The Center's work on 'Taxes and the Economy' Issues

Lee-Rubio Tax Plan Heavily Tilted Toward Top, Contrary to Tax Foundation Claims

March 11, 2015 at 4:22 pm

The Tax Foundation (TF) took issue with our post explaining that the new tax plan from Senators Mike Lee (R-CO) and Marco Rubio (R-FL) would give the highest-income people a large windfall while leaving many low-income working families behind.  TF argues that the plan “actually produces the largest increase in after-tax income for the lowest income earners, not the highest.”  Count me as a skeptic.  Let’s take a closer look at the plan’s effects at the bottom and top of the income scale.

First, the bottom.  TF claims the bottom 10 percent of households would see a 44 percent increase in after-tax income under Lee-Rubio (before counting TF’s large and unrealistic estimate of the plan’s impact on economic growth).  But a look at the main provisions potentially affecting low-income families doesn’t support this.

  • Lee-Rubio creates a new $2,500 Child Tax Credit to complement the current child credit. TF says the new credit “cuts taxes for most taxpayers.” But it would exclude many working-poor families.  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 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.
  • Lee-Rubio also replaces the standard deduction and personal exemption with a new tax credit (and eliminates the head of household filing status). TF states that this credit would be “fully refundable,” though the Lee-Rubio document itself doesn’t say one way or the other.  Let’s assume it is; if so, the new credit would benefit many low-income families.  Yet a substantial number of other low-income families would lose from this change, because the new credit would replace other current provisions that are worth more for them.  To return to the example family we used in our previous post, a mother with two children working full time at the minimum wage would lose $25 in 2018 from this change.  Some low-income workers would lose substantially more than this amount, while other low-income workers could get a significant boost from this change, assuming the credit is indeed fully refundable.
  • More importantly, Lee-Rubio would let a key provision of the current Child Tax Credit expire after 2017, causing millions of low-income working families to lose all or part of their credit.  The provision in question — under which the Child Tax Credit begins to phase in as family earnings rise above $3,000, rather than being unavailable until family earnings reach nearly $15,000 — is currently in effect through 2017; it needs to be made permanent. Ron Haskins, who as a senior Republican congressional staffer was a lead architect of the 1996 welfare law and later served as an adviser to President George W. Bush before joining the Brookings Institution, urged in recent congressional testimony that this provision be made permanent.  Haskins called it “an important part of the work-based safety net” and noted that if it’s allowed to expire after 2017, “working families with children will lose billions of dollars and a substantial amount of work incentive.”  He observed that this “is one policy that both encourages work and attacks inequality directly by boosting the income of low-income workers.”  Yet Lee-Rubio lets the provision end after 2017.

    If the provision expires, the full-time minimum-wage mother with two children whom we discussed above would lose her existing $1,725 CTC in 2018.  Many other low-income workers would lose under the plan as well.  Failing to extend the improvements in the CTC and EITC scheduled to expire at the end of 2017 would cast millions of people into or deeper into poverty.

Now let’s turn to the top end of the income scale.

Lee-Rubio cuts the top income tax rate to 35 percent and eliminates the alternative minimum tax, both of which represent large tax cuts that would heavily benefit high-income households.  Lee-Rubio also includes some tax increases on high-income filers by cutting back many deductions.  But both of these sets of changes were part of a tax plan that Senator Lee introduced in 2014 and the Tax Policy Center (TPC) analyzed.  TPC found that while the curtailment of deductions would, by itself, increase high-income households’ tax burdens, the net effect of the proposal overall would be a large tax cut for those at the top of the income scale.

Moreover, Lee-Rubio appears to tilt even more heavily to the top than last year’s Lee plan.  It does so by:  1) eliminating taxes on capital gains and dividends, which are highly concentrated at the top; 2) eliminating the estate tax; and 3) cutting corporate and business taxes.

By eliminating taxes on capital gains and dividends, the plan would make the single largest source of income for the wealthiest people in the country tax free.  By eliminating the estate tax, which now applies only to the estates of the wealthiest 0.15 percent of people who die, the plan would allow vast sums that the wealthiest Americans have amassed to be passed on to their heirs and heiresses tax free as well.

The plan also would cut the tax rate on domestic corporate profits to 25 percent, cut taxes on the partnership income of very high-income households from 39.6 percent to 25 percent, and cut corporate taxes on profits that U.S. companies earn overseas to zero.  The plan does cut back various corporate tax breaks.  But overall, it is likely to reduce corporate and business taxes significantly.  And since ownership of businesses and corporate stock is highly concentrated among high-income individuals, this would add to the tax cuts they receive.

As Howard Gleckman of the Tax Policy Center noted a few days ago, last year’s Lee plan would add $2.4 trillion to the debt over ten years and give almost one-third of its costly tax cuts to the top 1 percent of households.  Gleckman added that the new Lee-Rubio version of the plan “would surely be even more expensive.”

The bottom line is that those at the top would be the big winners even as many low-income working families lost ground.

Lee-Rubio Tax Plan: Huge New Windfall at the Top, Lost Child Credits at the Bottom

March 4, 2015 at 5:06 pm

The new tax plan from Senators Mike Lee (R-UT) and Marco Rubio (R-FL) builds on Senator Lee’s 2014 plan and creates something that’s even more tilted — outrageously so — in favor of the country’s highest-income people and likely much more fiscally irresponsible.  And, like last year’s plan, it not only excludes most working-poor families from its new child tax credit but allows much of their existing child credit to disappear after 2017.

Last year’s plan lost $2.4 trillion of revenue over the first decade and gave its largest tax cuts, both in dollars and as a share of after-tax income, to people making more than $1 million a year, the Urban-Brookings Tax Policy Center found.

The new plan essentially takes the old plan (which set tax rates of 15 and 35 percent and eliminated many deductions as well as the individual and corporate alternative minimum taxes) and adds more tax cuts for those at the top.  To understand their impact, it’s helpful to grab a copy of the IRS’s tax information on the country’s richest 400 filers:

  • Eliminating taxes on capital gains and dividends. The plan would do away with taxes on capital gains and dividends, even though they are already taxed at lower rates than wages and salaries.  And the benefit would flow overwhelmingly to those with the highest incomes.  In 2012, more than 10 percent of capital gains went to the top 400 filers, who collected an average of $230 million apiece (or $92 billion total).  This tax cut would also encourage wealthy people to use tax schemes to convert ordinary income into this newly tax-free income.
  • Cutting taxes on “pass-through” businesses. The plan would tax all partnerships and S corporations, whose earnings are “passed through” to owners and taxed at the individual rather than corporate level, at a special 25 percent rate.  Like capital gains and dividends, pass-through income is heavily concentrated at the top:  the top 400 filers had $18 billion of it in 2012, an average of $84 million apiece.  With this tax cut, the tax rate on pass-through income would be ten percentage points lower than a family with taxable income of $160,000 would pay on its salary.

As the IRS document shows, capitals gains/dividends and pass-through income are the two largest sources of income for the top 400 filers, as well as for the rest of the top 0.1 percent.  The Lee-Rubio plan targets these income sources for breathtaking windfalls.

At the same time, it targets working-poor families very differently.  Right now, many working-poor families receive some or all of the $1,000 Child Tax Credit thanks to a key provision created in 2009.  But this provision will expire at the end of 2017 unless policymakers extend it, causing millions of low-income working families to lose all or part of their credit.  The Lee-Rubio plan would allow this critical provision to expire.

Consider a mother with two children who works full time, year round at the minimum wage in a nursing home and receives a Child Tax Credit of $1,750.  The Lee-Rubio plan would let her credit disappear in 2018.  It also would exclude her — and millions of other working-poor people — from its new child credit, which wouldn’t be fully refundable.

The big losers under the Lee-Rubio plan, therefore, would be the working-poor people who feed and bathe the elderly, care for preschoolers, clean offices, and perform other essential tasks.  The big winners would be the country’s highest-income 400 filers, at a cost of much higher deficits.

Timing Gimmick Alert on Corporate Tax Reform

March 3, 2015 at 3:38 pm

As we’ve explained, timing gimmicks pose a threat to fiscally responsible corporate tax reform.  A recent comment by Dr. Laura Tyson, a University of California, Berkeley professor and an adviser to a coalition of American businesses that favor comprehensive corporate tax reform, illustrates the point.  Testifying before the Senate Finance Committee, she responded to a question by noting that one possible use of one-time revenues from a tax on multinationals’ current stock of overseas profits could be to “pay for” a permanent cut in corporate tax rates.  That’s a way for corporate tax reform to increase the deficit over the long term.

Multinationals have about $2 trillion in profits stashed offshore to avoid U.S. tax; they don’t owe tax on them until they declare them “repatriated” to the United States.  Any enacted corporate tax reform will likely include a mandatory, one-time transition tax on those existing foreign profits to wipe the slate of those deferred tax liabilities.  (Future overseas profits would be treated differently.)

Such a transition tax could raise significant revenues.  The President’s proposed transition tax of 14 percent, for example, would raise $268 billion over 2016-2025.  Companies would have six years to pay the tax, but since the tax wouldn’t apply to future overseas profits, it wouldn’t raise any revenues after the sixth year.

That’s the problem with suggestions that revenues from a transition tax could be used to help “finance” a lower corporate rate.  In reality, those one-off revenues can’t pay for any permanent tax cuts because the revenues disappear after six years.  The result would be a reform package that’s revenue neutral within the ten-year budget window but expands deficits by large and growing amounts in future decades.

Indeed, if the $268 billion from the President’s transition tax went to finance a corporate rate cut so that the combined policy would be revenue-neutral in the first decade, such a policy combination would add more than $300 billion to deficits in the second decade (see graph).

To avoid a long-run increase in deficits, the President’s budget devotes the one-time revenues from the transition tax to one-time infrastructure investments.

At a time when critical investments face continued cuts in the name of deficit reduction, it would be inequitable for the corporate sector not only to avoid contributing to deficit reduction but to receive permanent, deficit-increasing tax cuts.

The Risks of Dynamic Scoring

February 26, 2015 at 11:06 am

In a guest TaxVox blog post for the Tax Policy Center’s series on “dynamic scoring,” I discuss some of the risks of a new House rule requiring dynamic scoring for official cost estimates of tax reform and other major legislation.  Under dynamic scoring, those estimates would incorporate estimates of how legislation would affect the size of the U. S. economy and, in turn, federal revenues and spending.

Dynamic estimates vary widely depending on the models and assumptions used.  I conclude that to make sense of those scores, policymakers will need more information about the models and assumptions than the House rule requires:

The House rule allows the House to use any increase in revenue from highly uncertain estimates of macroeconomic growth to pay for other policies. Policymakers will also be tempted to use a favorable dynamic estimate as proof that a policy is good for the economy and therefore should be enacted.  But the uncertainty and gaps in the models may mean that such a simple conclusion isn’t appropriate. Lawmakers will need more information than the House rule requires to assess the reliability of the estimate and to understand a bill’s possible economic effects.

House Republicans Pushing More Expensive Tax Cuts

February 12, 2015 at 11:48 am

Update, February 12: We’ve updated this post (including the graph) to reflect action by the House Ways and Means Committee.

We’ve warned that the bill before the House today to make permanent various tax breaks related to charities would be the start of a costly, fiscally irresponsible series of permanent tax cuts. Proving our point, the Ways and Means Committee approved bills today making permanent two other “tax extenders” (several dozen mostly corporate tax breaks that policymakers routinely extend a year at a time) and significantly expanding one of them — all without offsetting their substantial cost.

As our paper explains, making the extenders permanent without paying for them is costly, biases tax reform against reducing deficits, and prioritizes corporate tax breaks over tax credits that help millions of low- and moderate-income working families. This is why policymakers should reject today’s package of charitable provisions, regardless of whether they support it on policy grounds.

The President, whose budget modifies and expands some charitable tax provisions but offsets the cost, has threatened to veto today’s House package.

The two new extenders bills that Ways and Means approved are far costlier than the charitable provisions. One bill expands and makes permanent one of the biggest tax extenders related to businesses, the research and experimentation credit (costing $177 billion over 2016-2025); the other makes permanent one of the biggest individual extenders, the tax deduction for state and local sales taxes (costing $42 billion).

The total price tag of the bill before the House, the two new Ways and Means bills, and business provisions that the full House will consider tomorrow is $304 billion (see chart).