Nova workboard

a blog from young economists at Nova SBE

Jeb Bush’s tax plan: A viable high-growth strategy?

Jeb Bush, former governor of Florida and 2016 US Republican presidential contender, released his tax plan on September 9th. He believes that his tax reform is a high-growth strategy. Could this tax plan contribute to achieve the objective of 4% annual economic growth, as Jeb Bush stated, without widening the deficit?

Regarding corporate income tax, Jeb Bush offers to reduce its rate from 35% to 20%, to stop taxing repatriated foreign earnings and to make earnings currently hold abroad by US companies subject to a one-time tax of 8.75%, payable over ten years. US corporate income tax rate is currently the highest in the OECD. Such a high corporate tax rate may be a burden on firms’ productivity. Besides, the United States is one of the few countries where repatriated foreign earnings are taxed. For these reasons, many US multinational companies flee US tax system by hoarding cash overseas: in 2014, US companies’ estimated foreign cash holdings was approximately $2 trillion. Some US companies change their nationality to benefit from lower corporate income rates abroad. This process, known as “tax inversion”, can be implemented by acquiring a foreign company. Since 2012, about 17 US companies have reincorporated in low-tax countries. Jeb Bush’s measures may encourage multinational companies to pay taxes within the US and prevent them from implementing tax inversion. They would also boost firms’ productivity, foster job creation, higher wages and investment.

As for the individual income tax, Jeb Bush plans to double the Earned Income Tax Credit (EITC) for childless low-earners, which would be a significant relief for low income earners and would foster labor force participation. Moreover, Jeb Bush wants to consolidate the current seven tax brackets, ranging from 10% to 39.6%, into three with rates of 10%, 15% and 28%. The plan also includes doubling the standard deduction, eliminating state and local income deduction, and capping itemized tax deductions, such as mortgage interest and medical deductions, at 2% of the adjusted gross income. Millions of American would get rid of tax liability and all taxpayers would get a higher after-tax income. However, upper class seems to benefit the most from this tax system: the wealthiest 1% would enjoy an income boost of at least 11.6% and would be less affected by the ceiling on itemized deductions.

Consequently, Jeb Bush’s tax plan would have positive impacts on economic growth: the think-tank Tax Foundation estimated it would lead to a 10% GDP growth over the long run, to 7.4% higher wages and to increased labor force participation. Moreover, all taxpayers would benefit from it. Nonetheless, it could considerably widen the deficit and reduce federal revenue by between $1.6 and $3.6 trillion over the next ten years. Estimating plan’s effects is difficult, since companies and individuals would change their behavior, but it may be sustainable on a dynamic basis, even though some measures are very generous to wealthy people and do not contribute much to boost economic growth.

Elise Grégoire

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Author: studentnovasbe

Master student in Nova Sbe

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