Lee-Rubio Tax Plan: Huge New Windfall at the Top, Lost Child Credits at the Bottom

The new tax plan from Senators Mike Lee (R-UT) and Marco Rubio (R-FL) builds on Senator Lee’s 2014 plan and creates something that’s even more tilted — outrageously so — in favor of the country’s highest-income people and likely much more fiscally irresponsible.  And, like last year’s plan, it not only excludes most working-poor families from its new child tax credit but allows much of their existing child credit to disappear after 2017. Last year’s plan lost $2.4 trillion of revenue over the first decade and gave its largest tax cuts, both in dollars and as a share of after-tax income, to people making more than $1 million a year, the Urban-Brookings Tax Policy Center found. The new plan essentially takes the old plan (which set tax rates of 15 and 35 percent and eliminated many deductions as well as the individual and corporate alternative minimum taxes) and adds more tax cuts for those at the top.  To understand their impact, it’s helpful to grab a copy of the IRS’s tax information on the country’s richest 400 filers:

• Eliminating taxes on capital gains and dividends. The plan would do away with taxes on capital gains and dividends, even though they are already taxed at lower rates than wages and salaries.  And the benefit would flow overwhelmingly to those with the highest incomes.  In 2012, more than 10 percent of capital gains went to the top 400 filers, who collected an average of $230 million apiece (or $92 billion total).  This tax cut would also encourage wealthy people to use tax schemes to convert ordinary income into this newly tax-free income.
• Cutting taxes on “pass-through” businesses. The plan would tax all partnerships and S corporations, whose earnings are “passed through” to owners and taxed at the individual rather than corporate level, at a special 25 percent rate.  Like capital gains and dividends, pass-through income is heavily concentrated at the top:  the top 400 filers had $18 billion of it in 2012, an average of $84 million apiece.  With this tax cut, the tax rate on pass-through income would be ten percentage points lower than a family with taxable income of $160,000 would pay on its salary.

As the IRS document shows, capitals gains/dividends and pass-through income are the two largest sources of income for the top 400 filers, as well as for the rest of the top 0.1 percent.  The Lee-Rubio plan targets these income sources for breathtaking windfalls. At the same time, it targets working-poor families very differently.  Right now, many working-poor families receive some or all of the $1,000 Child Tax Credit thanks to a key provision created in 2009.  But this provision will expire at the end of 2017 unless policymakers extend it, causing millions of low-income working families to lose all or part of their credit.  The Lee-Rubio plan would allow this critical provision to expire. Consider a mother with two children who works full time, year round at the minimum wage in a nursing home and receives a Child Tax Credit of $1,750.  The Lee-Rubio plan would let her credit disappear in 2018.  It also would exclude her — and millions of other working-poor people — from its new child credit, which wouldn’t be fully refundable. The big losers under the Lee-Rubio plan, therefore, would be the working-poor people who feed and bathe the elderly, care for preschoolers, clean offices, and perform other essential tasks.  The big winners would be the country’s highest-income 400 filers, at a cost of much higher deficits.