Rubio-Lee Isn't Great
By David Henderson
Co-blogger Scott Sumner, over at his TheMoneyIllusion blog, has a post titled “Rubio-Lee is great, so why not make it even greater?”
I don’t agree that Rubio-Lee is great. It has many good features and Scott has listed pretty much all of them, so I won’t repeat them here. It has a feature, that I’ll mention shortly, that is a major negative. Also, however great or not great Rubio-Lee is, the one major addition that Scott proposes would lower the level of greatness. Scott proposes a stiff 50 percent marginal tax rate on all taxable income over $250,000 for single people and $500,000 for married people. That’s a large increase from the current top rate of 43.4 percent. In fact, it’s a 15 percent increase.
Scott argues that Rubio-Lee essentially changes the federal income tax into a progressive consumption tax, and he’s basically right. But even for a consumption tax, 50% is pretty high.
If Scott Sumner’s change to the Rubio-Lee proposal were adopted, the highest-income people in California, where I live, would pay a 50% marginal tax rate on their labor income to the feds and a 13.3% marginal rate to the state government. That’s 63.3%. And remember that the 13.3% paid to the state government isn’t a deductible expense under Rubio-Lee. (I’m not objecting on this last one: I agree with both Scott and Senators Rubio and Lee that state taxes should not be deductible.)
Unfortunately, Scott didn’t mention the worst aspect of Rubio-Lee: the huge tax credits.
Here’s what I thought Scott was going to say when I read the title of his post: a way to dramatically improve Rubio-Lee would be to have the two marginal tax rates both be lower (drop them from 15% and 35% to, say, 12% and 30%) but make up for the revenue loss from that reduction in rates by eliminating the high tax credits they propose and replacing them with tax deductions. For example, under Rubio-Lee, a married couple with 4 children would get a tax credit of $14,000–$4,000 for the couple and $2,500 for each of the 4 children. If that couple made $100,000 in wage income, the family would compute a $20,000 liability but then offset this with a $14,000 tax credit, for a net tax liability to the feds of only $6,000. I say “only” not because I think they should pay more but because, given what the various players, including Rubio and Lee, want the feds to raise in revenue, this is too small a number. So, for example, if Rubio and Lee proposed instead replacing tax credits with somewhat higher tax deductions for singles, couples, and children, there would not be as much of a revenue loss to the feds and they could have marginal tax rates be a few percentage points lower, as I mentioned above.
The big problem with tax credits is that they change literally no marginal tax rates. Tax deductions, on the other hand, would reduce marginal tax rates for at least a few people.