Rubio-Lee Plan Cuts Taxes on Business Investment to Grow the Economy by 15 Percent

March 04, 2015

Earlier today Senators Rubio and Lee released their “Economic Growth and Family Fairness Tax Reform Plan.” We have modeled the economic and budgetary effects of the plan and will release our full results Monday, but the following is a preview.

On the business side, the plan is strongly pro-growth by design. Instead of taxing net business income at our current high rates, it taxes business cash-flow at a top rate of 25 percent. This is the essential way to reduce the most growth-slowing aspects of our federal tax code:

  1. It cuts the corporate and non-corporate (or pass-through) business tax rate to 25 percent.
  2. It eliminates the double-tax on equity financed corporate investment, by zeroing out capital gains and dividends taxes.
  3. It allows businesses to immediately write-off their investments, instead of requiring a multi-year depreciation.

It also takes interest out of the tax code for non-financial businesses, neither allowing interest deductions nor taxing interest income. This is a dramatic simplification.

On the individual side, it simplifies the income tax code by reducing the brackets from 7 to 2, with a top tax rate of 35 percent and bottom tax rate of 15 percent. It also introduces a generous child tax credit of $2,500, on top of the current $1,000 child tax credit.

On both the business and individual side, the plan eliminates a number of tax preferences.

After modeling the plan, we find it to be indeed strongly pro-growth. As the table below shows, it would grow GDP by 15 percent by the end of the adjustment period, roughly 10 years. That means the economy would be 15 percent larger than CBO predicts under current law. As well, relative to a current law, we find the capital stock would grow by almost 50 percent, wages by almost 13 percent, hours worked by almost 3 percent, and jobs by 2.7 million.

Second, the growth in the economy would eventually boost tax revenue, relative to current law. We find after all adjustments (again, about 10 years) that federal tax revenue would be about $94 billion higher on an annual basis. This is our dynamic estimate. Our static estimate, i.e. assuming the economy does not change at all, shows a tax cut of $414 billion per year. We believe the dynamic estimate is much closer to reality.

Our full analysis will be out Monday, and there we’ll provide a distributional analysis, and also an estimate of the 10 year budget effects.

 

Table: The Rubio-Lee Tax Reform Plan Would Grow the Economy by 15 Percent

Economic and Revenue Estimates for the Rubio-Lee Tax Reform vs. Current Law (2015 Dollars)

 

 

GDP

15.0%

GDP ($ billions)

2,658

Private Business GDP

15.6%

Private Business Stocks (Machines, Equipment, Structures, etc.)

48.9%

Wage Rate

12.5%

Private Business Hours of Work

2.8%

Full-time Equivalent Jobs (in Thousands)

2,667

 

 

Static Federal Revenue Estimate ($ billions)

-$414

Dynamic Federal Revenue Estimate after GDP Gain or Loss ($ billions)

$94

 

 

Weighted Average Service Price

% Change

Corporate

-26.9%

Noncorporate

-11.5%

All Business

-22.3%

 

 

Source: Tax Foundation Taxes and Growth Model.

 

 

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