FINALLY: A Republican Tax Plan That Doesn't Suck
Credit where it's due: Lee is out with a new tax plan that's much better and actually addresses the needs of the middle class. Unusually for Republican tax plans, his new plan cuts taxes for the middle class and finances that with a tax increase on the wealthy.
Republicans usually get caught in a trap on tax policy. They feel they need to sharply cut the top income tax rate, which means a tax cut for the rich. Then they have to pay for that somehow, and they end up calling for tax increases on the middle class. Then, if they're Mitt Romney, they try to deny it.
Lee's new plan avoids that trap by going for simplification through the elimination of deductions and credits (a good idea) but retaining a graduated rate structure. Lee would have two income tax rates: 15% for most filers, and 35% for incomes over $87,850 ($175,700 for married couples.) The standard deduction would be replaced with a standard credit of $2,000.
He would then give new, generous tax credits to people with young children. That would mean big tax cuts for middle-income families with children ($5,000 for a family of four earning $51,000, Lee says).
The question is, who pays more to offset those tax cuts? Lee hopes his plan would collect 18 to 20% of GDP in revenues, meaning it's not a big tax cut overall. And as with a lot of Republican tax plans, he may have trouble hitting that target.
At first glance, it looks like his plan would raise taxes on affluent people without children. But I'm such a person, and when I ran Lee's plan against my 2012 taxes I found I would have gotten a $1,400 tax cut. His plan raises my top marginal tax rate from 28% to 35% but more than offsets that because most of my income only gets taxed at 15%.
If I were married without kids, Lee's plan would treat me even better, because it eliminates the marriage tax penalty. In fact, I find it hard to imagine a situation where an affluent married couple whose income consists mostly of wages and salaries pays more taxes under the Lee plan than the current tax code, even if they make north of $300,000. Perhaps if they have a very large mortgage.
The one place I think Lee's plan is likely to raise a lot of money is by raising taxes on capital gains and dividends. His plan makes no mention of a preferential rate for capital gains (currently they're taxed at 20%) though he did say in a speech yesterday that he hopes to make a proposal in the future about changing the way we tax investments.
If he really intends to tax capital gains at a 35% rate, Lee's proposed tax code is likely more progressive than the current tax code. I'm still not sure it would raise as much money as he thinks. Anyway, these are the sorts of questions an analysis from the Brookings-Urban Tax Policy Center can answer.
If the revenue or distribution numbers don't come in where they should be, Lee should tweak his plan to make it better. For now, he's shown he gets that cutting the top rate isn't job one, and that tax simplification can be consistent with progressive taxation. The key question is, how will other Republicans receive that shift?
P.S.: I should note, I don't actually buy the human capital argument that Lee and other proponents of "family-friendly" tax plans advance. They argue that people help keep the country solvent by raising children who will pay Social Security taxes while we're all old and retired; therefore, not giving big tax credits to families with children is a "family penalty."
It seems to me that every generation is, by definition, fiscally neutral: Your kid who will be paying Social Security taxes in 40 years will be attending public school in 10 years and collecting Social Security in 70 years. I don't really owe you anything, fiscally, for the fact you chose to raise a child.
That said, I favor higher child tax credits for a different and simpler reason: A family of four with an income of $100,000 has a significantly lower standard of living than a family of two with an income of $100,000 and therefore should not be expected to pay as much in tax. I'm with Lee on the policy end even if we don't agree on the exact rationale.