Each week, I will use this column to examine policy proposals of presidential candidates. Instead of focusing on the horse race of he-said she-said politics, I plan to examine the race from a policy perspective. This week, I will examine Jeb Bush’s tax reform proposal for individuals, which he laid out in detail last week in Garner, NC and on his website. There is little argument to be made against reforming the tax code, which was estimated in a landmark study in 2011 to cost Americans $431.1 billion dollars annually in compliance costs alone. The tax code as it stands today does not represent a comprehensive policy idea, but instead was born out of a 1986 tax reform bill to which deductions and tax credits have been continually added. How to reform the tax code, however, is up for great debate.
Jeb Bush’s main proposals for individuals go as follows: reduce the number of tax brackets from seven to three, lower the marginal tax rate in each of these brackets, reduce capital gains taxes slightly, eliminate loopholes and cap itemized deductions (including the mortgage interest rate deduction) at 2% of income, eliminate the marriage penalty, increase the standard deduction, and increase the earned income tax credit (EITC). Bush argues that these proposals would simplify the tax code for individuals, reduce perverse incentives, and lower tax rates for lower and middle-income Americans more so than for the wealthy in a way that will boost economic growth.
There are obvious economic benefits to reducing tax rates for all Americans. However, many claim these reductions would largely benefit the rich, adding to criticism of Bush’s plan to eliminate the estate tax and the alternative minimum tax. The liberal policy think tank Citizens for Tax Justice estimated that 53% of the $227 billion reduction in taxes in Bush’s plan would go to the 1%. This estimate is based on Bush’s proposed reduction of the highest marginal tax rate from 39.6% to 28% and his elimination of four higher-income tax brackets. There is certainly an argument to be made against the reduced progressiveness of Bush’s plan. This criticism and the Citizens for Tax Justice estimate, however, ignores many of Bush’s proposals for reducing itemized deductions and closing loopholes, reforms that would reduce tax savings for the wealthy and justify tax rate reductions.
Bush’s campaign claims that his plan would benefit low-income Americans far more than the wealthy. The campaign argues that his plan would reduce tax rates for individuals making $250,000 by 7.1%, while those making $25,000 would see a 45.4% tax reduction and those making below $15,300 would pay no taxes at all. Many, such as Nate Silver of FiveThirtyEight, have noted the populist aspects of Bush’s reform, such as limiting itemized deductions overall and ending the tax break on “carried interest” that largely benefits hedge fund managers. The current code has an upper rate of 39.6%, a far too high tax rate on economic activity, and copious deductions with perverse incentives that benefit the wealthy. Given all these loopholes, an earner in the highest tax bracket who actually pays 39.6% on income over $464,850 (for married filers) is few and far between. The same is true for the the next three tax brackets. Perhaps the best example of a loophole that benefits the wealthy and has perverse incentives is the mortgage interest rate deduction, which currently is capped at $1 million of debt. This has proven to not encourage home-buying but instead to benefit the wealthy and encourage the purchase of large homes that Americans do not need and cannot afford. Bush would severely limit this deduction among many others.
Bush’s tax plan also offers numerous benefits to lower and middle-income Americans. First, Bush would double the standard deduction, which is an alternative to the numerous itemized deductions offered in the code. While the wealthy can make sizable itemized deductions and rarely take the standard deduction, those with lower incomes, fewer assets, and less access to accountants either do not make itemizations or simply earn more from the standard deduction. Secondly, Bush proposes an expansion of the Earned Income Tax Credit (EITC) to 1.6 million low-income Americans. The earned income tax credit is a subsidy on low incomes, effectively increasing the earners wage. It is considered by conservative economists to be a more efficient alternative to a minimum wage hike, like the $15 minimum wage being proposed by many Democratic presidential candidates. Such a policy puts the burden on employers instead of taxpayers and many argue has an adverse impact on employment. The expansion of the EITC would incentivize people to enter the labor force and increase the wages of those in it. Lastly, Bush would end (or maybe only reduce) the marriage penalty by allowing the lower income spouse to file separately and not pay the higher tax rate of a combined income, while still allowing the spouse to benefit from the tax credits and deductions of a joint tax return. These proposals together would amount to thousands of dollars of savings for middle- and lower-income Americans.
Taken together, Bush’s tax plan is a fair and economically-sound proposal. Bush’s plan certainly does reduce tax rates on wealthy Americans, but it is also ripe with populist reforms that eliminate billions of dollars of loopholes for wealthy Americans and increases benefits to lower-income Americans. Not only does his proposed tax plan directly help the average American, both through reduced compliance costs and the aforementioned tax reforms, it will also bring great economic benefit to all. The greatest benefits to economic growth in Jeb’s plan, however, will come from his plan for regulatory reform and corporate tax policy reform. Though I will not spend this week’s column discussing that or Jeb’s ambitious goal of 4% economic growth, the components of his tax plan discussed in this column offer a fair way to ease the burden on taxpayers and offer opportunity for greater economic activity.