ICYMI: Non-Partisan Tax Experts: Rubio-Lee Plan Would Create 2.7 Million Jobs, Boost GDP By 15% And Wages By 12.5%
Mar 04 2015
By William McBride
March 4, 2015
Earlier today Senators Rubio and Lee released their “Economic Growth and Family Fairness Tax Reform Plan.” We have modeled the economic and budgetary effects of the plan and will release our full results Monday, but the following is a preview.
On the business side, the plan is strongly pro-growth by design. Instead of taxing net business income at our current high rates, it taxes business cash-flow at a top rate of 25 percent. This is the essential way to reduce the most growth-slowing aspects of our federal tax code:
- It cuts the corporate and non-corporate (or pass-through) business tax rate to 25 percent.
- It eliminates the double-tax on equity financed corporate investment, by zeroing out capital gains and dividends taxes.
- It allows businesses to immediately write-off their investments, instead of requiring a multi-year depreciation.
It also takes interest out of the tax code for non-financial businesses, neither allowing interest deductions nor taxing interest income. This is a dramatic simplification.
On the individual side, it simplifies the income tax code by reducing the brackets from 7 to 2, with a top tax rate of 35 percent and bottom tax rate of 15 percent. It also introduces a generous child tax credit of $2,500, on top of the current $1,000 child tax credit.
On both the business and individual side, the plan eliminates a number of tax preferences.
After modeling the plan, we find it to be indeed strongly pro-growth. As the table below shows, it would grow GDP by 15 percent by the end of the adjustment period, roughly 10 years. That means the economy would be 15 percent larger than CBO predicts under current law. As well, relative to a current law, we find the capital stock would grow by almost 50 percent, wages by almost 13 percent, hours worked by almost 3 percent, and jobs by 2.7 million.
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