Tax Reform and the Economy: Who is Best?

Tax policy is an interesting lens through which to assess the present fracas we are all calling a presidential primary. On the plus side, while tax policy can be complex, detailed, and boring, some accurate and interesting elements pop off the page. First, a common point among the candidates: they all want to change the way Americans and businesses are taxed. Some, like Cruz, want Reagan-like tax cuts. Others, like Sanders and Clinton want radical tax increases.

In general, Republicans want lower tax rates on personal income, as well as capital and private investment, dropping as much double taxation as possible, such as by eliminating the estate tax. Their common belief seems to be that lower taxes will increase consumption by average Americans, when their disposable income rises. Ronald Reagan and John Kennedy both did that, to good effect.

At the same time, they all seem to believe that lower corporate income taxes, in one form or another, will spur elevated investment by America’s small businesses especially, creating new and higher quality jobs. Since roughly 80 percent of all jobs are created by small businesses, this makes sense. 

Among the Republican candidates, differences pop off the page. While all want lower taxes and adhere to federal spending cuts, they slice the pie differently. Trump, for example, aims to create four brackets out of seven for average Americans, with a $25,000 bottom level that pays zero tax and a top of 25 percent, leaving the standard deduction. Over 10 years, the plan generates a 10 trillion dollar rise in U.S. debt, according to non-partisan reviewers -- if you discount new collections and possible cuts. With added specifics, the plan would be an improvement.

Cruz, more closely following the example of Ronald Reagan, is more focused on tax cuts as an engine of growth. His plan would collapse all seven individual brackets into one, just 10 percent. He would increase the personal standard deduction, causing a jump in disposable income for working Americans, and likely spike in consumer spending -- which many economists see as the prime engine for economic recovery. 

Cruz would also end the corporate income tax, allowing smaller businesses to invest in increased employment. He would end payroll taxes for Social Security and Medicare, again encouraging corporate investment in capital and labor. To help pay for the drop in federal revenues, he proposes cuts in wasteful federal discretionary spending, and a 16 percent broad-based consumption tax. Generally, economists applaud the plan, although some reject any consumption tax. 

Rubio would also lean heavily on a consumption tax, but create tax credits for those at different income levels, effectively lowering their rates with highest credits at highest income levels. He would add a $2,500 child tax credit and eliminate the estate and gifts taxes, as both Cruz and Trump would do. He would generate a ten-year burden of roughly seven trillion dollars, on par with Cruz (absent compensating cuts) and substantially below Trump. 

Kasich, less ambitiously but with the express aim of balancing the budget in eight years, would lower the top income tax rate from 39.6 to 28 percent, reduce capital gains to 15 percent, and lower top business taxes from to 25 percent, while offering a tax credit to smaller businesses doing research and development, and eliminating the estate tax. He would raise by ten percent the so-called earned income tax credit for low-income taxpayers.

Ironically, the Jeb Bush tax plan is similar in some ways to the (less well defined) Trump plan, or vice versa. Bush would drop to three brackets, 10, 25 and 28 percent by ascending income level. He would boost the standard deduction, capping corporate and investment income taxes at 20 percent. He would double the earned income tax credit for some. Finally, he would -- like other Republicans -- eliminate the estate tax. He would have to compensate with federal spending cuts. 

On the Democrat side, the math is much simpler – individual and corporate taxes would rise. Federal spending would balloon – again. Consumers and businesses would be left with less to invest, as the economy continued to fight for growth. Regulations would grow. How any of this would work under Clinton is largely undefined. How it would work under Sanders, if the economy were reshaped to allow free college, free health care, and an end of banks as we know them, is like trying to follow Argentina, Brazil, and Russia into their world, a morass. 

Specifically, Clinton would tax those who invest at a markedly higher rate, what she calls a 4% surtax on those who otherwise spend, hire, and invest with higher disposable income. That money would go straight to Uncle Sam. She would require individuals or small businesses run by individuals to pay at least a 30 percent tax rate. To ice the cake, she would tax IRAs and ramp up the estate tax, so the federal government would take more of what people earn in hopes of passing it to children. In sum, while Clinton does not think ending the banking system is wise, she would tax those who use it most, as highly as possible to pay for more federal spending. 

So, where do these varied choices leave us? In a nutshell, the deepest cuts to all personal and corporate income taxes are clearly made by Senator Cruz. He seems most intent on returning to taxpayers -- or leaving with them -- their own dollars, allowing those who earned the money to keep it. This is compensated for by a manageable, simpler consumption tax. Trump and Bush want lower rates, but still high and variegated tax levels -- certainly higher than Cruz. Kasich is modest in his goals but finds savings in cutting federal spending and freezing discretionary spending. Finally, Rubio has a complex tax credit system that, in some ways, mirrors the Bush, Kasich, and Trump levels of taxation, although its workability is unclear. If you prefer to end the American banking system as we know it, get everything for free -- from someone, possibly yourself -- then Sanders is your man. If you just want to tax everyone more, especially those you can convince others to hate, Clinton is the one.

In the end, I like to put the field on grid – and think of it this way. Roughly in rank order, Cruz, Rubio, Bush, Trump, and Kasich want to cut taxes, restarting the economy with more consumption and growth by smaller businesses, creating new incentives to invest, hire, and boost individual consumption, vectoring to less federal spending. In that order, they seem intent on growth. And in rank order, Sanders and Clinton, want to do the reverse -- raise taxes, add economic drag through elevated federal spending (from somewhere), boost regulation, and cut private sector incentives to invest, hire and consume.

One could argue that only three issues really matter this year: national security, which includes cogent policy for rebuilding the American military and foreign policy, the Supreme Court appointments and all they entail, and the economy -- how taxing (or not taxing) and spending (or not spending) will happen ahead. Net-net, one candidate wants to tax individuals and small businesses the least, and that is Cruz. All Republicans want to restructure the system, to varying degrees -- and return more earned money to average Americans. Two candidates -- Sanders and Clinton -- think those paying the most taxes are not paying enough, and that the federal government should spend more. Make your choice. I think I have made mine.  

Robert Charles is a former commercial litigator, former US House committee counsel, and former Assistant Secretary of State under GHW Bush. He taught law and congressional oversight at the Harvard University extension school, and writes widely on both domestic and international policy. 

Tax policy is an interesting lens through which to assess the present fracas we are all calling a presidential primary. On the plus side, while tax policy can be complex, detailed, and boring, some accurate and interesting elements pop off the page. First, a common point among the candidates: they all want to change the way Americans and businesses are taxed. Some, like Cruz, want Reagan-like tax cuts. Others, like Sanders and Clinton want radical tax increases.

In general, Republicans want lower tax rates on personal income, as well as capital and private investment, dropping as much double taxation as possible, such as by eliminating the estate tax. Their common belief seems to be that lower taxes will increase consumption by average Americans, when their disposable income rises. Ronald Reagan and John Kennedy both did that, to good effect.

At the same time, they all seem to believe that lower corporate income taxes, in one form or another, will spur elevated investment by America’s small businesses especially, creating new and higher quality jobs. Since roughly 80 percent of all jobs are created by small businesses, this makes sense. 

Among the Republican candidates, differences pop off the page. While all want lower taxes and adhere to federal spending cuts, they slice the pie differently. Trump, for example, aims to create four brackets out of seven for average Americans, with a $25,000 bottom level that pays zero tax and a top of 25 percent, leaving the standard deduction. Over 10 years, the plan generates a 10 trillion dollar rise in U.S. debt, according to non-partisan reviewers -- if you discount new collections and possible cuts. With added specifics, the plan would be an improvement.

Cruz, more closely following the example of Ronald Reagan, is more focused on tax cuts as an engine of growth. His plan would collapse all seven individual brackets into one, just 10 percent. He would increase the personal standard deduction, causing a jump in disposable income for working Americans, and likely spike in consumer spending -- which many economists see as the prime engine for economic recovery. 

Cruz would also end the corporate income tax, allowing smaller businesses to invest in increased employment. He would end payroll taxes for Social Security and Medicare, again encouraging corporate investment in capital and labor. To help pay for the drop in federal revenues, he proposes cuts in wasteful federal discretionary spending, and a 16 percent broad-based consumption tax. Generally, economists applaud the plan, although some reject any consumption tax. 

Rubio would also lean heavily on a consumption tax, but create tax credits for those at different income levels, effectively lowering their rates with highest credits at highest income levels. He would add a $2,500 child tax credit and eliminate the estate and gifts taxes, as both Cruz and Trump would do. He would generate a ten-year burden of roughly seven trillion dollars, on par with Cruz (absent compensating cuts) and substantially below Trump. 

Kasich, less ambitiously but with the express aim of balancing the budget in eight years, would lower the top income tax rate from 39.6 to 28 percent, reduce capital gains to 15 percent, and lower top business taxes from to 25 percent, while offering a tax credit to smaller businesses doing research and development, and eliminating the estate tax. He would raise by ten percent the so-called earned income tax credit for low-income taxpayers.

Ironically, the Jeb Bush tax plan is similar in some ways to the (less well defined) Trump plan, or vice versa. Bush would drop to three brackets, 10, 25 and 28 percent by ascending income level. He would boost the standard deduction, capping corporate and investment income taxes at 20 percent. He would double the earned income tax credit for some. Finally, he would -- like other Republicans -- eliminate the estate tax. He would have to compensate with federal spending cuts. 

On the Democrat side, the math is much simpler – individual and corporate taxes would rise. Federal spending would balloon – again. Consumers and businesses would be left with less to invest, as the economy continued to fight for growth. Regulations would grow. How any of this would work under Clinton is largely undefined. How it would work under Sanders, if the economy were reshaped to allow free college, free health care, and an end of banks as we know them, is like trying to follow Argentina, Brazil, and Russia into their world, a morass. 

Specifically, Clinton would tax those who invest at a markedly higher rate, what she calls a 4% surtax on those who otherwise spend, hire, and invest with higher disposable income. That money would go straight to Uncle Sam. She would require individuals or small businesses run by individuals to pay at least a 30 percent tax rate. To ice the cake, she would tax IRAs and ramp up the estate tax, so the federal government would take more of what people earn in hopes of passing it to children. In sum, while Clinton does not think ending the banking system is wise, she would tax those who use it most, as highly as possible to pay for more federal spending. 

So, where do these varied choices leave us? In a nutshell, the deepest cuts to all personal and corporate income taxes are clearly made by Senator Cruz. He seems most intent on returning to taxpayers -- or leaving with them -- their own dollars, allowing those who earned the money to keep it. This is compensated for by a manageable, simpler consumption tax. Trump and Bush want lower rates, but still high and variegated tax levels -- certainly higher than Cruz. Kasich is modest in his goals but finds savings in cutting federal spending and freezing discretionary spending. Finally, Rubio has a complex tax credit system that, in some ways, mirrors the Bush, Kasich, and Trump levels of taxation, although its workability is unclear. If you prefer to end the American banking system as we know it, get everything for free -- from someone, possibly yourself -- then Sanders is your man. If you just want to tax everyone more, especially those you can convince others to hate, Clinton is the one.

In the end, I like to put the field on grid – and think of it this way. Roughly in rank order, Cruz, Rubio, Bush, Trump, and Kasich want to cut taxes, restarting the economy with more consumption and growth by smaller businesses, creating new incentives to invest, hire, and boost individual consumption, vectoring to less federal spending. In that order, they seem intent on growth. And in rank order, Sanders and Clinton, want to do the reverse -- raise taxes, add economic drag through elevated federal spending (from somewhere), boost regulation, and cut private sector incentives to invest, hire and consume.

One could argue that only three issues really matter this year: national security, which includes cogent policy for rebuilding the American military and foreign policy, the Supreme Court appointments and all they entail, and the economy -- how taxing (or not taxing) and spending (or not spending) will happen ahead. Net-net, one candidate wants to tax individuals and small businesses the least, and that is Cruz. All Republicans want to restructure the system, to varying degrees -- and return more earned money to average Americans. Two candidates -- Sanders and Clinton -- think those paying the most taxes are not paying enough, and that the federal government should spend more. Make your choice. I think I have made mine.  

Robert Charles is a former commercial litigator, former US House committee counsel, and former Assistant Secretary of State under GHW Bush. He taught law and congressional oversight at the Harvard University extension school, and writes widely on both domestic and international policy.