GARNER, N.C. -- Of all the topics U.S. voters have to understand, none is more complicated than taxes. Think 80,000 pages of convoluted code, abstract loopholes and what seems like innumerable exemptions.
Republican presidential candidate Jeb Bush said he wants to change all that.
“Of all the terrible things that can be said about our tax code – and I can think of a few – the worst is probably this: It punishes people for doing things we should encourage and rewards people for doing things that may not be so good. It taxes paychecks hard but gives companies a write-off for debt,” Bush said Wednesday in North Carolina. "I believe it’s time we build for the future, not borrow from it.”
In short, he plans to simplify the tax code, making it so that ordinary people can understand and file their own taxes. So what would this mean for you? We asked these two economists to help us figure it out:
Kevin Hassett: director of economic policy studies, the American Enterprise Institute, served as a policy consultant to the U.S. Treasury under Presidents George W. Bush and Bill Clinton.
Harry Stein: director, fiscal policy, the Center for American Progress
"It's a really big proposal; kind of thing that a president pushes in the first State of the Union. It has a million bells and whistles," Hassett said, adding, "It's the kind of impressive tax plan that you usually don't see."
1. Reducing Tax Brackets:
Bush’s big goal is to do what President Reagan did: lower tax rates. In his policy plan, instead of seven brackets, there are now three: 28 percent, 25 percent and 10 percent. Bush noted in an op-ed in the Wall Street Journal that "at 28 percent, the highest tax bracket would return to where it was when President Ronald Reagan signed into law his monumental and successful 1986 tax reform.”
QUESTION: Aren't these just more tax cuts for the wealthy?
Hassett: That will undoubtedly benefit people in upper brackets more. One of the things we've seen is a collapse in the role of small business in the economy ... this is the policy that has the potential to have the biggest positive effect.
Stein: Bush's tax plan would give huge tax cuts to the wealthiest Americans. It cuts taxes on investment income, which overwhelmingly benefits the wealthy (since they are the ones with wealth to invest).
2. Eliminating Penalties and Other Taxes
Bush’s plan also eliminates certain taxes to double the standard deduction now taken by roughly two-thirds of all filers. He would cut the marriage penalty, which causes some married couples to pay higher taxes than they would if they were single.
It also expands the Earned Income Tax Credit, ends the death tax, which requires a person's estate to be taxed, retires the Alternative Minimum Tax and ends the employee’s share of the Social Security tax on earnings for workers older than 67.
Bush says that, under his plan, 15 million Americans would no longer bear any income-tax liability. Families of four, with an income less than $40,000 a year would no longer pay any income taxes.
QUESTION: So what does that mean for the ordinary taxpayer? Will most people see their taxes go down?
Hassett: The rate reduction means, for people who are trying to decide to work an extra hour or get another job, wherever you are in the tax code, under the Bush plan you get to keep more of the money you earn. Through an increase in the standard deduction, it makes a lot of people not go into taxable status.
I think that it's probably the case that just about everyone's taxes would go down. It's not a revenue neutral proposal. Here they're cutting it for everyone. The rich guy's taxes are going down but the poor guy's are, too.
Stein: For ordinary taxpayers, some will get tax cuts but others might get tax increases. For taxpayers who itemize, including some middle-class taxpayers, the reductions in itemized deductions might outweigh the other effects of the plan and cause their tax bills to go up.
QUESTION: Is this sustainable for our economy?
Hassett: We have to wait and see what the other proposals say. He's mentioned cutting government spending but it's impossible to know how much revenue could actually still be generated with just this plan.
Stein: Like his brother's tax cut sales pitch, Jeb Bush promises that his tax cuts will deliver huge economic growth, so everyone will prosper and deficits will not get worse. But we know how that turned out: Surpluses turned into massive deficits and, instead of growth, we got the Great Recession. More tax cuts for the rich are not sustainable for the economy, especially when we need more revenue over the long term to sustain programs like Social Security and Medicare as the population ages.
3. Getting Rid of All Those Loopholes
Here is where it gets interesting; Bush actually breaks with many in his party. He advocates a cap on deductions used by the wealthy and Washington special interests, enabling, as he says, "tax-rate cuts across the board for everyone."
He also proposed treating all income that doesn't come from investments the same, which means that unless you stake capital in an investment, you won’t be able to claim the capital-gains tax rate on your market gains.
QUESTION: Won't this anger the conservative base?
Hassett: It is a pretty populist plan. It's a very ambitious proposal that has something for everyone except for people who are deficit-anxious.
Stein: It is good that Bush is closing the “carried interest” loophole -- we should just do that now -- but his huge rate cuts still make the plan a huge winner for Wall Street. Carried interest [or a share of any profits that the general partners of private equity and hedge funds receive as compensation] currently gets taxed as capital gains at up to 23.8 percent, instead of the current ordinary rates up to 39.6 percent. He is only raising taxes on carried interest from 23.8 percent to 28 percent. The rate cuts on labor and investment income will more than make up for the loss of the carried interest loophole for Wall Street fund managers.
4. Cutting Corporate Tax Rate
This applies to all business owners. In an effort to boost businesses, Bush had pledged to cut the corporate tax rate from 35 percent – the highest in the industrial world -- to 20 percent.
Bush also proposes ending the practice of world-wide taxation on U.S. businesses, which taxes a company's revenue whether made in the United States or overseas. Bush says this tax can lead to an evasive tactic called “inversions,” when small overseas companies buy big U.S. companies so that both can enjoy the lowest tax rate possible, which can lead to U.S. jobs being lost.
He also proposes hitting businesses that have done this with a one-time tax of 8.75 percent, payable over 10 years to entice them to bring that revenue back to the States.
QUESTION: Bush says this will lead to more U.S. jobs and revenue. Is that possible?
Hassett: Many companies like Apple that have piled up huge amounts of cash overseas to get out of this tax. The idea is to say, 'Hey, you can bring that money back overseas and we'll only tax it once.’ It could be a revenue generator and entice companies to bring business back home.
Stein: Corporate tax reform that broadens the base and lowers the rate could be good policy to simplify the tax code, increase competitiveness and stop corporate tax avoidance. But Bush's plan looks more like just a corporate tax cut. Corporate profits are already higher than ever in the U.S., so it is not clear how giving even more help to corporations will help anyone but corporations.
QUESTION: Can this really help us compete with China, Bush asserts?
Hassett: Yes, It will definitely do that.
Stein: With U.S. corporate profits at record highs, corporate tax cuts that further increase profits are not the solution for competing economically with China and the rest of the world. Those tax cuts mean less revenues to support education, infrastructure, and scientific research, which are exactly the places we need to invent to compete abroad.