A few (admittedly speculative) thoughts concerning the Jeb Bush tax proposal

Others have noted that more than half of the tax cuts that Jeb Bush is proposing – even excluding the distributional impact of cutting corporate rates – would go to people in the top 1 percent of the income distribution.

I would guess that a “fractal” pattern continues to hold inside the top 1 percent – i.e., that those in the top 0.1 percent benefit far more from the tax cut (even as a percentage of income) than those towards the bottom of the top 1 percent. For example, both the corporate tax rate  cut to 20 percent, and the proposed new 20 percent top rate for interest income, would likely make it considerably easier for them, than for many of the pikers just below them, to avoid the 28 percent individual rate.  Also, those at the very top would almost certainly be hit relatively less by the proposed 2 percent of AGI cap on itemized deductions – especially given that charitable deductions would be excluded from the cap.

To some extent, differential planning flexibility might create something of a “bubble” top rate – 28 percent for high-paid professionals and the like, then effectively dropping down to 20 percent for those who are rich enough to keep most or all of their income out of the 28 percent ordinary income bracket.  (The issue of those at the very top not even needing to realize taxable income is there as well, of course, but is not attributable to this plan in particular.)

It’s also quite clear that, whatever the long-term incidence of corporate taxation in steady state, the transition incidence of the rate cut would inure predominantly to the benefit of those who are at the top distributionally.

I also would expect non-corporate businesses that now pay the 39.6% and 35% corporate rates to rush to incorporate more frequently.  Often these may be domestic businesses that don’t have the same sort of global mobility as the big U.S. (and foreign) multinationals - potentially undermining the story in which the long-term incidence of taxing such companies might be shifted to lower-paid labor. The new incorporators might often effectively be earning labor income as an economic matter – but at the very highest end of the wage scale.

Some of these issues with the proposal could probably be addressed to a degree (for example, via a "dual income tax" addressing the use of 20% corporations as a labor income tax shelter).  But they won’t be addressed if the first-cut distributional effects are an intended feature, not a bug.  And making them a feature, not a bug, would surely be to the taste of those whom I would think are the proposal’s main intended audience.  I would guess that its main targets, apart from imperfectly attentive Beltway pundits who reflexively like all putatively 1986-style tax reform, are the high-end campaign contributors whose donations reportedly have slowed in recent months.  If it's mainly aimed at Iowa and New Hampshire voters (even those on the Republican side), then it is more politically naive than I would have expected, even given the Bush campaign's many stumbles to date.

One last point concerns the budgetary effects.  As Bill Gale has noted, claims by Bush supporters that the $3.4 trillion 10-year static revenue cost would be two-thirds offset through dynamic effects “would require the growth rate to rise by at least 0.5 percentage points per year.  This seems like quite an optimistic scenario, given that the evidence that income tax cuts can boost economic growth rates is weak.“

Gale has elsewhere noted (in joint work with Andrew Samwick) that tax cuts which raise the federal budget deficit - as these surely would; I haven’t heard much from the Bush camp about commensurate spending cuts – are likely to raise interest rates and reduce national saving, “creat[ing] a fiscal drag on the economy’s ability to grow.”

So conceivably (it seems to me) the true overall dynamic effect of the Bush plan and Bush budget, for the federal budget as a whole, might even end up lying in the opposite direction – towards a larger, rather than smaller, than $3.4 trillion revenue loss - although this depends on the full details on both the tax and spending sides. Think Kansas under Sam Brownback, if you want a handy analogy.

In sum, this is a fundamentally frivolous proposal economically – even if it has a few nice bells and whistles, such as ending the step-up in asset basis at death.  As nice bells and whistles go, however, the widely-noted carried interest part is hardly even worth mentioning.  While it hits a current political sweet spot, it’s truly trivial in scope compared to everything else, especially in combination with the proposed 20 percent and 28 percent top rates. The stakes in carried interest today are often 20 percent capital gains rate versus 39.6 percent top individual rate.  The "losers" if the law is changed might not even need to pay 28 percent - they might be able to find new ways under the Bush plan to keep it at 20 percent, even without reporting long-term capital gains.

ADDENDUM: Just as a point about balance, while I was significantly less critical than this, overall, with regard to Hillary Clinton's recent capital gains proposal - reflecting that she did not propose to blow a highly regressive $3.4 trillion hole in the budget - I was certainly very far from being in the tank for it.  Indeed, I agreed with Victor Fleischer that it quite "misses the mark," and even verges on being "pointless," insofar as its intended effects on corporate governance are concerned.