Beneath the coarseness of the 2016 presidential campaign and the no-longer-surprising surge of candidates giving voice to the anger and frustration of millions of Americans lurks a surprisingly serious debate about bold, far-reaching changes to the U.S. tax code.
Ideas that for years had been relegated to economists’ white papers and seminar rooms have been embraced by at least three candidates. On the Republican side, Ted Cruz and Marco Rubio would turn the tax code inside out, taxing spending rather than income to encourage saving. On the Democratic side, Bernie Sanders is talking about a new financial transactions tax to discourage unproductive speculation in securities markets as well as a carbon tax, which is economists’ favorite tool for fighting climate change.
Mr. Cruz proposes to shrink the income tax and eliminate the payroll tax and would impose what he calls a flat tax–something economists call “a subtraction-method value-added tax,” or a national sales tax that is collected from businesses rather than at retail counters. Mr. Rubio would eliminate taxes on interest, dividends, and capital gains, which amounts to taxing spending–at progressively higher rates for upper-income taxpayers–in a version of what economists call “the X-tax,” designed by the late Princeton University economist David Bradford.
None of this means that major tax reform is around the corner. At the moment, none of these senators–Mr. Cruz, Mr. Rubio, or Mr. Sanders–is poised to win his party’s nomination.
Each candidate also faces a nagging arithmetic problem. Mr. Sanders is prepared to raise taxes–a lot–but it’s far from clear that his tax increases would cover the cost of his ambitious government programs. Ted Cruz, Marco Rubio, and Donald Trump are proposing huge tax cuts–in the neighborhood of $6 trillion to $10 trillion over 10 years, according to the Tax Policy Center–without endorsing spending cuts large enough to offset the lost revenues.
Indeed, Bill Hoagland, a former Republican staff director of Senate Budget Committee, figures that balancing the budget over the next 10 years as congressional Republicans say they want to do and cutting taxes as the leading GOP presidential candidates propose would require cutting spending by 50%. Spending cuts that large would never get through Congress even if a president actually proposed them.
Of course, the candidates promise that enacting their proposals would yield faster economic growth, and the more growth the more tax revenues. But even the most optimistic, credible models (especially those used by the official congressional scorekeepers) fail to predict nearly enough economic growth to offset the Republicans’ tax cuts or Mr. Sanders’s investment spending. Hillary Clinton hasn’t fleshed out all of her tax proposals yet, but so far she has focused on targeted tax increases on the rich and targeted tax cuts for the middle class rather than turning the tax code inside out.
So is all this bold talk just talk? Are these ideas that will linger on abandoned Web sites after the campaign and never make it into legislation? For now, yes. But sometimes campaign proposals are like seeds that sprout years later, influencing tax bills in significant ways.