Democracy in America | Capital and the 21st century candidate

Marco Rubio’s tax plan is efficient. It is also expensive and regressive

By H.C. | WASHINGTON DC

FEW policy choices bring the trade-off between efficiency and equality into sharper view than taxes on capital. On the one hand, capital taxes harm the economy by discouraging productive saving and investment; many economists argue that capital should not be taxed at all. On the other hand, capital owners tend to be rich—if you are struggling, you are unlikely to have much of a stock portfolio. Capital taxes, then, are progressive. Marco Rubio’s tax plan places him squarely in the efficiency camp—and at great cost to the federal budget.

Mr Rubio would eliminate all personal capital taxes, whether on interest, dividends or capital gains. This would encourage Americans to invest, in property, stocks, and by starting small businesses. In the long-run, that would be welcome. Americans typically do not save enough, and productivity growth could do with a fillip from investment. Capital taxes encourage jam today rather than jam tomorrow; choose to spend your earnings, and there is no tax to pay, but choose to invest them and the returns are taxed again before they can be cashed out. If you invest in a business, it typically must pay a levy on its profits, too. Mr Rubio decries this double-taxation, and claims the increased investment his plan would whip up would spur the economy.

It would. Yet capital gains are mostly the preserve of the rich: only a fifth of adults who earn less than $30,000 tell pollsters they have stock market investments, compared to nearly nine in ten of adults earning more than $90,000. The Centre for Tax Justice, an advocacy group, reckons Mr Rubio’s plan gives the top 1% of earners a tax cut worth 12.5% of their income, or nearly $225,000 on average. This is more than under Jeb Bush’s plan, despite the fact that Mr Rubio would cut the top rate of income tax by less (to 35%, versus 28% under Mr Bush). Thomas Piketty’s bestseller Capital in the Twenty-First Century ended with a call for a new tax on capital to avert widening and entrenched inequality; Mr Rubio goes the other way. Abolishing taxes on inherited wealth does not help, either.

These giveaways blow a hole in the budget. The Tax Foundation, a right-leaning think-tank, reckons Mr Rubio’s plan would cost $6 trillion over a decade, before accounting for its effects on the economy. This makes it 65% more costly than Mr Bush’s plan—which is already too expensive to be credible.

To his credit, Mr Rubio gives a roughly equivalent percentage boost to low earners (at much lower expense, given the greatly lower starting point). He would replace the standard deduction with a tax credit of $2,000. The credit would be fully refundable, meaning that if any worker owed less than $2,000 in taxes, they would receive a cheque from the government rather than a bill. The campaign has suggested, though, that the refund will not be available to individuals with no income (lest Mr Rubio be accused of supporting a state income for layabouts).

That makes the credit look a lot like what some economists have called a “work bonus”; a lump-sum benefit for those with a job. There is a strong case for work bonuses. Often, starting work comes with fixed costs, such as travel costs and appropriate clothing. These upfront expenses can make low-paid work unattractive for those on the margins of the labour force. A work bonus helps them clear the hurdle.

One tax on capital remains in Mr Rubio’s plan; he would keep taxing company profits. (Perhaps he felt that the argument that “corporations are people too”, which Mitt Romney infamously deployed, is not a winner.) But the plan would, like Mr Bush’s, allow “full expensing” of company investments. Currently, if a firm buys a piece of new equipment, they can, for the most part, deduct only the annual wear-and-tear on that equipment from their profits. Mr Rubio would let them deduct the whole cost up front. As a way to encourage investment, that makes sense—and is cheaper than his other ideas.

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