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Clarifying the Distributional Effects of the Rubio-Lee Tax Plan

2 min readBy: Scott Greenberg

Last night’s Republican primary debate focused on the U.S. economy and contained several extended discussions of 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. policy. At one point in the debate, Senator Marco Rubio and moderator John Harwood went back and forth about which taxpayers would benefit more from Rubio’s tax plan. The exchange began like this:

HARWOOD: The Tax Foundation, which was alluded to earlier, scored your tax plan and concluded that you give nearly twice as much of a gain in 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. to the top 1 percent as to people in the middle of the income scale.

Since you’re the champion of Americans living paycheck-to-paycheck, don’t you have that backward?

RUBIO: No, that’s – you’re wrong. In fact, the largest after-tax gains is for the people at the lower end of the tax spectrum under my plan. And there’s a bunch of things my tax plan does to help them.

In this exchange, both Rubio and Hardwood were referring to our analysis of the Rubio-Lee tax plan, which we published in March. Our analysis included an estimate of how much different income groups in the U.S. would benefit from the plan. Specifically, we estimated the percentage by which each group’s after-tax incomes would change as a result of the Rubio-Lee plan. This is a standard convention for evaluating the distributional effects of a tax proposal.

As the table above shows, the Rubio-Lee tax plan provides the largest benefits to the lowest-income Americans, who would see their after-tax incomes rise by 44.2 percent as a result of the plan, and 55.9 percent when accounting for economic growth. These benefits come primarily from the new child 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. touted by the senators. The next largest benefits go to the highest-income Americans, who would see their after-tax incomes rise by 11.5 percent on a static basis and 27.9 percent after taking economic effects into account. These benefits come primarily from the elimination of taxes on capital gains. Finally, the smallest benefits from the Rubio-Lee tax plan would go to taxpayers between the 40th and 90th percentiles of income. Overall, the Rubio-Lee tax plan would cut taxes for individuals at all income levels.