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Jeb Bush’s new tax plan: A revenue-eating wolf in sheep’s clothing

REUTERS/Brian Snyder

It seems like just yesterday we were pointing out that a) the arithmetic in Republican presidential candidates’ tax plans didn’t add up, and b) they were highly regressive.

Well, crank up the old calculator, because Jeb Bush’s new tax plan appears to have both of those problems, big time. We’ll have to wait for scorekeepers like the Tax Policy Center to run the tables, but based on the prior scores for plans that cut high end taxes less regressively than Gov. Bush does, as well as some of his team’s own numbers, I can confidently assert that the plan loses piles of revenue. Perhaps that’s the point, but if so, it’s a serious problem for our fiscal accounts, our economy, and the ability of our government to do what we need it to do.

The plan whacks the tax take by lowering marginal tax rates, which is of course the core principle of supply-side economics since some waiter was foolish enough to give Art Laffer a napkin and a pen. On this front, Jeb! deeply doubles down even relative to past Republican tax plans. He takes the income tax rate down from about 40 percent to 28 percent (Republican Dave Camp’s plan went to 35 percent). He takes the corporate rate from 35 percent to 20 percent (Camp went to 25 percent), and allows for full expensing (immediate and full deduction) of capital investments. He goes to a territorial system so foreign profits would no longer be taxed when repatriated back here. He eliminates the estate tax and the alternative minimum tax. There’s a bump down in the rate for unearned income (cap gains, dividends).

These are just absolutely huge, regressive changes, far bigger than his bro’s, and really–what did we get for all of W’s supply-side cuts? Growth, jobs, and productivity had little to show for them, while after-tax inequality significantly worsened.

There are a few pieces I’ll note below that claw back some lost revenue, but this is really aggressive tax cutting. As CBPP’s Chuck Marr notes, many corporate tax reform plans recognize a tradeoff between points off the rate and tax breaks on investments and foreign profits. This plan lets the corps have it all.

That means you either make up your losses by going after the less well-off, running larger budget deficits, or cutting spending. Re the latter, since Bush is unlikely to cut defense spending, he either goes after entitlements, or more likely, spending on low-income populations. In either case, since social insurance and safety net spending disproportionately help people in need, this is yet another version of RRH tax policy—Reverse Robin Hood.

But didn’t I say something about sheep’s clothing?

There are a few ideas in the plan that tilt in different directions from the usual supply-side formula. To its credit, the Bush team expands the Earned Income Tax Credit for childless workers, an idea we’ve long pushed here at CBPP. They also expand the standard deduction, thereby significantly reducing the number of households with federal tax liability, by 15 million, according to Dylan Matthews. As Matthews notes, this pits Bush against the Romney “makers/takers” crowd and puts him with the conservative “reformers,” who argue that lower-income people not having to pay income taxes is a bragging point for a tax plan.

The plan also makes a few changes to offset the revenue losses. It ends the federal tax deduction for state and local taxes paid, but don’t forget that this is one of the few tax increases conservatives like because it dings the wealthier blue states that raise significant revenues through state and local taxes (end the exemption, and they’re likely to face pressure to lower their state taxes). It caps the value of itemized deductions—a major source of loopholes—at 2 percent of income, though I’m not sure how far this goes (specifically, I can’t tell if this cap hits the “employer health exclusion”—a tax exemption versus a deduction you must itemize, this is the money employers deduct for employees’ health care spending; if it’s not covered by the cap, then the cap is unlikely to raise much at all).

Another idea in the plan—one that has some merit—is to end the deductibility of interest paid by debt financers, a tax break often relished by private equity firms (another swipe at Mitt!). However, as one expert pointed out to me, if you’re going with the full-expensing provision noted above, you either have to end the interest exemption or you give companies a double break. Suppose your company borrows to invest in a new drill press. With full expensing and the interest deduction, you first lower your tax bill by the cost of the machine, and second, by deducting interest payments on the loan. That has the potential to generate negative tax rates for profitable businesses.

They also make a big deal about closing the carried interest loophole, a pretty egregious flaw in the tax code where fund managers get to pay favorable capital gains rates on their earnings. It’s a fine and overdue reform, for sure, but it’s a drop in the bucket (past versions of this change raised between $3 and $16 billion over 10 years). That’s a Band-Aid on a wound the Bush team themselves tells us amounts to $1.2 trillion in lost revenues relative to the current system, and that unrealistically low estimate is juiced with rosy assumptions (“dynamic scoring”) about how much the plan is going to boost growth.

OK, that’s enough of the weeds. And I give the Bush team credit for presenting a fairly detailed plan at this early stage of the race. Also, as I said, we’ll have to wait for a score by someone not associated with the campaign (rev up the hamster wheels, TPC!) to see the real extent of the revenue and distributional damage. But I’d be amazed—and I promise to publicly eat crow on this point (i.e., I will admit my mistake on these pages) if I’m wrong—if this plan doesn’t blow a huge hole in the budget and make the federal tax code less progressive.

And those are two things we really, really don’t need right now.