Republicans' Middle-Class Economics

Middle-class tax cuts for everyone.

Photographer: Drew Angerer/Getty Images

Marco Rubio and Mike Lee's ballyhooed new tax-reform plan raises all the usual questions about cost, viability and wisdom. (Short answers: a lot, not much and variable.) It nevertheless deserves consideration as an intriguing example of Republican thinking about how to respond to wage stagnation and economic anxiety among the middle class.

Related: Have Kids? You Deserve a Tax Break

The two senators are darlings of the "reformocon" movement, which believes in the glory of both the free market and effective public services. The gist of their plan is familiar: Simplify the tax code, and spread the benefits around to businesses, the wealthy and -- emphasis theirs -- the middle class.

The main way it helps the middle class, specifically middle-class families, is through an increased child tax credit, to $2,500 from $1,000. This makes sense. On the higher end, the plan would completely eliminate taxes on dividends, capital gains and estates. This makes little sense, fiscally or policywise; there's no reason this income should be immune from taxes.

On the business side, the main proposal is to lower corporate taxes to 25 percent from 35 percent. It would also move the U.S. toward a system of territorial taxation, a more rational approach in which profits earned overseas are not taxed in the U.S.

As for simplifying the tax code -- well, it's complicated. The plan would collapse seven individual tax rates to two, and it would eliminate all itemized deductions except for charitable contributions and mortgage interest. Fewer deductions is better, but -- why stop at two? And the plan proposes a new way to treat so-called pass-through income -- business profits that owners take as income -- which has the effect of adding complexity to the tax code, thus encouraging gamesmanship.

So what does it all add up to? That's part of the problem. Aspects of the plan are self-funding; expanding the tax base will help make up for lower rates and more generous benefits. But overall, as presented, the plan could add trillions to the debt. (A more precise figure awaits an official score from the Congressional Budget Office.)

Another predicate question is whether this plan stands any chance of becoming law. In an alternate universe, perhaps. A similar proposal from Lee in 2013 went nowhere, as did a more ambitious attempt by former Representative Dave Camp last year. Like those plans, this one has opposition from within the Republican Party as well as without.

Which then leads to a final question: Why pay any attention at all? Mainly because it captures an emerging strain of Republican thinking in the political debate over the meaning of "middle-class economics."

On that score, the plan is less ambitious than its authors claim, but not as feckless as its critics contend. Eliminating taxes on estates and investments certainly won't do much to help middle-class wage earners. But an increased child tax credit would -- as would, to choose but one example, streamlining and simplifying the confusing array of tax-free vehicles Americans use to save for retirement.

None of this is likely to happen in the next two years, of course. But a prerequisite for any change is expanding the range of acceptable choices. That's what Rubio and Lee have done.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.