U.S. Sen. Marco Rubio, who will announce his candidacy for president later today, has already made it clear that his ambitious tax-reform proposal will be a centerpiece of his 2016 campaign.
How ambitious, you ask? Well, among other things, it would totally eliminate all taxes on unearned income. More specifically, the capital gains tax would be cut to zero. The tax on interest income would be eliminated. The tax on dividend incomes would be cut to zero. The estate tax would be cut to zero. All income generated by those means would become tax free.
Because of privacy laws, we could ordinarily only guess or speak in general terms about the impact that such changes might have on the tax liabilities of wealthier Americans. But as it happens, we have access to the tax returns of one such couple in the 2011 income tax return of Willard M. and Ann D. Romney. So let’s see what happens if we take the proposals in the Rubio plan, which the Florida senator developed in concert with U.S. Sen. Mike Lee of Utah, and apply them to the Romneys.
Back in 2011, the former GOP presidential nominee and his wife reported adjusted gross income of $13.7 million, and they paid $1.935 million in federal income taxes, producing an effective tax rate of just 14.1 percent. Looking deeper into the Romney’s return, we learn that almost of their income that year came in the form of taxable interest ($3 million), stock dividends ($3.65 million) and capital gains ($6.8 million).
Under the Rubio plan, none of those income sources would be taxable any longer. So after the Romneys deducted their mortgage interest and charitable contributions, their federal tax liability would fall to …. zero. Literally, zero.
On income of almost $14 million, they would pay no federal taxes. Not a single penny. Ironically, Mitt and Ann would fall into that “47 percent” that Romney himself condemned in the 2012 presidential campaign for living in this country and benefiting from its prosperity but paying no federal income taxes to help run and defend it.
But wait. It gets worse.
According to the latest IRS numbers, in 2012 the richest 400 taxpayers in the country** earned a total of $5.2 billion in taxable interest income. All of that money would become tax free under the Rubio-Lee plan. They also earned $21.7 billion in dividend income, which also becomes tax free. And they earned $76.3 billion in capital gains, also tax free under Rubio-Lee. That’s a total of $103 billion a year, collected by the richest 400 Americans, that would suddenly be completely free of federal taxation.
Now, if you eliminate taxes on all that unearned income, you obviously create a giant, gaping hole in federal revenue. According to an analysis by the Tax Policy Center, an earlier version of the Rubio-Lee tax plan announced back in in 2013 would increase the deficit by some $2.4 trillion over the next decade. The newest version, updated last month, is considerably more aggressive and would cost the treasury considerably more, although the TPC has yet to conduct a full-scale analysis of the new version.
Given the gargantuan scale of the tax redistribution proposed by Rubio, and given its emphasis on enriching those already quite wealthy, you might think that his plan must have been embraced enthusiastically by conservatives. If so, you would be wrong.
You see, as generous as it is to those already doing splendidly, the Rubio-Lee plan still isn’t generous enough in some minds. Conservatives love the fact that it eliminates taxes on unearned income, but they argue that the top tax rate on earned income is still too high under the plan. It calls for a top rate of 35 percent, down from the current 39.6 percent, and conservatives want that cut still further.
Rand Paul, by comparison, wins applause by eliminating all taxation of investment and interest income, just as Rubio does. But he proposes a single tax rate on earned income of just 17 percent on all taxpayers, rich and poor, which would significantly boost the tax benefits to wealthier Americans. (It would also slash federal revenue by $7 trillion over the next decade, and that’s by his own reckoning.)
And Ted Cruz, while decrying income inequality and the concentration of wealth, likewise calls for a flat tax of some unspecified percentage, the elimination of taxes on capital gains and dividends and, oh yeah, a cherry on top in the form of abolishing the IRS. He has not merely embraced the GOP tactic of using highly populist rhetoric to cloak policies favorable to the rich, he is taking the practice to new levels of audacity.
In short, if you think that the problems of America can be traced to the fact that its wealthiest citizens just aren’t wealthy enough, if you think that the greatest concentration of wealth in our nation’s history is a sign of health that ought to be encouraged through the tax system, if you think it’s a good thing that the share of our national output going to paychecks of working people is the smallest it has been in the 68 years in which we’ve measured such a thing, then boy do I have the political party for you.
** Income for the richest 400 taxpayers averaged $335.7 million in 2012.