“If you look at the tax code in its totality, over nine out of 10 Americans – the vast, enormous, overwhelming majority — in its total, will save more money under this plan than they’re saving today on the tax code.”
“This plan, we believe — and have seen the evidence — that it would cut taxes for over 90 percent of Americans. Some of them, quite significantly. I think it’s impossible to do that and raise taxes on the middle class since 90 percent of Americans are not in the top bracket.”
–Sen. Marco Rubio (R-Fla.), Heritage Foundation event on the Lee-Rubio tax plan, April 15, 2015
There is a lot of discussion over the tax proposal introduced by Rubio and Sen. Mike Lee (R-Utah), especially now that Rubio has announced a presidential run. At a recent event where the pair presented the plan, they addressed concerns over whether the proposal would hurt middle-class Americans. Rubio said on two occasions that the plan would instead help the majority of Americans — and that 90 percent of Americans would see a tax cut under their plan.
It is important to note that this is a working proposal, and there are provisions that yet remain to be fleshed out. But the claim is worth exploring. Critics of their plan say it appears to conflict with Rubio’s middle-class message, and that the plan would disproportionately benefit the rich and hurt the poor.
What are the facts underlying Rubio’s figures?
Lee and Rubio billed the “Economic Growth and Family Fairness Tax Plan” as a pro-growth and pro-family proposal to overhaul and simplify the tax code.
One of the main provisions would consolidate the personal income tax into two brackets — 15 percent and 35 percent. Depending on the interaction with other provisions, that could result in a break for some and a tax increase for others, as the current lowest bracket is 10 percent and the highest is 39.6 percent. It cuts taxes on investment income, eliminates double taxation for business income, and reduces the corporate tax rate to 25 percent from the current 35 percent.
The plan also eliminates the Alternative Minimum Tax and most itemized deductions, except for a modified mortgage deduction and the deduction for charitable giving. The elimination of itemized deductions has come under criticism, as some argue it would get rid of breaks that benefit the middle class. It expands the child tax credit to $2,500 per child — the key pro-family provision that the authors said would get rid of the “parent tax penalty.” The credit is partially refundable up to the payroll taxes paid, so there is criticism that poorest families would not benefit from the expanded child tax credit.
But the key provision that could make a difference is a new personal tax credit, of $2,000 for individuals and $4,000 for joint filers, to replace the standard deduction and personal exemption.
According to the right-leaning Tax Foundation, to whom the Rubio staff pointed us, the trade-offs in the plan ultimately would be balanced out by the personal tax credit, especially for lower-income taxpayers. The Tax Foundation found that under a fully refundable personal credit, taxpayers essentially would get $2,000 off their bill.
The highest deciles would benefit from the drop in marginal rate from the bracket consolidation, and elimination of the AMT, taxes on capital gains, dividends, and double taxation on corporate income. The lowest deciles would see a bump largely due to the refundable personal tax credit.
With that refund, every income decile would see an increase in their after-tax income — i.e., they’d get a tax cut — thus confirming Rubio’s statements. The “evidence” he refers to is below:
Cutting taxes for 90 percent of Americans does not mean that everyone would get the same percentage tax cut, as shown in the graphic. The 40 to 80 percent income decile, in particular, would see a much smaller cut than the rest. A refundable personal credit could take away all tax liability for the lowest deciles, since the average tax bill is about $2,100 or lower for people with adjusted incomes under $40,000.
The problem here is that the full refundability of the personal tax credit is not written in the current proposal. Aides for Lee and Rubio have told the Tax Foundation the credit would be refundable, and Lee’s staff confirmed it as such to The Fact Checker. Some outlets have reported it would be refundable subject to a work requirement, but Lee’s staff told us it would be refundable to everyone.
Kyle Pomerleau, economist at the Tax Foundation, said even if there were a work requirement on the personal credit, it would not create a drastic change to the distribution. The model uses federal income tax returns, so the distributions under a work requirement largely would mirror the current graph, according to Pomerleau.
A fully refundable personal credit also would be costly and add to the deficit. The refund, essentially, would be new spending since there is no such current program. Pomerleau did not have a specific calculation for the personal credit portion. The expanded child tax credit alone would cost about $170 billion a year in static and dynamic estimates, according to the Tax Foundation. (Their breakdown of economic impacts is available here, and shows the change in deficit would balance out after the first decade.)
We consulted the non-partisan Tax Policy Center, which calculated an earlier version of this proposal that Lee introduced in 2013. Under the 2013 plan, 61.5 percent of taxpayers will see a tax cut, and 12 percent will see a tax increase. The center found it would disproportionately help the rich, and raise taxes on poor families. The biggest difference between this analysis and the Tax Foundation’s analysis is the refundable tax credit.
Full refundability would be a “significant departure” from the Lee plan, and would be a radical change, according to the Tax Policy Center. It would benefit low-income households compared to the Lee plan and the current tax code.
But the Tax Policy Center has not run a model for a plan that includes refundable personal credits. Howard Gleckman, Urban Institute resident fellow who is with the Tax Policy Center, said it is impossible to analyze the impact of the Lee-Rubio plan without knowing the specifics of how the refundable tax credit would work.
The Pinocchio Test
The bottom line is that this tax proposal is evolving, and there is no way to definitively prove or disprove Rubio’s claim that more than 90 percent of Americans will see a tax cut. That surely sounds like a significant promise, yet staff for Lee and Rubio would not answer our question as to why such a critical component — full refundability — was not written into the proposal.
A lot of vague promises are made on the presidential campaign trail. But when it comes to statements such as the ones highlighted here, it would be more responsible for Rubio to note that the figures are based on a provision that is not explicitly written into the proposal.
We will withhold a Pinocchio rating until we can gather more facts. We will monitor how the proposal evolves, and update our rating appropriately.
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