Rubio and Lee Offer a Promising Path Forward on Tax Reform

It has been 29 years since the last major tax reform package was enacted, during which time the size of the U.S. tax code has more than doubled, the corporate tax rate has become the highest in the industrialized world, and the amount of credits, loopholes and deductions has increased by 44 percent. And yet it’s safe to say that fundamental tax reform isn’t happening anytime soon. Why? Because tax reform is like threading a needle in a haystack that sits behind a moving target – the window of acceptable compromise is very small, it’s hard to find, and can change quickly.

The problem is that everyone wants to reduce the rates and simplify the code up to the point that their favored deduction or exclusion is the one on the chopping block. And each of those loopholes comes with an army of interest groups and lobbyists who are fighting for their respective interests. All that is to say that tax reform is hard, but it’s not to say that it’s impossible, and even if it were, it would still be worth trying.

That’s why the new tax reform plan offered by Sen. Marco Rubio (R-Fla.) and Sen. Mike Lee (R-Utah) is so important. Its legislative prospects are bleak (at least in the short term) and yet it offers a touchstone to guide conservative reformers into the 21st Century. The reason it’s so important is that it begins to add nuance to Republicans’ unblinking notion that simple rate reductions always create broad-based economic growth.

The plan accomplishes that, not by trashing the virtues of pursuing a tax code that is more amenable to promoting economic growth, but by broadening the mission to offer tangible, real-world benefits to a large number of middle-class households. As Reihan Salam writes for National Review:  “What’s really important about Lee-Rubio is not the specific tax rates it proposes but rather the basic political bargain it represents: conservatives should strive to make the tax code more growth-friendly, yet they should also seek middle-class tax relief.”

To be clear, the tax rates it proposes aren’t too bad either. The plan would cut the corporate tax rates from 35 percent to 25 percent, eliminate taxes on all savings so that they all benefit from tax-free growth, allow businesses to fully, immediately deduct their capital investments (thereby replacing the antiquated, multi-year system of depreciation), eliminate the death tax, move the U.S. to a territorial tax system (so that money taxed overseas won’t face additional taxation if it’s brought to our shores), and create two simple tax brackets with only two eligible deductions (mortgage interests and charitable contributions).

But what sets this particular plan apart from others is two things: First, it replaces today’s standard deduction with a $2,000 credit for individual filers ($4,000 for married couples) and (2) it creates a new $2,500 child tax credit, which would exist alongside the current $1,000 child tax credit that phases out as incomes rise. Previous conservative dogma would have eschewed the notion of a new credit, instead opting to use those dollars to further reduce rates. But that’s why this plan is so important. It makes a conscious choice to try and both lower rates and help the middle class, a group that has fared especially poorly in the economic recovery.

Is that a good turn for conservative reformers to take? It’s an open question, but that in and of itself is a crucial factor in the plan’s importance. As Reihan Salam writes for National Review:

There is another reason Lee-Rubio matters: it is a successful example of conservative political entrepreneurship, and as such it might inspire other conservatives to try their hand at advancing new ideas. The most successful entrepreneurs create new business models to capitalize on new markets and new appetites. Similarly, political entrepreneurs are sensitive to how the electorate is changing, and how new narratives or new policy ideas might tilt the political balance in their favor.

Republicans are fast becoming the party of ideas. Some will be good ideas, others will be bad. Some will pass, others will fail. Some will broaden the political base, others will narrow it. But ultimately they all will contribute to a vibrant party that is constantly thinking and always debating about how to best help spur broad-based growth, while improving the lives of the middle-class along the way. Democrats simply can’t say the same.