Conservative anti-tax advocates don’t like any tax hike, so they dislike the treatment of carried interest as regular income. They, however, are pleased with pro-investment incentives, reduction in the corporate tax and tax relief for most every category of taxpayers. Social conservatives applaud the provisions incentivizing work, keeping the charitable deduction and ending the marriage penalty.
It is not surprising that there are complaints from those who prioritize one issue over another, or one purpose of the tax code over another. Bush chose not to pursue solely one objective. An analysis provided by Bush-friendly economists John Cogan, Glenn Hubbard, Martin Feldstein and Kevin Warsh confirms that Bush has multiple aims. They write:
The Governor’s plan reduces significantly incentive-destroying taxes on individuals and families, while reducing special tax provisions that disproportionately benefit those at the top.The Governor’s plan reforms our business tax code to ensure U.S. businesses, small and large, can be at the forefront of economic prosperity in the 21st century.The Governor’s plan simplifies the tax code for all Americans to increase prosperity and reduce the cost of complying with the tax code.The Governor’s plan ensures that Americans who are able to work have the right incentives to be part of the workforce.
Insofar as it is impossible to accomplish each and every goal perfectly without impeding others, Bush nevertheless substantially addresses each of the four concerns. As to the first, he lowers rates and removes most deductions. As to the second, he allows full expensing and lowers the corporate tax. As to the third, he eliminates the alternative minimum and most deductions and reduces the number of rates. Finally, increasing the EITC and giving relief to working spouses addresses the fourth.
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The most important aspect of the plan, I would suggest, are the elements that reward work and lend a hand to poorer workers. It is a major aspect of his proposal and arguably the most important anti-poverty measures proposed by any Republican candidate. They may not get as much attention because they are part of tax reform, but properly understood these are measures that promote upward mobility, not a common GOP goal in tax reform.
The most problematic aspect is the revenue gap. The authors write:
We estimate the tax plan, with conservative assumptions for revenue feedbacks from the Governor’s tax and regulatory policies, will reduce revenues from the current CBO baseline by [$1.2 trillion] over the next decade; about a 3 percent reduction from projected federal revenues over that period. Based on the tax and regulatory policies alone the plan will slow the growth of the debt to GDP ratio by half. The remaining revenue loss would be offset by reasonable, incremental feedback effects from the tax and regulatory reforms, meaningful spending restraint across the federal budget, and growth and feedback effects from Governor Bush’s forthcoming proposals to restrain federal 3 spending and reform health care policy, the nation’s education system, energy policy, trade, and immigration policy. With these added effects the debt to GDP ratio would decline even further. While our estimates here only account for tax and regulatory policy, these other proposals will further bolster growth in the direction of the Governor’s goal of 4 percent – a prospect that would add over $4 trillion of revenue to the government coffers.
Budget hawks should keep in mind that the deficit is already dropping. As reported by the Wall Street Journal in June, the Treasury determined that in the preceding 12 months “the budget deficit has fallen to $412 billion, down from $460 billion in April and $491 billion a year earlier. That marks the lowest 12-month deficit since August 2008.” Nevertheless I agree that Bush is obligated, as are all tax plan proponents, to show us the budget cuts necessary to erase the revenue gap and make headway on long-term debt. New Jersey Gov. Chris Christie has an entitlement plan, and Bush should put his cards on the table, especially because he also argues that the cap on defense spending must go up.
Finally, it has become gospel in the GOP that the estate (“death”) tax needs to be eliminated entirely. Frankly, it has been virtually eliminated for all but the super-rich. The first $5.43 million (and $10.86 million for a couple) are already excluded. More than 99 percent of estates pay no estate tax. Taxes on the super-big estates still paying the tax (which is certainly not promoting “growth” or “work”) amount to $246 billion in revenue over the next 10 years. It would be preferable to use that amount to reduce the revenue gap (pay down debt) or to sink it back into payroll tax relief for modest-income earners, another pro-work measure. If the carried interest tax break can go the way of the dinosaurs, so can eliminating the rump of the estate tax. The positive economic and social consequences derived from pro-work incentives and/or debt reduction are certainly worth the trade.