The Rubio-Lee Tax Reform Plan’s Impact on the U.S. Economy

March 9, 2015

The Rubio-Lee Tax Reform Plan’s Impact on the U.S. Economy

New analysis highlights plan’s effect on GDP, job growth, wages

Washington, DC (Mar 9, 2015)—The tax reform debate has garnered a fair amount of attention this season due to serious proposals coming from both sides of the aisle. The latest proposal to make waves is a new plan from Senators Marco Rubio (R-FL) and Mike Lee (R-UT) which seeks to reform both the individual and corporate income tax codes. The plan would increase the size of the economy by 15 percent in the long run, but would increase the federal government’s deficit in the first several years, according to the latest analysis from the nonpartisan Tax Foundation.

The report summarizes the major elements of the Rubio-Lee plan. The proposal would:

  • Reduce the number of tax brackets to two (15 percent and 35 percent) and eliminate nearly all itemized deductions;
  • Create a new child tax credit of $2,500;
  • Replace the standard deduction and personal exemption with a refundable personal credit;
  • Create a top tax rate of 25 percent on both corporate and non-corporate business income;
  • Allow businesses to deduct the cost of investments when they occur (full expensing);
  • Move to a territorial tax system that would exempt active foreign income of U.S. corporations;
  • Integrate corporate and shareholder taxes to eliminate double-taxation;
  • Eliminate most business tax credits and many special deductions;
  • Eliminate the estate tax.

Next, using the latest available data and research, Tax Foundation economists used the Taxes and Growth (TAG) Model to estimate the long-term impact of the proposal on the U.S. economy.

“The results indicate that the plan would generate a large and positive impact on growth. Measured by the rise in economic activity, the Rubio-Lee proposal qualifies as genuine tax reform,” said Tax Foundation Senior Fellow Michael Schuyler, PhD. “However, its tax changes would also create a large financing need during the first several years.”

The reports key findings include:

  • According to the Taxes and Growth Model, the Rubio-Lee tax reform plan would increase the size of the economy by 15 percent over the long run. This is equivalent to an average additional annual growth of 1.44 percent over a ten-year adjustment period.
  • The plan would boost investment by nearly 49 percent, wages by 12.5 percent, and raise the level of employment by nearly 2.7 million jobs.
  • The plan would increase federal revenue on a dynamic basis by an annual $94 billion in the long run, following an estimated $1.7 trillion revenue loss over the initial ten year period. On a static basis, the plan would cost $414 billion annually.
  • The plan would have widely shared benefits, with low-income earners receiving a large boost to their after-tax incomes.
  • The plan’s main drivers of growth are the lower cost of investment—from full expensing, corporate integration, and lower tax rate on businesses—and the increased incentive to work—from the lower rates on personal income.

As serious tax reform proposals arise, the Tax Foundation will use the TAG model to estimate each plan’s impact on the U.S. economy. Up next, we will model Senator Ben Cardin’s (D-MD) plan to cut the corporate tax rate in half and replace the revenue with a 10 percent Value-Added Tax (VAT).

Full report: The Economic Effects of the Rubio-Lee Tax Reform Plan

Media Contact:
Richard Borean
Communications Manager
Tax Foundation
202-661-8088
borean@taxfoundation.org

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.

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The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.