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America’s Tax Code Is Broken, But The Rubio-Lee Plan Won’t Fix It

Economy Memo Pad Politics

America’s Tax Code Is Broken, But The Rubio-Lee Plan Won’t Fix It

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Photo: U.S. Senator Mike Lee of Utah speaking at the 2015 Conservative Political Action Conference (CPAC) in National Harbor, Maryland. (Gage Skidmore/Flickr)

“We believe that America’s best days are still ahead. But we also recognize that restoring the shared prosperity that comes from a strong economy requires reforming the most antiquated and dysfunctional government policies, beginning with the federal tax system.”

—Senators Marco Rubio and Mike Lee 

Finally, something we can all agree on.

In their joint op-ed in Tuesday’s Wall Street Journal, the two Republican senators proposed a new tax plan and argued that our current federal tax structure is broken, its problems “rooted in the same fundamental unfairness and inequity of a government that picks winners and losers.”

Again, we here at the Roosevelt Institute welcome this realization. For too long, our tax code has helped the few at the expense of the many. Unfortunately, an analysis of their proposed solutions shows that the senators have come out on the wrong side of this argument.

First, they propose lowering the top corporate tax rate to 25 percent. This would be a step worth discussing if not for the fact that, with offshore tax havens and a wealth of other tax benefits, America’s largest corporations currently pay an effective rate of just 12.6 percent. In the words of Roosevelt Institute Chief Economist Joseph Stiglitz, it would seem that the problem is not double taxation, but no taxation.

The senators then argue that, in order to incentivize investment, they would make all capital expenditures 100 percent tax deductible, suggesting that taxes have squeezed corporations out of the investment business. But if this is the case, then how do we explain the $2 trillion currently being held abroad by America’s largest corporations? And what about the enormous sums that companies like Apple and Home Depot are spending on buybacks to enrich investors?

In fact, new research from Roosevelt Institute Fellow J.W. Mason shows us that the link between corporate cash flow and productive investment has been all but severed since the shareholder revolution of the 1980s. Shareholders now pocket an increasingly large portion of corporate earnings and borrowing that would have once gone to capital investments, job creation, or raising workers’ pay. Given these facts, as well as the current level of historically high profits, it is clear that corporate investment is not suffering from lack of funding, and that more spending on corporate welfare is the wrong way to go.

Lee and Rubio suggest that corporate taxes drive American industries abroad. This is absolutely true: Corporations want to benefit from American security, infrastructure, and human capital, but they don’t want to pay their share to maintain those invaluable assets, so they shelter themselves in tax havens like Ireland. The problem, from our point of view, is not, as Rubio and Lee suggest, that the tax code taxes corporations (indeed, that is what a tax code exists to do); the problem is that it allows wealthy corporations to avoid those taxes.

We need policies that will ensure corporations contribute like the rest of us, not ones that will commit more public money to private enterprise.

The senators state that their plan is guided by the principles of fairness, freedom, and growth. This raises the question: In whose mind is it fair to spend hundreds of billions of dollars on wealthy corporations, while Americans drive on pothole-pocked roads and send their children to overcrowded schools to learn from underpaid teachers?

For the individual income tax, Rubio and Lee propose reducing the number of brackets to two — one at 15 percent and one at 35 percent. Even though they have been greatly reduced since the 1980s, lowering rates for middle-income earners is worth discussing. The far more significant part of this proposal, however, is the 11 percent tax break for top income earners, which would further reduce the amount of public funds available for things like roads and schools, and which would further tip our economic balance toward the wealthy.

The senators would likely argue that this tax break will stimulate productive spending, but trickle-down economics did not work under Reagan and will not work now.

Toward the end of their op-ed, the authors posit a series of pro-family tax reforms, like tax credits for children and tax breaks for couples filing jointly. These policies are rooted in a belief that families with married parents are more economically stable and productive than single-parent families. Again, this may be a point worth debating, but these minuscule incentives are scarcely more than lip service to the American middle class, which this plan largely forsakes in favor of more tax cuts for large corporations and the wealthy.

More generally, Rubio and Lee frame their entire plan as a benefit to average Americans, but do this while glossing over policies that will only continue our current trend of supporting the wealthy at the expense of the country as a whole. The Stiglitz tax reform plan, on the other hand, offers a blueprint for a tax code that would bolster the middle class while driving growth and opportunity.

Now that we’ve all agreed on the problem, we should look to solutions that economists tell us actually work.

Eric Harris Bernstein is a Program Associate at the Roosevelt Institute.

Cross-posted from the Roosevelt Institute’s Next New Deal blog.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: U.S. Senator Mike Lee of Utah speaking at the 2015 Conservative Political Action Conference (CPAC) in National Harbor, MD. (Gage Skidmore/Flickr)

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8 Comments

  1. ExRadioGuy15 March 6, 2015

    Geez….I’ve been correctly pointing out that the federal tax code is “Upside Down” for nearly four years….where you been, media?!?
    The problem with our tax code, as the Roosevelt Institute indirectly and correctly points out (see above paragraph), is not the tax rates…it’s the EFFECTIVE tax rates paid by the wealthy and big corporations thanks to the black heart of the Fascist and greedy GOP’s Upward Wealth Redistribution plan (about $12 Trillion and counting), the 1,500 or so “DELs” (Deductions, Exemptions & Loopholes) of the Bush 43 tax policies that are STILL in effect!
    Hey, GOP! If you REALLY want to fix the tax code (and, who are we kidding; they love it the way it is and won’t do a thing about it), repeal all of those Bush 43 tax policies. Doing that would turn a half-trillion yearly deficit into a trillion-dollar SURPLUS that can be used to pay down the national debt.
    Sadly, however, 30 million GOP Progressives and Moderates stayed home in “protest” of their Fascist and corrupt party last fall, allowing the GOP to seize the US Senate and gain a bigger majority in the US House. This is what you wrought by staying home, “Progs” and “Mods” of the GOP….own it and do something about it next year, ie, stop voting for Republicans and vote for Democrats.

    Reply
  2. charleo1 March 7, 2015

    The problem with fixing a tax system that is clearly too generous with large corps, and the investor class. Is voting for doing the right thing, and raising taxes on the ones doing the loin’s share of the campaign funding, would be tantamount to resigning to spend more time with one’s family. This has become true of both Parties at both the State, and Federal levels. But especially so on the Right. A Party already in political turmoil, and frankly frightened to death of supporting any initiatives that would run afoul of the anti-taxers, and deregulation zealots that rule them with an iron fist. So the problems with the current system they can’t deny exist, must be misdiagnosed for political purposes. And therefore, any suggestions for, “reforming.” the current system becomes by necessity, a matter of merely proposing more of the same. Or, as in the case of Senators, Lee, and Rubio, and Ryan before them. To use the opportunity of talking about reform, to remind their benefactors they’re in there protecting, and holding the line at all costs for their interests. Which wouldn’t pose such a significant problem, if the influence of a few super wealthy ideologues wasn’t so overwhelming. Or, if their interests weren’t so diametrically inverse to the reforms that need to be made. Why, we should be asking ourselves, is a gambling magnate, or an oil, and chemical refiner, given license to run, and hold tax policy hostage, in the largest economy in the World? Why can’t we seem to be able to get out of our own way, in trying to address almost anything in this Country any more?

    Reply
    1. dpaano March 26, 2015

      For this, we can also thank Citizen’s United…….big business has now the opportunity to “buy” the government they want and NOT the government that the American people want!! Someday soon this is going to hit the right in the butt, and they’re going to see the error of their ways. We can only hope it isn’t AFTER the American public has been totally screwed by these people!

      Reply
      1. charleo1 March 26, 2015

        Well sure! How could such a ruling come from a majority body that believes in the empowerment of small d democracy? And not a Court that in fact favors a big, C, corporate monied Plutocracy, in de facto control of the Country? And since it isn’t a matter of if the public will be
        screwed. We’re all already being so. But rather when will enough of the public come to connect the cause and effect correlation between the two, and demand their voices back?

        Reply
  3. Wedge Shot March 9, 2015

    Does it look like Corporate taxes are too high? 80% of all Federal taxes are paid by individuals. Corporation used to pay about 30% and now only pay 10%.

    The greedy corporations would like zero taxes and then want credits beside.
    The individual is being squeezed and corporations are pigs.

    See Chart. http://www.cbpp.org/cms/?fa=view&id=3822

    Reply
    1. dpaano March 26, 2015

      Unfortunately, the GOP don’t seem to see that…..they are still living in the Reagan aura of trickle down….amazing!

      Reply
  4. Wedge Shot March 9, 2015

    Does it look like Corporate taxes are too high? 80% of all Federal taxes are paid by individuals. Corporation used to pay about 30% and now only pay 10%.

    The greedy corporations would like zero taxes and then want credits beside.
    The individual is being squeezed and corporations are pigs.

    See Chart. http://www.cbpp.org/cms/?fa=view&id=3822

    Reply
  5. Wedge Shot March 9, 2015

    Does it look like Corporate taxes are too high? 80% of all Federal taxes are paid by individuals. Corporation used to pay about 30% and now only pay 10%.

    The greedy corporations would like zero taxes and then want credits beside.
    The individual is being squeezed and corporations are pigs.

    See Chart. http://www.cbpp.org/cms/?fa=view&id=3822

    Reply

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