Mike Lee’s Tax Plan: An Intriguing Idea That Would Add $2.4 Trillion to the Deficit

By :: March 12th, 2014

An ambitious tax reform plan proposed by Sen. Mike Lee (R-UT) would provide generous new tax credits for families with children and repeal the Alternative Minimum Tax, while at the same time eliminating the standard deduction and nearly all itemized deductions. More than 60 percent of households would pay lower taxes than under current law but, as a result, the plan would increase the deficit by $2.4 trillion over the next decade, according to a new analysis by the Tax Policy Center.

In contrast to many other GOP tax reform plans, Lee’s—first offered last fall-- does not aim to sharply reduce marginal tax rates. He’d replace the current system with two brackets—15 percent and 35 percent. By eliminating the 10 percent bracket, he’d actually increase rates for many households, nearly all of whom would be paying at 15 percent. Others now paying at 28 percent would be taxed at the top rate of 35 percent. Indeed, many households would face higher effective marginal rates than under current law.

Lee’s goal is to cut taxes for families with kids. Thus, it is full of trade-offs. He’d eliminate the standard deduction and repeal Head of Household filing status—a step that would raise taxes on some single parents. He’d also end the personal exemption for taxpayers and their spouses, but retain the dependent exemption, create an additional child tax credit, and a new personal tax credit. A married couple with two kids could get a combined credit of as much as $11,000 ($4,000 from the personal credit, $2,000 from the existing CTC, and $5,000 from the new child credit).

The plan would retain preferential tax rates for capital gains. Nearly all deductions would be ended, except those for charitable giving and mortgage interest, which would be available for only the first $300,000 in mortgage debt. Since there would no longer be a standard deduction, the remaining subsidies would no longer be limited to today's itemizers.

TPC found the biggest winners under the Lee plan would be the highest income households. The top 0.1 percent would enjoy a 3.8 percent increase in their after-tax income while middle-income families would get a tax cut of about 2 percent. Singles, on average, would see their after-tax income rise by less than 1 percent, while incomes for joint filers would increase by 2.7 percent. Families with children would get a 3.4 percent tax cut on average, with the largest benefit going to upper middle-income households with kids.

While Lee takes an interesting approach to reform, adding $2.4 trillion to the debt over 10 years makes his idea a political non-starter. Could he retain the basic concept behind the bill—helping families with kids—without losing all that money?

He’s got some options: He could raise statutory rates, cut tax preferences more deeply, or scale back those very generous credits. He could also get there by subjecting more households to the top 35 percent rate. In his proposal, the bracket begins at $175,500 for couples filing jointly ($87,850 for singles) He could avoid adding to the deficit by beginning the 35 percent rate at $100,000 for joint filers ($50,000 for singles).

Give Lee credit for original thinking. He’s designed a tax plan aimed at achieving what he believes is an important social goal—having a family with kids. And he’s done it in a transparent way. His numbers don’t add up, but it is easy to see how they could. It is also worth comparing Lee’s effort with Dave Camp’s. While Camp borrowed some of Lee’s ideas, such as ending Head of Household status, he was trying to achieve a very different goal--simplifying the code without adding to the deficit or changing the share of taxes paid by different income groups.

10Comments

  1. Leslie  ::  1:11 pm on March 12th, 2014:

    “beginning the 35 percent rate at $100,000 for joint filers, $50,000 for singles”

    Married or single, someone making $50,000 is what? Middle-class?

    I guess, when the minimum wage is $7.25 per hour ($15K per year). If it goes to $10.10 per hour ($21K per year), then the working poor become what? lower-middle class? And the middle-class with children (the focus of Lee’s plan), at $50K single or $100K couples they step into the highest bracket (35%)?!

    Is the US facing a shortage of people or a precarious decline in population? How much of the GDP comes from population growth alone? Some say, none.

    How would the major component of GDP, productivity growth, fare with more two-income families with kids, both adults working to make ends meet?

    Mortgage, car loans, college savings…anything left for retirement savings? Or does Lee foresee a return to aged parents living with their children, who are caring for the grandchildren until grandpa and grandma die and the dead tired parents “retire” and live with their grown kids?

    What does Congressman Lee think will happen to Social Security in the future under his tax plan? How will he tax Social Security income?

  2. ND  ::  2:29 pm on March 12th, 2014:

    Adding more debt-ballooning subsidies to sole breadwinners, more tax and benefit subsidies to men to neglect their children?

    Adding more taxes to women who take economic responsibility for themselves and men who take personal responsibility for meeting their children’s needs.

    I don’t think this plan makes any sense.

  3. 2014 TAX BRACKETS INCOME News  ::  1:18 am on March 13th, 2014:

    […] TaxVox » Blog Archive » Mike Lee's Tax Plan: An Intriguing Idea … […]

  4. Michael Bindner  ::  4:03 am on March 13th, 2014:

    I agree with Lee’s goal on beefing up the child credit – but he should end the dependent credit and simply increase the child credit amount – rather than adding a new one. This credit should also be distributed with pay, not at the end of the year (yes, that means being made refundable). Still, he misses out on the need to shift most taxation to employers from families (which makes shifting the credit to payroll much easier and eliminates the need for most deductions). Since business collected consumption taxes can be a revenue machine, the problem of long term fiscal imbalance can be mitigated, while relying on a high income surtax to directly attack the debt problem long term (by taxing the class that holds the most bonds – the rich). I don’t expect that from Tea Party Darling Mike Lee – but I hope others look at these possibilities in the not too distant future.

  5. Michael Bindner  ::  4:04 am on March 13th, 2014:

    No, we stay poor – which is the non-PC term for working class

  6. 2014 STANDARD DEDUCTION FOR CHILDREN 2014  ::  8:01 am on March 13th, 2014:

    […] TaxVox » blog Archive » Mike Lee's Tax Plan: An exciting idea … […]

  7. Ralph H  ::  9:07 am on March 13th, 2014:

    I believe Howard, not Mr Lee came up with the $100K start of the bracket. I assume that SSI would be unchanged in its treatment. Still taken out and taxed as income when received. Due to the changed brackets and credits there has to be an effect, perhaps someone can calculate this.

  8. Jobs, Growth and Tax Reform: Everybody’s hungry, and looking for a cook.  ::  2:03 am on March 17th, 2014:

    […] tax reform bill in the Senate—but it would cost $2.4 trillion. TPC’s Howard Gleckman notes an intriguing idea from Sen. Mike Lee that costs $2.4 trillion. The Senator wants to help families with children, but […]

  9. So long to fantasy tax reform plans, please | AEIdeas  ::  11:40 am on August 22nd, 2014:

    […] tax reform plan, which I find directionally smart — though as this TPC analysis finds, it is far from perfect though certainly fixable. What both plans have in common is an attempt to reform the tax code in a serious, real-world way […]

  10. The GOP tax debate and the healing power of ‘and’ | AEIdeas  ::  10:03 am on August 27th, 2014:

    […] although Lee’s numbers may not add up right now, Howard Gleckman of the Tax Policy Center says, “it is easy to see how they could.” Indeed, Lee and Rubio are working on, […]