Five questions to ask about presidential candidates' tax plans
滨听聽that voters look seriously at the tax proposals being touted by presidential candidates, even though those plans have little chance of ever becoming law as proposed. But what should those voters look for as they sort through these complex ideas? Here are five questions you should ask yourself about any candidate鈥檚 tax plan:
What would the plan do to the nation鈥檚 deficit and accumulating debt?聽It may be unreasonable to expect any candidate to propose a plan that would raise revenue to help reduce the deficit, but there are key issues to consider even if every plan involves a net tax cut and revenue loss. For instance, what is the scale of the revenue loss? Would the plan greatly exacerbate our current deficit or only marginally do so? If the revenue losses are significant, does the candidate propose meaningful spending cuts to close the budget gap?聽If so, what are they?
Do the candidate鈥檚 revenue claims require substantial economic growth?聽Tax plans have traditionally been scored based on 鈥渟tatic鈥� revenue estimates. That is, estimates that assume taxpayers adjust behavior in response to changes in the law, but do not attempt to calculate how changes in the overall economy might affect tax revenues. This year, the Joint Committee on Taxation began to include a 鈥渄ynamic score鈥� that does take into account those macroeconomic feedback effects.
The problem is that candidates can assert that their tax plans will generate substantial economic growth鈥攅nough to make any revenue loss from tax cuts disappear. The question for voters: How credible are those feedback effects? It may be reasonable to assume that additional revenues from growth offset perhaps 10 percent to 15 percent of a plan鈥檚 static revenue loss. But be very suspicious of claims that 鈥渄ynamic effects鈥� offset 30 percent to 50 percent or more. These estimates are not supported by economic research, as noted by the Tax Policy Center鈥檚聽聽of Jeb Bush鈥檚 and Donald Trump鈥檚 tax plans.
Evaluating macro claims will help sort out whether a tax plan can be part of a broader deficit reduction plan or, despite what other benefits it may have, it is likely to worsen the budget outlook. Just be aware that it is easy to paper over large revenue losses by assuming large feedback effects.
How is the net tax cut distributed among taxpayers?聽Especially in light of current concerns about income inequality, how does the plan affect the distribution of tax burdens and after-tax income? How best to measure distributional effects is itself controversial although TPC prefers to focus on percentage changes in after-tax income (). Does the plan significantly change the current distribution of after-tax income or is it fairly neutral relative to current law? Do high-income taxpayers, who pay a higher share of their income in taxes, receive an above-average increase in their after-tax incomes or are tax cuts tilted more toward lower-income households?聽Often it鈥檚 the distributional effects鈥攁nd not specific details about changes in tax rates or tax preferences鈥攖hat reveal the big picture story of whom a candidate cares most about.
Is the tax cut tilted towards business income or workers鈥� earnings?聽A tax cut focused primarily on business activity, regardless of whether the enterprise is organized as a standard corporation or as a pass-through entity, affects both the fairness of the program and incentives to save and invest. Such a tax cut indicates that a candidate is primarily concerned with supporting the private sector. A tax cut focused on labor income demonstrates a greater concern with workers鈥� needs, including greater wage growth or boosting labor force participation. A voter should know which choice is a candidate鈥檚 top priority.
What do specific tax changes reveal about the candidate鈥檚 priorities?聽For example, increasing business credits for investment or research and development shows a concern for growth and innovation.聽In contrast, expanding the earned income tax credit or the child tax credit shows a concern for wage-earners and families.聽A balanced program may involve both but at a greater revenue loss.
Every tax plan involves trade-offs among equity, economic growth, efficiency, and deficit reduction. And candidates鈥� priorities often differ among these objectives. Only by looking closely at tax proposals can voters learn whether a candidate shares their views on tax and fiscal matters. Throughout the 2016 election cycle, TPC will continue to provide more analysis to inform your assessment.
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