This story appears in the May 24, 2015 issue of Forbes. Subscribe
In March two freshman Republican senators—Mike Lee (Utah) and Marco Rubio (Fla.)—released an ambitious plan for tax reform. Nonpartisan experts believe the plan would turbocharge U.S. economic growth. But the plan is marred by a multitrillion-dollar effort at social engineering, one that would increase the deficit without expanding the economy.
(DISCLOSURE: I am an adviser to former Texas Gov. Rick Perry, but the opinions in this post are mine, and do not necessarily correspond to those of Gov. Perry.)
Given that Senator Rubio is one of the most attractive contenders in the 2016 presidential race, his views on tax reform warrant special attention. And there is a lot of good stuff in his proposal, entitled the "Economic Growth and Family Fairness Tax Reform Plan."
It would clean up loopholes in the corporate tax code, cut the federal corporate tax rate to 25%, move to a territorial tax system and eliminate taxes on capital gains and dividends, among other things. On the individual side, the plan would consolidate the code into two brackets: 15% and 35%. It would eliminate all itemized deductions save the mortgage and charitable deductions. It would abolish the alternative minimum tax.
Michael Schuyler and Will McBride of the Tax Foundation have conducted the most thorough analysis to date of the plan. They estimate that it would reduce federal tax revenue by more than $4 trillion in its first decade, if you exclude the effects of economic growth. But over the long run, they say, Lee-Rubio would pay for itself, by increasing the size of the economy by 15% and by increasing employment by 2.7 million jobs.
The most controversial feature of the plan--and rightly so--is its effort to use the tax code to encourage more Americans to make babies. The plan includes a new child tax credit of $2,500, which would be refundable against income and, importantly, payroll taxes. Rubio and Lee worry that parents don't bear more children because they "shoulder the financial burden of raising the next generation of taxpayers." This has been a leading concern for a fraction of the "reform conservative" wing of the Republican Party, a group focused on expanding opportunity for lower-income Americans.
Now, I'm a card-carrying reformocon, but I see a ton of problems with the Lee-Rubio child tax credit.
First of all, there's no empirical evidence that the plan would actually lead to the production of future taxpayers. Most of the tax credits would go to parents who've already borne children and have no interest in bearing more. Furthermore, to the degree that the credit incentivizes more childbearing, it may increase out-of-wedlock births. Numerous studies indicate that children born out of wedlock have a far higher risk of living their lives in poverty: net recipients, not financiers, of the entitlement state.
Second, we already have a democratic imbalance, with two-fifths of Americans experiencing no income tax liabilities. Lee-Rubio would worsen that problem by eliminating payroll tax liabilities for a significant portion of the population. The U.S. tax code is already the most progressive in the industrialized world; Lee-Rubio would make that worse.
Third, because the credit is refundable against payroll taxes, it would either accelerate the impending bankruptcy of the programs funded by payroll taxes—Social Security and Medicare—or count as new federal spending, spending that Lee-Rubio doesn't offset with cuts elsewhere.
And fourth, as the Tax Foundation analysis points out, the child tax credit would increase the deficit by more than $1.7 trillion over a decade, while contributing nothing to economic growth. Think about it this way: The Lee-Rubio child tax credits are at least $700 billion costlier than the tax credits deployed by Obamacare to offer health coverage to the uninsured.
That $1.7 trillion could have been used to raise living standards for every American by further reducing individual and corporate tax rates. For Senator Rubio it's a missed opportunity.
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