Which GOP Candidate's Tax Plan Is the Most Pro-Growth?
It is unfortunate that insults have replace substantive policy debate in the race for the Republican nomination because we should be enjoying a spirited debate over how to overhaul the tax code. Never before has there been a presidential campaign in which so many candidates put forward such well-developed, pro-growth tax reform plans. At one point in the race, as many as eleven candidates had released substantive tax reform plans.
Although the field is shrinking, the tax plans of the three leading Republican candidates, Marco Rubio, Ted Cruz, and Donald Trump, can still offer a useful guide to which policies could form the basis of true tax reform in 2017 and which policies should be avoided. Using the Tax Foundation's Taxes and Growth macroeconomic tax model, we find that the Rubio and Cruz plans offer credible ideas for improving the tax code while the Trump plan does not.
Tax reform involves tradeoffs between three competing priorities: economic growth, tax revenues, and equity concerns (who pays and how much). The challenge for reformers is that you cannot easily have all three. We saw this with the plan drafted in 2014 by former Ways and Means Chairman Dave Camp. Although the plan was revenue neutral and maintained the same distributional balance between the rich and poor, it delivered very little of what should be the primary goal of tax reform, economic growth.
By contrast, nearly all of the Republican candidates put a priority on maximizing economic growth, but with an eye to maintaining some degree of progressivity. The current tax code is so progressive that it is impossible to cut marginal tax rates without "cutting taxes for the rich." To maintain some equitable balance while cutting rates, most of the plans kept the various tax credits aimed at the poor. Revenue concerns were the lowest priority. Every plan cut federal tax revenues substantially.
What makes the Rubio and Cruz plans good models for reform in 2017 is that they take different approaches to replace our current income-based tax system with a neutral consumption-based tax system.
While Rubio's plan has attracted a great deal of attention for its generous child tax credits, the structure of his plan incorporates the core planks of David Bradford's "X-Tax," or progressive consumption tax. Rubio achieves this by cutting both corporate and passthrough business tax rates to 25 percent, moving to full expensing for all capital investment, eliminating the second layer of corporate taxation by repealing taxes on dividends and capital gains, and moving to a full territorial tax system. For individuals, the plan taxes wages at rates of 15 and 35 percent.
According to the Tax Policy Center, these measures reduce the marginal effective tax rate on new investment to zero. The Tax Foundation's model estimates that the Rubio plan would boost the long-term level of GDP by roughly 15 percent, the capital stock by 49 percent, which, in turn, would raise wages by 12.5 percent and create 2.7 million new jobs.
Cruz takes a different approach to get to nearly the same place. He would replace the corporate income tax and all payroll taxes with a 16 percent "Business Flat Tax," or value-added tax (VAT). This allows for the full expensing of all capital investment, but shifts the tax burden away from capital to labor. Cruz compensates workers for this shift by creating a single individual tax rate of 10 percent and expanding the Earned Income Tax Credit.
The Cruz plan doesn't create quite as much growth (14 percent) as the Rubio plan because it fails to eliminate the second layer of tax on corporate income. Still, it would increase the capital stock by 44 percent and wages by 12 percent. And because his lower individual tax rate would encourage more people to enter the workforce, Cruz's plan would create more jobs than Rubio's, nearly 5 million.
Trump's plan contains none of these structural changes and it shows in the results. Trump would cut the top individual wage rate to 25 percent while cutting the tax rate on both corporations and passthroughs to 15 percent. The plan does not move to full expensing, nor does it remove the second layer of tax on corporate income. Instead of switching to a territorial tax system, Trump goes against global trends by eliminating deferral and moving to a pure worldwide tax system.
The lower tax rates would lift the level of GDP by 11.5 percent over a decade. But because the plan fails to either improve the cost recovery system or eliminate the second layer of tax on corporate income, the capital stock would rise by 29 percent and the wage rate by 6.5 percent-roughly half the amounts achieved by the Rubio and Cruz plans.
Interestingly, Trump's plan would create the most jobs of the three, 5.3 million. How? Through a combination of lower marginal rates and a zero tax rate on the first $25,000 of income for individuals, $50,000 for couples-including Donald and Melania Trump. His plan would remove more than half of all Americans from the income tax rolls and cost the Treasury more than $10 trillion over a decade, even after accounting for any economic growth. This is four times the cost of the Rubio plan and more than ten times the cost of the Cruz plan.
The Trump plan shows the limited benefits of simply cutting tax rates while eliminating "loopholes" and should not be a model for reformers in 2017. By contrast, both the Rubio and Cruz plans could provide a legitimate framework for a tax reform plan that would generate shared prosperity, and make America a more desirable place to do business from and do business in.