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The Problem With Republican Tax Plans

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.”
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Three of the Republican presidential candidates have produced comprehensive plans for tax reform: first Marco Rubio, then Rand Paul and now Jeb Bush. The plans have some common features that set them apart from what Mitt Romney offered four years ago. They're also all vulnerable to one of the attacks that helped to sink Romney.

Here are a few important takeaways:

Republicans are less concerned than they used to be about the budget deficit. Romney promised a revenue-neutral tax reform that cut income-tax rates but made up for it by, for example, scaling back exemptions and deductions. This was in keeping with his general antipathy toward offering "gifts" to voters. Rubio, Paul and Bush say they'll reduce some tax breaks, too, but they're also offering net tax cuts measured in the trillions of dollars. They all claim that their plans would increase economic growth enough to soften the hit to federal revenue. Without added growth, though, their plans would each reduce revenue by between $3 trillion and $4 trillion over the next decade.

It may be that as the deficit has narrowed, Republican politicians have grown less fearful of it, or at least less convinced that voters are fearful of it. They may also have drawn a lesson from Romney's campaign. Cutting popular tax breaks is politically difficult. That's why Romney didn't specify how his plan would add up. But that opened him up to the charge of raising middle-class taxes. The candidates this time around may prefer to be accused of raising the deficit.

Republicans remain a supply-side party. Since Ronald Reagan's presidency, Republicans have sought to improve incentives to work, save and invest by cutting tax rates. Bush's plan emphasizes cutting tax rates on labor income (especially for high earners), corporate income and inheritances. He also modestly reduces taxes on capital gains and dividends. Rubio is more aggressive on capital gains and dividends -- he abolishes those taxes altogether -- and less so on the paychecks of the rich. Paul is aggressive on both fronts.

All the plans embrace "full expensing" for business investments. They'd do away with complicated depreciation schedules that let businesses write off the cost of their investments over time. Instead, companies would get the write-off as soon as they incurred the cost of the investment. This measure is becoming a Republican consensus.

All the plans reduce middle-class tax burdens. Republicans have rarely been supply-side purists: They've usually coupled pro-growth elements with middle-class tax relief. These plans follow that tradition, to different extents. Rubio's plan expands the child credit and applies it against payroll taxes. Middle-class families of four would get the most relief from his plan. But they'd get some from Bush and Paul, too. Bush cuts the lowest tax rate, expands the standard deduction and doubles the earned income tax credit for childless workers. Paul abolishes the payroll tax, flattens the income tax and imposes a new value-added tax in a way that leaves the middle class a bit ahead.

Democrats won't have to adjust their talking points much. It's not just the Republican playbook on taxes that has been fairly consistent since the early 1980s: Democrats, too, have had a consistent response, which is that Republican tax cuts recklessly increase deficits and are tilted toward the rich. They can and will make the same charges about these plans. All of them, as we've seen, would increase the deficit unless coupled with spending cuts.

All of them would also ensure that the top 1 percent comes out way ahead. Paul's plan, because it would abolish taxes on capital and also lower the top income-tax rate from 43.4 percent to 26.9 percent, would offer them the largest cut. But a rich person whose income comes mostly from investment would pay almost nothing in taxes under Rubio's plan. The Tax Foundation estimates that Bush's plan, leaving aside its possible effects on economic growth, would raise incomes for people in the middle of the spectrum by about 3 percent. For taxpayers in the top 1 percent, though, incomes would go up by 11.6 percent.

Republicans would probably be better off in the general election next year if their plans weren't quite so favorable to the rich. If they cut the taxes on capital gains and dividends a little less than Rubio or Paul want, cut taxes on high earners a little less than Bush or Paul want, and included some version of Rubio's child credit, they'd still be advancing pro-growth reforms. But they'd be less vulnerable to criticisms about boosting the deficit and favoring the wealthy. And while these middle-class-oriented plans wouldn't wow the most zealous supply-siders, most Republican voters aren't in that group.

In 2012, exit polls found that 53 percent of voters believed Romney's policies would favor the rich, while 34 percent believed they'd favor the middle class. Judging from their tax plans, several Republican candidates don't consider it at all urgent to change those numbers in 2016.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Ramesh Ponnuru at rponnuru@bloomberg.net

To contact the editor responsible for this story:
Timothy Lavin at tlavin1@bloomberg.net