Marco Rubio and Rand Paul on Fiscal Reform

It’s only a few weeks into the race for the Republican nomination for the 2016 presidential race and the field of candidates is already more interesting than it was in 2012. In the past  few days, Senators Rand Paul and Marco Rubio joined Senator Ted Cruz in a field that promises to become more crowded than any recent memory.

In spite of the perhaps overwhelming number of candidates who could take the stage in debates this fall, there aren’t a lot of worn-out has-runs looking to get in the race – at least not among Republicans. Democrats can look forward to Hillary Clinton and possibly Joe Biden as early frontrunners.

Will newcomers mean a new policy direction? Senators Paul and Rubio will argue that their respective candidates mean the answer is yes. Both have significant enough track records from their time in the Senate to draw some conclusions about their ideas and priorities, especially when it comes to fiscal policy reform.

Senator Paul, for example, has proposed his own federal budget three years running. Vox provides a helpful breakdown of the major changes that he has consistently put forward.

First, Paul would replace the personal income tax with a 17 percent flat tax on wages and an additional flat tax on corporations – “specifically on their revenue less investments, input costs, and wages.” The tax code would be simpler, as most tax deductions would be eliminated, but the standard deduction would stay and be significant in size.

Second, Paul’s budget would cut a lot of discretionary spending – from 20 percent from the FDA and the National Institutes of Health to over 70 percent from the departments of State and Interior. It would even go so far as to eliminate some departments, such as the Department of Energy.

Paul would eliminate the Department of Education and HUD, though he would leave Pell Grants in place. As well, he “would either eliminate or make non-refundable (meaning the credit would go only as high as taxes owed) the Earned Income Tax Credit and the Child Tax Credit…”

Foreign aid would disappear – including to Israel. In his 2012 budget, defense spending was cut by 30%, however, when taking the current sequestration cuts into account, the amount spent would be a modest increase on current defense spending – at least as long as the assumption that war spending is ended comes true.

Finally, Senator Paul has routinely called for a Balanced Budget Amendment. Though AEI’s James Pethokoukis admits that budget rules in theory could be a good thing, he argues that the kind of amendment Paul proposes is not a great idea, for a number of reasons.

First, budget rules need a consensus on where revenue should come from and where it should be spent. As Pethokoukis puts it, “if Washington could agree on a fiscal rule it probably wouldn’t need a fiscal rule.”

Furthermore, the debt, as a share of the GDP, can be decreased without surpluses (Congressman Paul Ryan’s budget does so) and America’s aging population makes tax revenue equal to spending unlikely – at least in the short run. Such a change requires restructuring much of the federal government, which happens to be both Senator Paul’s means and one of his ends.

Senator Rubio has put forward a plan for economic growth, which includes such diverse ideas as distributing some of the wireless spectrum now held by government among private companies, increasing coordination between national research agencies and streamlining the process for regulatory review of natural-gas pipeline development.

The most important aspect of Rubio’s plan for economic growth is tax reform. The major tenets of the reform, which he has put forward along with Utah Senator Mike Lee,  are a simplification of the income tax – a 15 percent rate for the lower bracket and a 35 percent rate for the higher bracket; the latter of which would kick in at $75,000 for individuals and $150,000 for married couples – a new child tax credit of $2,500, a cut in the corporate tax rate from 35 to 25 percent and the elimination of the estate tax. It would also get rid of many business tax credits.

Commentators such as Ramesh Ponnuru generally praise his plan. On Bloomberg View, he notes the following:

The enlarged child credit would benefit more people every year than the capital-gains tax cut that all supply-siders favor. But the critics are right to say that it’s designed to provide tax relief, especially for middle-class families, and not to boost economic growth.

That criticism has overshadowed the many pro-growth elements of the plan. It would produce a tax code similar to what resulted from the last big round of reform, in 1986, but with two big differences: It would have somewhat higher rates and much better treatment of investment. That’s a tradeoff supply-siders should be happy with. It would make for a tax code that does more to encourage growth than any the U.S. has had since the 1920s.

A major difference between Paul’s budgets and the Lee-Rubio tax reform plan is that the latter does not even attempt to cut the deficit. Of course, it should not be considered statically in isolation and Lee and Rubio have called for entitlement reforms that should decrease expenditures, but it does create an easy target for more aggressively debt-attacking candidates like Paul and Cruz.

Compounding Rubio’s challenge to appear a fiscal hawk is the fact that he is a defense hawk. Together with Arkansas Senator Tom Cotton, he recently introduced an amendment to increase defense spending. As The Hill reports, “the amendment would swap out the fiscal year 2016 defense budget numbers with the projected fiscal year 2016 numbers included in former Defense Secretary Robert Gates’ fiscal year 2012 defense budget.” That comes to $661 billion.

The Republican Party, however, is shifting back to its usual hawkish ways after a brief flirtation with the less-intervention stance of Rand Paul, so Rubio might be forgiven this particular big spending proposal. Overall, his simple, middle-class-friendly tax proposals should appeal to the less-engaged American voter.

Paul’s budgets certainly will appeal to the libertarians and the less hawkish Tea Partiers on the Right. Rubio’s tax reform plan echoes much of what reform conservatives (loosely: the more fiscally-conservative neo-cons) have advocated and will likely appeal to traditional and social Republicans as well, along with the more hawkish members of the Tea Party.

And then there is the issue of broader political feasibility to consider. Rubio’s plan, a more modest effort from a dollars perspective, could for that reason prove easier to enact. Paul’s plan, again from a dollars perspective and because it forces the federal government to be reconstituted, could be the better long term goal.

Answering the question of what Republicans and then Americans generally are looking for is one of the reasons we have elections and 2016’s will be a fascinating one.