So it might be worth taking a closer look at Rubio’s very detailed tax proposal to see how it would benefit or set back private companies’ interests.
While Rubio’s tax plan, as it has evolved for the campaign, is quite comprehensive, there are a number of elements that should be of particular interest to private company CFOs and tax directors. The plan would:
Individual Taxes
- Eliminate the tax on dividends and capital gains accrued after the proposal’s effective date, while imposing a one-time transition tax on unrealized capital gains.
- Do away with the tax on interest income as well as the deductibility of interest payments (except for mortgage interest).
- Delete all itemized deductions, except for a modified mortgage interest deduction and a charitable contribution deduction.
- Reduce the seven existing tax brackets to just three — 15, 25, and 35 percent.
- Repeal the personal exemption for taxpayers (not dependents) and the head-of-household filing status; replace the standard deduction with a $2,000 and $4,000 (for couples) partially refundable tax credit, while increasing the per-child tax credit by $2,500.
- Eradicate the individual AMT.
- Repeal the ACA tax surcharge.
- Repeal certain tax expenditures for pass through entities
Estate and Gift Taxes
- Abolish the federal estate, gift, and other inter-generation transfer taxes.
Business Taxes
- Set the federal corporate income tax rate at 25 percent and eliminate corporate AMT.
- Likewise, set the top individual tax rate on pass-through business income at 25 percent.
- Permit the expensing of all business expenditures for equipment, structures, inventory and land.
- Eliminate both the tax on interest income and the deductibility of interest payments. Financial institutions would be exempted from these changes.
- Adopt a territorial tax system and levy a 6 percent deemed repatriation tax on currently deferred overseas earnings, payable over 10 years. (Not available for pass-through entities)
- Repeal certain tax expenditures for corporations
It would be difficult to evaluate the impact of these measures on individual private companies, since their tax situations vary significantly from company to company and year to year. However, one can use the projected impact of these measures on federal tax receipts as a proxy to measure the relative value of the various provisions for private companies — i.e., the larger the impact on federal receipts (positive or negative), the greater the inverse value for private companies (negative or positive) as a group,
ceteris paribus.
However, an evaluation of federal tax receipts will not capture the knock-on effects for state and local taxes (e.g. effective state rates should increase as federal income tax deductions are curtailed or eliminated for states that accept all or some federal deductions). Nor does it account for the plan’s dynamic impact on economic growth, which can vary significantly across economic models.
Of the many recent reviews of Marco Rubio’s tax proposal, by far the most detailed and current is The Tax Policy Center’s (TPC) February 11, 2016 study[i]. While the study’s estimate of the 10-year net federal revenue impact is slightly above that of the more conservative Tax Foundation study ($6.8 trillion v. $6.1T loss), both are relatively close compared to estimates from the liberal Citizens for Tax Justice ($11.8T loss)[ii].
The largest hit to federal tax revenues among the items listed above comes from replacing personal exemptions and standard deductions with a $2,000 and $4,000 (couples) tax credit, increasing the child credit by $2,500, and abolishing the head of household filing status, which would reduce federal tax receipts by a net $3.0T over the next 10 years. TPC estimates that restructuring the individual marginal tax rates will cost the Federal government $1.4T from 2016 to 2026. In addition, eliminating the ACA tax surcharge yields another $192B in tax savings. Of course, the benefits of these changes are spread across all taxpayers (whether business owners or not).
The TPC calculated that the net effect of expensing all investments, disallowing interest deductions and excluding interest received on new business loans would be $1.3T for individuals and $932B for corporations (over the next ten years). Excluding interest, dividends and capital gains from the AGI would reduce federal receipts by about $1T from individual filers.
Private company owners will gain about $652B from lowering top business income rate to 25 percent (corporations will gain $1.3T from reducing the corporate rate and repealing the corporate AMT). Repealing the personal AMT would yield $366B in tax savings, while repealing the estate and gift taxes would save taxpayers about $224B over 10 years. The net gains for corporations taxed under a territorial system would be roughly $108B, a savings not available to pass-through entities.
Conversely, under Rubio’s plan, increases in Federal tax receipts (2016-2026) would come from:
- Cutting itemized deductions (except mortgage and charity) -- $2.4T;
- The tax on unrealized capital gains (payable over 10 years) -- $497B; and
- Repealing certain tax expenditures for pass through entities -- $464B (compared to $260B for C-Corps).
While the Rubio tax plan contains specific provisions to lower the tax rates on business income to benefit pass-through entities, it is difficult to calculate the overall benefits for private companies and their owners. The TPC estimates about half the benefits of the plan accrue to corporations and pass through business entities. It also estimated that 71 percent of the plan’s total federal tax change would go to the top 20 percent of income earners, with 40 percent of the change going to the top 1 percent. Put differently, the Rubio plan would lead to a 5 percent increase in the top quintile’s income and an 8.9 percent increase for the top 1 percent by 2025, compared to an average 3.4 percent increase for all taxpayers.
i Tax Policy Center, “Analysis of Marco Rubio’s Tax Plan”, Urban Institute and Brookings Institution, February 11, 2016.
ii Jackie Calmes, “Analysts Question Viability of Deep Tax Cuts Proposed by Republican Candidates”, NYT, February 22, 2016.