Details and Analysis of Governor Jeb Bush’s Tax Plan

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Key Findings:

• Governor Jeb Bush’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan would reform both the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. and the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. and eliminate a number of complex features in the current tax code.
• According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly reduce marginal tax rates and the cost of capital, which would lead to a 10 percent higher GDP over the long-term.
• The plan would also lead to a 28.8 percent larger capital stock, 7.4 percent higher wages, and 2.7 million more full-time equivalent jobs.
• The Governor’s plan would cut taxes by $3.6 trillion over the next decade on a static basis. However, the plan would end up reducing revenue by $1.6 trillion over the next decade when accounting for the additional economic growth created by the plan.
• The plan would cut taxes and lead to higher after-tax incomes for taxpayers at all levels of income.

Yesterday, Governor Jeb Bush (R-FL) released a comprehensive tax reform plan.[1] This plan would reduce individual income tax rates, broaden the income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. by limiting itemized deductions, and expand the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for childless taxpayers. The plan would also reform the business tax code by reducing the corporate income tax rate to 20 percent, moving to full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of all capital investment, and moving to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. . In addition, the plan would eliminate the Estate TaxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , eliminate the Alternative Minimum Tax, change the treatment of interest, and eliminate many other complex features of the current tax code.

Our analysis finds that the plan would increase the size of Gross Domestic Product (GDP) by 10 percent over the long term. This increase in GDP would translate into 7.4 percent higher wages and 2.7 million new full-time equivalent jobs. On a static basis, the plan would be a $3.6 trillion tax cut over the next decade. However, accounting for the economic effects of the tax changes, the plan would end up reducing federal tax revenues by $1.6 trillion over the next decade.

Details of the Plan

Individual Income Tax Changes

• Consolidates the current 7 tax brackets into three, with a top marginal income tax rate of 28 percent (Table 1).
• Taxes long-term capital gains and qualified dividends at a top marginal rate of 20 percent.
• Increases the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. from the $6,300 to $11,300 for single filers, from $12,600 to $22,600 for married joint filers, and from $9,250 to $16,750 for heads of household. The personal exemption would remain at $4,000.
• Eliminates the personal exemption phase-out (PEP) and the Pease limitation on itemized deductions.
• Eliminates the state and local income tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. .
• Caps all remaining itemized deductions except for the charitable deduction at 2 percent of adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” (AGI).
• Eliminates the Alternative Minimum Tax.
• Eliminates the Net Investment Income Tax of 3.8 percent, which was passed as part of the Affordable Care Act.
• Doubles the Earned Income Tax Credit (EITC) for childless filers.
• Allows second earners to file their tax returns separately.
• Exempts taxpayers over the age of 67 from the employee-side payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. .
• Taxes carried interest at ordinary income tax rates instead of capital gains and dividends tax rates.
• Eliminates the Estate Tax and ends stepped-up basis in capital gains for estates currently liable for the estate tax.
• Taxes all interest income at the lower capital gains and dividend tax rates.

Business Tax Changes

• Cuts the corporate income tax rate from the current 35 percent to 20 percent.
• Allows all capital investments, including inventories, to be fully deductible in the year they are purchased.
• Enacts a territorial tax system that allows a 100 percent exemption on dividends received from controlled foreign subsidiaries. It would also enact, as a transitional revenue raiser, a one-time deemed repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. tax of 8.75 percent on all foreign profits currently deferred.
• Eliminates all other corporate tax expenditures, such as the Section 199 manufacturers’ deduction and various business credits.
• Eliminates the corporate Alternative Minimum Tax.
• Eliminates the deductibility of interest expenses.

Economic Impact

According to our Taxes and Growth Model, Governor Bush’s tax plan would increase the size of the economy by 10 percent over the long run. The plan would lead to 7.4 percent higher wages and a 28.8 percent larger capital stock. The larger economy is mainly the result of the significant reduction in the service price of capital due to the shift to full expensing and the reduction of the corporate income tax rate from 35 percent to 20 percent. In addition, the reduction of marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s on individual income would increase incentives to work and result in 2.762 million full-time equivalent jobs.

Revenue Impact

Overall, the plan would reduce federal revenue on a static basis by $3.66 trillion over the next ten years. Most of the revenue loss is due to the reduction in individual income tax rates, which we project to cost approximately $2.2 trillion over the next decade. The changes to the corporation income tax will cost an additional $1.1 trillion over the next decade, with the remaining static cost ($238 billion) due to the elimination of the estate tax.

However, if we account for the economic growth that the plan would produce, the plan would end up costing $1.6 trillion over the next decade. The larger economy would increase wages, which would narrow the revenue lost through the individual income tax by about $1 trillion and increase payroll tax revenue by about $726 billion over the next decade.

Distributional Impact

On a static basis, Governor Bush’s tax plan would increase the after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. across all taxpayers by 3.3 percent, on average, and taxpayers in all income classes would see higher after-tax income.

Taxpayers in the bottom deciles (the 0-10 and 10-20 percent deciles), would see increases in after-tax adjusted gross income (AGI) of 1.8 and 1 percent, respectively. Middle-income taxpayers with incomes that fall among the 30-40 to the 70-80 income deciles would see slightly larger increases in their after-tax AGI, of between 2.3 and 3.1 percent. Taxpayers with incomes that fall in the highest income class (the 90-100 decile) would see an increase in after-tax income of 4.7 percent. The top 1 percent of all taxpayers would see an 11.6 percent increase in after-tax income.

On a dynamic basis, the plan would increase after-tax incomes by 11.3 percent on average. All deciles would see an increase in after-tax AGI by at least 9.7 percent over the long-term. Taxpayers that fall in the bottom three deciles would see their after-tax AGIs increase between 9.7 and 10.3 percent. Middle income taxpayers would see increases in their after-tax AGI by as much as 12.9 percent. The top 1 percent of all taxpayers would see an increase in after-tax AGI of 16.4 percent.

Conclusion

Governor Jeb Bush’s comprehensive tax plan would enact a number of tax reforms that would both lower marginal tax rates on workers and significantly reduce the cost of capital. These changes would greatly increase the U.S. economy’s size in the long run, leading to higher incomes for taxpayers at all income levels. The plan would also be a large tax cut, which would increase the federal government’s deficit both on a static and dynamic basis.

Modeling Notes

We modeled the provisions outlined above except for the switch to a territorial tax system, the taxation of carried interest at ordinary income tax rates, the employee payroll tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for workers over the age of 67, the elimination of stepped-up basis for certain estates, and the option for second-earners to file separately. We also did not account for profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. from abroad due to a lower U.S. corporate income tax rate. Finally, we did not model any possible transitional costs associated with the plan.

With the exception of the ability for second-earners to file separately and additional revenues from profit shifting, these provisions would likely have a limited impact on both GDP and revenues. The effects of territorial taxation are likely to be small in tandem with a corporate tax rate of 20 percent, because the 20 percent is lower than the average corporate tax rate abroad, so foreign tax credits make the repatriation tax in that case relatively small.[2] Likewise, taxing carried interest at ordinary income rates under current law would only raise approximately $1.3 billion per year according to the Joint Committee on Taxation.[3] With the lower marginal tax rates under the Governor’s plan, the revenue impact would be even smaller.