It takes money to make money, goes the old adage—and while that saying is usually applied at the level of individual businesses, it could be fairly used to describe the economic effects of the Rubio-Lee tax reform plan, according to an analysis by the Tax Foundation.
Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, the former a potential 2016 presidential candidate, introduced their sweeping tax reform proposal last week, and the measure has already received a fair amount of criticism.
A New York Times editorial derisively dubs it the Puppies and Rainbows Tax Plan, saying “it’s full of things everybody likes, at least on the Republican side: family tax cuts that will make it easier to buy the children a puppy, and capital tax cuts that chase a pot of capital investment gold at the end of the rainbow.”
In short, the criticism is that Rubio-Lee would cost the government trillions it cannot afford.
The Tax Foundation, a nonprofit, nonpartisan research foundation that advocates for broad-based, low-rate, simple and transparent tax rules, acknowledges the plan would increase the U.S. budget deficit by over $2 trillion (including added debt-servicing costs) during the initial 10-year budget window.
But the authors of the analysis, Tax Foundation senior fellow Michael Schuyler and chief economist William McBride, emphasize that the proposal’s long-term impact would be to increase the size of the economy by over 15%, contributing an extra 1.44% annually to the currently projected GDP growth rate.
Thus, the Tax Foundation analysts distinguish between a “static” model that ignores the impact that tax changes have on economic growth and a “dynamic” model that accounts for such tax-induced changes in economic activity.
Based on their dynamic modeling, Schuyler and McBride write that “the Rubio-Lee plan would grow the economy, and the size of the economic pie is a major determinant of tax collections. In fact, some of the changes are so strongly pro-growth…that the model predicts the plan would increase federal revenue by over $90 billion annually in the long run.”
The proposal has three key features, not all of them mutually consistent from an economic perspective.
The first key thrust is the plan’s $2,500 child tax credit — the “Puppies” part of the plan in the Times’ telling.