somewhat revenue negative,” and ultimately would pay for itself.
The Democratic National Committee made sure to get a word in edgewise.
“Marco Rubio’s tax plan would dish out tax breaks for the rich and wealthy corporations while raising taxes for hardworking Americans, ” said DNC spokesperson Kristin Sosanie. “While Democrats continue to fight for a tax system and middle class economic policies that grow our economy from the middle out, Marco Rubio and his Republican friends continue to put those at the very top above hardworking families – the American people deserve more from their leaders.”
Meanwhile, on the business side, they’d create a top rate of 25 percent that would apply to all corporations and those pass-through firms with income in excess of $150,000. Businesses could fully deduct the cost of all investment (including inventories and real estate) in the year it is made. U.S.-based multinationals would be taxed through a dividend exemption system. The roughly $2 trillion in existing unrepatriated foreign income would be taxed at 6 percent, payable over 10 years.
At the same time, new business debt would no longer be tax deductible while most interest income would be exempt from tax. Financial firms would operate under their own set of tax rules, though Rubio and Lee don’t specify what they’d be.
And they’d eliminate what they call “extraneous” business tax provisions, and would not renew any of the 50+ tax breaks known as the tax extenders.
“There are a lot of good suggestions out there — we’re listening to some of them. A lot of them. And we always look for ways to improve our plan. But our hope is that from it, we can arrive at a consensus in America, about what a 21st century tax code looks like,” Rubio said in his concluding prepared remarks.