(Bloomberg) The campaign for the Republican nomination for president is poised to become a race to the biggest tax cut.
More than a dozen candidates are vying for attention from donors and the party’s base voters, and they aren’t letting the U.S. budget deficit get in their way.
Senator Marco Rubio of Florida kicked off the competition with his plan to boost economic growth by slashing taxes on investments, wages and business income. Even the plan’s proponents concede it would reduce tax collections by at least $1.7 trillion in the first decade, largely favoring the top 1 percent of Americans over the middle class.
Senator Rand Paul of Kentucky says he will propose the biggest tax cut in U.S. history. Rick Perry and Rick Santorum, both considering repeat presidential campaigns, ran on reducing taxes four years ago and would be expected to do so again.
The shrinking deficit—it’s less than half of what it was four years ago—creates an opening for Republicans to return to the tax-cut politics that propelled Ronald Reagan and George W. Bush into the White House.
“It focuses on the right question at the right time, which is: How will we grow more rapidly?” Douglas Holtz-Eakin, a Republican and former director of the Congressional Budget Office, said of the proposal Rubio released last week with Senator Mike Lee of Utah. Holtz-Eakin acknowledged that the tax cuts require spending reductions to keep the deficit in check.
The candidates “have an obligation to fill out the rest of their plan,” he said.
Republicans in the past have said the deficit and U.S. debt are a threat to the economy. They took the U.S. to the brink of a default on the debt twice over the past four years in attempts to extract concessions from President Barack Obama. In 2011, a deal they reached with Democrats cut about $2 trillion in spending over a decade.
To achieve the fiscal discipline they still espouse, Republicans would probably need reductions to programs such as Medicare and Social Security, both expected to balloon as the U.S. population ages and health care costs rise. They also may argue—despite skepticism from economists in both parties—that their tax cuts would generate enough growth to offset the lost revenue to the U.S. Treasury.
Rubio, 43, said when he and Lee released the plan that he favored a balanced federal budget. Achieving that goal, he said, would require Americans of his generation to accept that Medicare and Social Security won’t look the same in the future.
“I’ve never believed that tax reform by itself should pay for itself, because that basically argues that the money belongs to the government and not the people,” he said. “Let’s say we raise taxes in this plan today. You still wouldn’t bring the debt under control. You still you have to do the spending piece of it.”
By removing budgetary and income-distribution constraints from their tax plans, Republicans are seeking to avoid some of the criticism that had their 2012 presidential nominee, Mitt Romney, playing defense on tax policy in the campaign’s final months.
Obama, bolstered by independent analyses, said Romney couldn’t find enough tax breaks to eliminate in order to offset the cost of lowering tax rates as much as he wanted. The result, Obama maintained, was that Romney’s plan would cause middle-class families to pay more or increase the budget deficit.
“I will not under any circumstances increase taxes on the middle class,” Romney said during one of the presidential debates. “I’ll get us on track to a balanced budget.”
That argument may be replayed in 2016, particularly if Republicans spend the next year in a tax-cut race. The rate cuts and business write-offs that are attractive to Republican primary voters may not fare as well with a wider audience.
In a Republican primary, you want “a plan that is very pro-growth and is very simple to understand, and as a result you could put yourself in difficult positions,” said Lanhee Chen, who was Romney’s policy director in 2012. “I don’t think it’s insurmountable by any means, but it makes their job harder.”
The Rubio-Lee proposal is the first detailed plan of the 2016 election cycle, and it’s not going to advance in Congress with Obama as president. Instead, the senators described it as the start of a discussion—and Rubio’s plan if he announces a presidential bid.
In their plan, Rubio and Lee are trying to bridge a divide within the party over whether to emphasize lower marginal tax rates or expanded benefits for middle-income families.
They chose both.
For the rate-cutters, Rubio and Lee would drop the top tax rate on wages to 35 percent, from 39.6 percent, and the top rate on corporate income to 25 percent, from 35 percent. They propose eliminating the estate tax and taxes on capital gains and dividends, changes that overwhelmingly benefit high-income households.
Multinational corporations would get the global tax system they’ve been seeking, which would impose little or no U.S. tax on their foreign earnings. All businesses would be able to write off expenses immediately, rather than depreciating them over time.
Rubio and Lee offer households an additional tax credit of $2,500 per child, plus a $2,000 per-person fully refundable credit that replaces the standard deduction and personal exemptions.
Without the budget and distribution constraints, Rubio and Lee could also avoid the fate that befell Dave Camp, the former chairman of the House Ways and Means Committee.
Camp last year wrote the most complete, detailed Republican tax plan. It flopped among party lawmakers who were wary of some of the tradeoffs he made to balance the plan, including a tax on banks and limits on the mortgage interest deduction.
Lee and Rubio make fewer tradeoffs.
“If they want to have lower revenues, maybe be more explicit about what that target is,” said Alex Brill, a research fellow at the American Enterprise Institute, a Washington-based group that favors smaller government. “If you don’t have a budget constraint, it’s a hell of a lot easier to come up with ideas for what your tax reform should look like.”
Lee and Rubio, Brill said, are proposing tax cuts that would be hard to undo and attempting to force Congress to cut spending rather than re-impose those taxes.
The precedent is the tax cut plan Bush pushed through Congress in 2001 and 2003. Democrats, who objected to some of the cuts and reversed them in 2013, never mounted a serious attempt to repeal the expanded child tax credit, benefits for married couples and the 10 percent tax bracket in the Bush plan.
The Tax Foundation, which favors a simpler system with lower rates, estimates that the Rubio-Lee plan, would cost the government $1.7 trillion in forgone revenue over a decade even accounting for economic growth. That growth would pay for the tax plan in the long run, according to the foundation, which assumes that tax cuts can have more economic impact than most other groups do.
Under their analysis, the top 1 percent and the bottom 10 percent of households would receive the biggest gains in after- tax income from the plan.
Even some of the most ardent advocates for tax cuts say Rubio and Lee might be going too far. The Heritage Foundation, in its analysis, said the plan is “tremendously pro-growth” and would offer significant benefits to taxpayers.
Heritage then offered ideas for replacing some of the revenue loss.
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