(Bloomberg) — U.S. businesses, families and high-income households would see significant tax cuts under a plan outlined Wednesday by Marco Rubio, the Florida senator and potential 2016 Republican presidential candidate.
The proposal, offered with Senator Mike Lee of Utah, would reduce marginal tax rates, let businesses write off investments immediately and create a $2,500 tax credit for children. It would also eliminate taxes on capital gains and dividends for corporate shareholders.
“The goal of this plan is to generate growth,” Rubio said at a news conference at the Capitol in Washington.
The tax cuts would increase the U.S. deficit, complicating Rubio’s efforts to meet a goal of balancing the federal budget that he reiterated Wednesday. The senator said economic growth generated by the tax plan would cover at least some of the costs and that he would pair it with changes to Medicare and Social Security.
In contrast with other Republicans, Rubio and Lee place more emphasis on tax benefits for families and less on rate reduction. They said the twin goals of the plan are to focus on growth and on families.
House Republicans’ budgets for the past few years called for a 25 percent top rate on individuals; Rubio and Lee set theirs at 35 percent.
Some prominent Republicans — namely 2012 presidential nominee Mitt Romney and former House Ways and Means Committee Chairman Dave Camp — said their tax plans wouldn’t increase the budget deficit.
Rubio and Lee don’t make such revenue neutrality an explicit goal. Their marker pushes Republicans back toward the tax-cutting posture the party had under President George W. Bush.
“It’s definitely trillions of dollars over the next 10 years and probably many trillions,” said Leonard Burman, director of the Tax Policy Center in Washington and a former Treasury Department official under President Bill Clinton.
The Rubio-Lee tax plan would reduce the tax rate on business income to 25 percent and the top income tax rate for individuals to 35 percent from 39.6 percent, according to a summary.
The changes proposed by the senators could significantly cut rates for some high-income households, which earn more of their income from investments and businesses than lower-income wage earners do.
Corporations would pay a top tax rate of 25 percent, down from 35 percent today.
Companies could write off investments in the first year rather than spreading deductions over the life of an investment.
That “big, big supply-side tax cut” would generate economic growth, Burman said, though economists would disagree about how significant the effect would be. Any plan that increased the deficit could erase the growth benefits, he said.
U.S. corporations would no longer face U.S. taxes on their foreign income and would pay a 6 percent one-time tax on the $2.1 trillion in profits they have amassed overseas.
“It’s certainly simpler than what we have today, and therefore it would be better than what we have today, particularly on the international reforms,” said Warren Payne, former policy director for Ways and Means Committee Republicans.
Income from small businesses and others that pay taxes through their owners’ returns would be taxed at a top rate of 25 percent, down from a maximum of 39.6 percent.
Businesses outside of the financial-services industry would no longer be able to deduct interest payments on new debt. That’s “breaking new ground” compared with past Republican plans, Payne said.
That idea in the proposal drew an immediate response from a business coalition that includes private equity firms and the International Council of Shopping Centers.
“Maintaining full interest deductibility, an ordinary and necessary business expense, is essential to growth and should be fully maintained as part of reform efforts,” Sabrina Siddiqui, a spokeswoman for the Build coalition, said in a statement.
In addition to the expanded child tax credit, Rubio and Lee proposed to consolidate the current seven tax brackets into two: 15 percent and 35 percent.
The standard deduction would be replaced with a $2,000 personal credit, and all itemized deductions would be eliminated — except for the deduction for charitable contributions and a limited version of the home mortgage interest deduction.
Rubio wouldn’t endorse a previous Lee proposal to limit mortgage interest to the first $300,000 of principal, citing differences in housing prices across the country and noting that $300,000 would buy a “townhouse” in Miami and larger houses elsewhere.
The 35 percent personal tax rate would apply to income exceeding $75,000 for individuals and $150,000 for married couples filing jointly, less than one-third of the income now needed to reach the top tax bracket.
That rate structure means that high-income wage earners would pay 35 percent, high-income business owners would pay 25 percent and high-income investors could pay zero because of the elimination of capital gains taxes on corporate stock.
Those differentials would require rules to prevent people from turning labor income into something that’s more lightly taxed.
“They know it’s an issue and clearly they intend to address it,” Payne said.
The Rubio-Lee plan wouldn’t change one of the biggest tax breaks for individuals, the exclusion from income of employer- provided health insurance. The senators would connect changes to that policy with a revamp of the health-care system.
It’s not clear, based on what Rubio and Lee have released, exactly how their plan would affect the federal budget deficit.
The Tax Policy Center said last year that an earlier version of Lee’s plan would amount to a $2.4 trillion tax cut over a decade, or about 6 percent of projected federal revenue. The new version would be an even bigger tax cut, Burman said.