We’ve added an update to this story with more details of Jeb Bush’s tax plan, which were released Wednesday afternoon.
Jeb Bush’s new tax plan has something for everyone to love — and for everyone to hate. That might turn out to be good politics, but it makes for some strange economics.
The central theme of Bush’s plan, laid out in a Wall Street Journal opinion piece on Tuesday evening, is the need for faster economic growth. He says Americans shouldn’t accept the “anemic” 2 percent pace of annual growth that the U.S. has seen for much of the recent recovery. Instead, the U.S. should strive for the 4-plus percent growth rate that was once more common — and that Florida experienced during Bush’s two terms as governor. Achieving that goal, Bush writes, requires “a complete overhaul of the U.S. tax code.”
Leave aside, for now, whether Bush deserves credit for Florida’s strong economy in the early 2000s or whether, as most experts argue, he owes much of his success to the housing bubble that burst shortly after he left office. And leave aside whether any set of policies could realistically deliver consistent 4 percent growth, especially at a time when baby boomers are retiring in unprecedented numbers — a question that experts are more divided on. Even taken at face value, Bush’s plan offers an unlikely combination of solutions to the problem of slow growth.
At times, as The Washington Post’s Jim Tankersley observed Wednesday morning, Bush sounds like Mitt Romney 2.0: He wants to cut the income tax rate and eliminate the estate tax and the alternative minimum tax — all policies that would benefit mostly the wealthiest Americans. At other times, he sounds like a populist, calling for the closing of loopholes that benefit corporations and hedge fund managers. And at others, he sounds like a policy wonk, arguing to shift tax policy in a way that encourages companies to build rather than borrow.
It is a proposal, in other words, that takes on all of Bush’s various opponents at once. In its broad themes, it is a response to Hillary Clinton’s claim in a speech in July that the “defining economic challenge of our time” is raising incomes for working Americans. Instead, Bush argues that the defining challenge is increasing overall economic growth. But its specific proposals seem targeted at other Republican candidates: tax cuts to take on Scott Walker; wonkish reforms to take on Marco Rubio; populism to take on Donald Trump.
Whether those seemingly contradictory threads can somehow come together to form a unified whole depends, in part, on details that the Bush campaign hasn’t yet released. There’s no way to calculate yet what impact Bush’s proposals would have on the federal deficit, for example, or exactly how much more or less specific groups would pay in taxes. He hasn’t identified the corporate loopholes he would close or said whether closing them would fully offset his proposed cut to the headline corporate income tax rate.
Still, there are a few things that do seem clear about Bush’s plan:
It would cut taxes for the rich: Despite the lack of details, it’s virtually certain that Bush’s proposals would result in lower taxes for top earners.
Specifically, Bush wants to cut the tax rate on individuals earning more than about $190,000 and married couples earning more than about $230,000, based on the current earnings thresholds. (In all, he would reduce the number of brackets to three from seven, but it isn’t clear what the thresholds would be for each tier.)
Bush would also eliminate the alternative minimum tax, which effectively limits how much high earners can lower their taxes through deductions and exemptions. And he would eliminate the estate tax — what Republicans call the “death tax” — which imposes a tax on large inheritances. Bush would offset those cuts to some degree by capping tax deductions, which disproportionately benefit higher earners. And he would apparently end — or at least limit — the so-called carried-interest loophole, which allows investment managers and some other wealthy Americans to treat some of their earnings as capital gains, which are taxed at a lower rate than ordinary income.
The carried-interest change, in particular, could result in a higher tax burden for some financial professionals. But for the doctors, lawyers and corporate executives who make up the vast majority of top earners, Bush’s plan would almost certainly result in a sizable tax cut.
It would help the working poor: Bush wants to expand the earned income tax credit, which provides big tax refunds to lower-income workers. And he says that under his plan, “roughly 15 million Americans will no longer bear any income-tax liability,” although it isn’t clear exactly who those people are.
The EITC is a favorite program of many conservative economists because, unlike traditional welfare, it rewards work — you qualify for the tax credit only if you have a job. And unlike the minimum wage, the EITC doesn’t raise costs for employers, which means it doesn’t threaten to discourage hiring.
Bush chose not to embrace a recent proposal from conservative economist and former Romney adviser Oren Cass to create a “wage subsidy,” in which the government would essentially top-up low-wage workers’ paychecks. Cass’s proposal was warmly received by conservative wonks, who hope that one of the mainstream Republican candidates — perhaps Bush or Rubio — will adopt it. Cass argued that his subsidy would replicate the best features of both the minimum wage and the EITC, while eliminating many of their disadvantages. Like the minimum wage, it would provide an immediate incentive for people to work, and ensure they were fairly compensated. Like the EITC, the costs would be borne by taxpayers, not employers.
Nonetheless, by proposing an increased EITC, Bush is responding to calls from so-called reformicons to ensure that the GOP platform doesn’t ignore low-income workers at a time when the Fight for $15 movement for a higher minimum wage has gained momentum across the country.
It would make the tax code simpler: Politicians love to call for a simpler tax code. They rarely get one because every existing loophole has a built-in — and usually well-heeled — constituency that will fight to keep it. Bush hints at the challenge in his op-ed: “At 80,000 pages, it’s a tax code only an army of tax accountants and lobbyists could love — because they’ve written it.”
Politics aside, however, Bush is right on the economics: Pretty much all economists agree that the complexity of the existing tax code creates a system that is both less efficient and less fair than it could be. As I wrote in the spring, existing tax deductions mostly favor the rich (most Americans don’t itemize their deductions at all), and they can create perverse incentives, such as encouraging Americans to buy bigger houses than they need.
It isn’t clear whether Bush wants to eliminate specific individual tax breaks or simply cap the total amount taxpayers can deduct. But either way, his plan would reduce the importance of individual deductions. And he would nearly double the standard deduction that roughly two-thirds of taxpayers take.
Again, without knowing more details, it’s hard to say how these proposals would affect specific groups. There would almost certainly be winners and losers, although Bush says overall taxes would be lower. But taken in isolation, a simpler system is an idea most economists could likely get behind.
It would encourage older Americans to keep working: Earlier in the campaign, Bush made headlines for saying that Americans “need to work longer hours.” He quickly tried to clarify that he meant that too many workers are stuck in part-time jobs. But as I wrote at the time, Bush was right that one way to achieve faster economic growth is to encourage more Americans to work, or to work more hours than they do now.
Bush’s plan includes a number of provisions that implicitly encourage work, such as expanding the EITC and cutting overall taxes. But it only explicitly targets one group: workers older than 67. Under Bush’s plan, they would be exempt from the employee’s share (but not the employer’s share) of Social Security taxes. That would encourage workers to stay on the job, and presumably encourage companies to keep them by making them cheaper to employ.
If workers delay retirement, that would help the Social Security system (although those gains would be at least partly offset by the lower taxes being paid into the system). But the larger economic effect is less clear. Older workers are already staying in the workforce longer; the age group struggling most in the economy is Americans ages 16 to 24, whose unemployment rate remains in the double digits.
It would overhaul business taxes: Roughly a third of Bush’s proposal is dedicated to corporate taxes. He wants to cut the overall business income tax rate to 20 percent from 35 percent, eliminate unspecified loopholes, encourage companies to bring back cash held overseas and change the way the tax code treats borrowing and investment.
Cutting the corporate tax rate and eliminating loopholes is a long-time Republican idea — Romney proposed something similar in 2012 — and it’s one that, at least in theory, has fairly widespread support among economists. On paper, the U.S. has some of the highest corporate taxes in the world, but in practice, a bevy of exemptions and deductions means many big companies pay nowhere close to the headline rate. As with individual taxes, a lower, simpler tax would likely be more efficient. It’s less clear whether the change would accomplish the other goal Bush lays out: discouraging companies from moving overseas. Even at 20 percent, U.S. corporate taxes would remain well above those in many low-tax havens.
One of Bush’s other proposed reforms is a fresher idea. He wants to eliminate the tax deduction for corporate borrowing, which he says “encourages business models dependent on heavy debt.” In its place, he wants to let businesses immediately deduct new capital investments, like new factories or equipment. Without more numbers, it’s hard to know what practical impact those proposals could have. But they could offer a way to address two recent challenges in the economy: excessive borrowing, which played an important role in the 2008 financial crisis, and the longer-run problem of reduced business investment.
UPDATE (Sept. 9, 2:17 p.m.): This afternoon, the Bush campaign released a more complete version of the candidate’s tax plan that fills in some of the missing details. Bush would, for example, eliminate the deduction for state and local taxes — a proposal many economists are likely to favor. Other deductions would be capped but not eliminated.
The full plan also includes more specifics on who would benefit from Bush’s proposals. The campaign claims that all filers who don’t itemize their deductions would see a tax cut, with lower-income Americans experiencing the biggest cuts on a percentage basis. A typical married couple that earns $38,600 would pay no income tax at all, according to Bush’s calculations, while a similar family earning $50,000 would see its taxes cut in half. Of course, in dollar terms, wealthy families would see the biggest cuts because they also pay the most in taxes. (Interestingly, the proposal doesn’t estimate the effect the policies would have on high-earning households that do itemize their deductions.)
The plan also provides more incentives to work than Bush’s initial op-ed described. The expansion of the earned income tax credit would target childless workers and young people, especially childless 20-somethings who are neither working nor in school full time. Another change would eliminate the so-called marriage penalty, which discourages married couples from both working.
Check out our live coverage of the second Republican debate.