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September 1, 2015
Candidates Short on How to Pay for Tax Cuts
by Paul C. Barton

Full Text Published by Tax Analysts®

All dessert without the vegetables is how groups worried about federal deficits and the national debt characterize the tax policy proposals emanating from many of the 2016 presidential candidates.

With yearly deficits still as high as $426 billion and the national debt within a rounding error of $19 trillion, the country can't afford any more unpaid-for tax cuts, they say.

"It's not like there is money to give away," Robert L. Bixby, executive director of the Concord Coalition, told Tax Analysts. "It's not like it was at the beginning of the [former President] George W. Bush era, when we had a surplus."

The $426 billion figure is what the Congressional Budget Office projects for the fiscal 2015 deficit, with the deficit falling to $414 billion in fiscal 2016 but then growing steadily until trillion-dollar deficits return by 2025.

Leaving No Stone Unturned in Tax Cut Search

Despite those projections, most, if not all, of the 17 declared Republican candidates promise major tax cuts for individuals and corporations, although only a few have laid out specifics. They declare that cutting taxes, especially on investment, is a surefire path to more vigorous GDP growth and higher wages, boosting government revenues in the long run.

Some talk of tearing up the tax code and implementing flat taxes; some advocate the "FairTax," or a "Fair and Flat Tax." Others speak of lowering top marginal rates to at least 25 percent or 20 percent, with some promising 14.5 percent or even as low as 10 percent. Along with those reductions, several call for far more generous treatment of investment income as well as of corporate income and expenses. Elimination of estate taxes is also popular.

But the candidates' belief in the Laffer curve and dynamic scoring to keep their plans from blowing bigger holes in government finances does not assuage groups like the Concord Coalition and the Committee for a Responsible Federal Budget. That's even if they promise to support a balanced budget amendment to the Constitution, which many do.

"What we hope is they don't promise a lot of goodies without a way to pay for them," Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget, said in an interview. He added that "the jury is still out on whether dynamic scoring is a good idea or not."

Bixby is more blunt: "No credible economic analysis I've ever seen says that large tax cuts pay for themselves." It's a point that Keith Hall, director of the CBO, seconded on August 25. "The evidence is that tax cuts do not pay for themselves," Hall said during a briefing.

Bixby says candidates promising tax cuts should first lay on the table the spending cuts needed to pay for them. He calls it putting hard choices "ahead of the fudge sauce." Some GOP candidates are calling for tax cuts so generous, he said, "you would have to gut the rest of government," including the Defense Department.

Democrats Also Missing Details

Meanwhile, Democratic presidential candidates have their own tax proposals that lack details. At a recent Nevada AFL-CIO convention, Sen. Bernie Sanders, I-Vt., and former Maryland Gov. Martin O'Malley pledged to eliminate the "Cadillac tax" on high-end healthcare plans but said nothing about making up the revenue. The tax will go into effect in 2018 and is supposed to bring in $87 billion by 2025, money that will be used to pay for parts of the Affordable Care Act.

While Sanders is also talking about lots of new taxes, Goldwein said, "it isn't clear he wants to put any of it toward deficit reduction -- other than some to improve Social Security."

Meanwhile, Hillary Clinton has proposed tax credits as incentives for employers to create profit-sharing plans, saying the credits would be paid for by closing "tax loopholes" that she has yet to identify. Clinton has also proposed $350 billion in new aid for college students, saying it would be paid for by eliminating tax preferences for the wealthy, which she also has yet to specify.

Numbers That Don't Jibe

But it's the Republican proposals that portend the biggest fiscal consequences. "Most of them [tax plans] lose significant revenue," said Howard Gleckman of the Urban-Brookings Tax Policy Center, adding that often "the numbers are difficult to square."

One such case, some say, involves the FairTax -- a national sales tax to replace the income tax -- which former Arkansas Gov. Mike Huckabee proposes. During the August 6 GOP debate in Cleveland, Huckabee asserted that a 23 percent FairTax would do a better job of securing long-term revenue to pay Social Security benefits because it would bring in money from "illegals, prostitutes, pimps, drug dealers [and] all the people that are freeloading off the system."

"He's proposing a tax that is supposed to be revenue neutral and yet claiming it generates revenue to cover Social Security's shortfall. How can it be both?" Goldwein asked. The Committee for a Responsible Federal Budget official also dismissed Huckabee's claim that the FairTax would spur 6 percent annual economic growth. "We are hearing promises that we know just won't add up," he said.

Rubio and Paul More Specific

Republican candidates who have offered details about their tax plans are Sens. Marco Rubio of Florida and Rand Paul of Kentucky.

Rubio proposes consolidating the seven individual brackets into two, with the top rate at 35 percent and the bottom at 15 percent, and the latter applying to individual incomes up to $75,000 and family incomes up to $150,000. He also proposes eliminating capital gains and dividend taxes, cutting corporate and passthrough rates to 25 percent, allowing 100 percent expensing of capital investments, and providing a $2,500 child tax credit on top of the current $1,000 child tax credit.

"In terms of seriousness of detail, the plan I'm most impressed with is Rubio's," Goldwein said.

Rubio developed the plan with Sen. Mike Lee, R-Utah. An earlier version was projected to cost $2.4 trillion over 10 years. Gleckman said the updated version would "surely be even more expensive."

The Tax Foundation said Rubio's plan would add at least 1.44 percent annually to economic growth that would occur naturally. It also said it would eventually increase federal revenue by $94 billion "following an estimated $1.7 trillion revenue loss over the initial ten year period." Static scoring, it said, showed a loss of $414 billion annually.

Rubio addressed his tax plan in the context of debt and deficit issues at an April 2015 Heritage Foundation program. "If this was a tax-increase plan, you would still have a problem with the debt, because you can't realistically raise rates to any level to deal with the debt," he said. Added revenue, Rubio said, comes "by creating more taxpayers, not more taxes."

The key to debt reduction, Rubio said, is bringing about more rapid economic growth while "holding the line on spending." However, he offered no details about what he meant by the latter.

Rubio also said there must be "a whole separate conversation" about entitlement programs, which he called "the long-term drivers of our long-term debt." Taxpayers of his generation, he said, "are going to have to accept that our Medicare and Social Security are going to look different than our parents'."

But when Rubio outlined his tax plan before the Detroit Economic Club on August 20, he mentioned only its purported economic growth effects and said nothing about spending restraints or overhauling entitlement programs.

Meanwhile, Paul's plan, the Fair and Flat Tax, would apply a flat 14.5 percent rate to all personal income, including wages, salaries, dividends, capital gains, rents, and interest, with no tax at all on the first $50,000 of family income. For businesses, there would be a 14.5 percent "activity tax" on revenue minus certain expenses, along with immediate expensing for capital investments.

Paul himself calls it a $2 trillion tax cut over 10 years -- "the largest tax cut in our history." He also says that over a decade it would add at least 10 percent to economic growth that would occur under current tax law.

But Citizens for Tax Justice put its cost at $1.2 trillion annually and close to $15 trillion over a decade (

And Gleckman wrote of it: "Paul is probably underestimating the cost of his plan. He claims he'd cut taxes (and thus increase the debt) by $2 trillion over 10 years. But he's using a very aggressive analysis that assumes powerful growth effects from the tax reductions." Gleckman noted that the Tax Foundation, even assuming dynamic scoring, projected it would add $1 trillion to the debt over a decade, with a static analysis raising that to $3 trillion.

Paul, however, asserts he is more than ready to address the spending side of the equation. He points to a proposal for balancing the budget in five years that he has introduced repeatedly after coming to the Senate in 2011. Among other steps, it calls for abolishing four Cabinet-level agencies -- Housing and Urban Development, Commerce, Education, and Energy (

But Bixby said he still doesn't see enough realism in the claims of either Rubio or Paul. "I don't see how starting with a large tax cut gets you there," the Concord Coalition official said. "The tax cut has to be paid for." He added that even many of Paul's proposed spending cuts, especially the elimination of four Cabinet departments, "is pie-in-the-sky stuff."

In the coming weeks, more GOP candidates, including business magnate Donald Trump, are expected to fill in their ideas on taxes. When voters listen, Gleckman said, "it's a useful exercise to try to do the math."

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