The Rubio-Lee Plan Would be Good for Everyone, Especially Low Income Earners

March 5, 2015

Chuck Marr over at the Center for Budget and Policy Priorities seems pretty upset over the new Rubio-Lee tax reform plan. He is calling it a “Huge new windfall at the top.” He is also concerned about the plan not addressing the soon-to-expire temporary expansion of the Child Tax Credit. “The plan creates something that’s even more tilted—outrageously so—in favor of the country’s highest-income people and likely much more fiscally irresponsible.”

He points to two pieces of the Rubio-Lee plan as being large windfalls for high income taxpayers.

First, the plan eliminates taxes on capital gains and dividends.

Second, the Rubio-Lee plan lowers the marginal tax rate for pass-through business income from the current 39.6 percent to 25 percent.

He is correct that just cutting those taxes alone would create a sizeable benefit for high income earners since they earn the majority of investment and business income.

But, Rubio-Lee’s plan does not just cut those taxes. His analysis misses almost every other part of the tax plan. Specifically these three pieces:

  • The elimination of most itemized deduction, which is a large tax increase on high-income earners
  • A new, expanded $2,500 child tax credit that cuts taxes for most taxpayers
  • The elimination of the standard deduction and personal exemption for a new refundable tax credit. Potentially worth as much as $1,750, this is a large tax cut for the lowest income earners.

If you take all the pieces of the Rubio-Lee tax plan together, it actually produces the largest increase in after-tax income for the lowest income earners, not the highest.

According to our analysis, the bottom decile of taxpayers will see an increase in after-tax income of 44.2 percent, a percentage increase in income nearly four times larger than the top 1 percent’s increase in after-tax income. But the plan doesn’t just increase the after-tax income of the top and the bottom. All taxpayers will see higher after-tax incomes due to this plan.

And if you account for the increased economic growth that the plan will produce, income for all taxpayers will increase even more. The bottom decile will see a 55 percent increase in after-tax income.

Distributional analysis is important. It gives us insight into who is currently paying taxes and how proposals will change that distribution. But when doing that sort of analysis, you should incorporate all relevant changes. Otherwise you may end up making the wrong conclusion.

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