June 22, 2015
The Wall Street Journal editorial page offers a lengthy criticism of Senator Marco Rubio’s tax plan — “Rubio’s Tax Mistake” — first coauthored with Senator Mike Lee. To be more precise, it’s a lengthy criticism of Rubio’s proposed expansion of the child tax credit. Why does the WSJ hate that credit so much? It argues a bigger child credit (a) does nothing for economic growth and is thus (b) a waste of money that could be better spent on lowering the top personal income tax rate below the 35% rate in the Rubio plan.
A few thoughts: First, to the extent that higher take-home pay would allow families to invest more in their own kids and reduce family instability and stress, the tax credit does have a pro-growth aspect. Human capital counts, too, and this would be a human capital gains tax cut for the folks creating and raising the next generation of workers. Now the WSJ might counter that a better solution for a struggling middle class would be to supercharge GDP growth by deeply cutting the top rate. Yet note that Rand Paul’s new flat-tax plan with its low, low, low 14.5% top rate would only increase growth by about 1 percentage point a year for the next decade, according to the Tax Foundation. We are talking about a Three Percent (ish) Economy not a Five Percent Economy, if you buy the group’s optimistic modeling assumptions. (Indeed, the same Tax Foundation modeling shows a significantly bigger growth impact from the Rubio plan thanks to its sweeping, supply-side investment and corporate tax reform.)
Second, the WSJ fails to consider the possibility that right now a “rising tide” might not not so easily lift all boats in a US economy where globalization and automation are buffeting the middle class. Faster growth is necessary, of course, but may not currently be sufficient for broadly experienced prosperity. What’s more, smart supply-side reforms may take some time to raise US growth potential. (That sure seemed to be the case with the Reagan tax cuts.) For instance: The WSJ points out how the economy flagged after the slow-motion tax cuts of George W. Bush, which also included a larger child tax credit. It was “only when Mr. Bush pushed in 2003 to accelerate the rate reductions and slashed the capital gains rate to 15% from 20% did the economy take off and save his re-election...”
Read the full article at the American Enterprise Institute: On Marco Rubio’s supposed ‘tax mistake’