Bush’s tax plan would slash rates while closing some loopholes

Former Gov. Jeb Bush of Florida challenged some long-held tenets of conservative tax policy on Wednesday by proposing to curtail valuable deductions that benefit the wealthy and eliminate the tax loophole that has benefited hedge fund and private equity managers for years.

That an establishment Republican candidate has embraced such changes not only highlights how income inequality has altered the tenor of the presidential debate for the party, but also indicates the ideological pull Donald J. Trump’s candidacy is having on the Republican field after he made similar proposals.

Bush’s proposals nevertheless drew a harsh rebuke from Democrats who are unhappy that he is seeking to lower taxes across all income brackets and slash the corporate tax rate. But conservative anti-tax activists were worried by his suggestion that “carried interest” – the profits that fund managers get from investing other people’s money – should be taxed at a higher rate, like ordinary income.

“No Republican should be for higher taxes on capital gains,” said Ryan Ellis, tax policy director at Americans for Tax Reform. “This tax hike idea is supported by Barack Obama, Hillary Clinton, Bernie Sanders and Elizabeth Warren. The Democratic left deeply wishes to tax all capital gains as ordinary income.”

The debate over how to tax carried interest has become central to a wider battle over income inequality, which Bush has been highlighting along with other Republican candidates like Trump and Mike Huckabee as they seek to undercut Democrats on an issue that polls show has increasing resonance with voters. Mitt Romney’s 2012 presidential bid was dogged by the carried interest issue when he revealed that he paid an effective tax rate of about 15 percent, largely on his compensation from Bain Capital.

But the effect of Bush’s proposals on the wealthy would be muted by his proposal to cut the number of individual tax brackets from seven to three, taxing income at 28 percent, 25 percent and 10 percent. His proposals would double the standard tax deduction that most filers take, end what Republicans call the “death tax” on estates of the deceased and seek to make marriage more beneficial for tax purposes.

Bush’s also proposes to cut the corporate tax rate from 35 percent to 20 percent and give incentives to invest domestically as he seeks to spur economic growth to an annual rate of 4 percent, an objective that has been met with skepticism by economists.

Speaking from the factory floor of a poultry-chilling-equipment company just south of Raleigh, North Carolina, Bush took pains to sound a series of populist notes.

“The new normal is a comfortable ride for the affluent people that live off their portfolios,” he told a crowd of supporters and workers with protective goggles resting on their foreheads. “My plan will help those who live on their paychecks, who haven’t seen a raise in a while.”

Grover Norquist, the founder of Americans for Tax Reform, said the Bush proposals represented sound strategy and a step in the right direction of reducing taxes overall.

To pay for the cuts, Bush says he will end the practice of taxing the international profits of American corporations, which has spurred the trend of corporate “inversions,” in which companies use cross-border mergers to take advantage of lower tax rates abroad. He would also assess a one-time tax on corporate money stashed overseas and eliminate the interest deductions that companies take when they borrow, and he has set his sights on the sensitive issue of carried interest.

“We will treat all noninvestment income the same, so unless you stake capital in an investment, you won’t be able to claim the capital-gains tax rate on your market gains,” he wrote in a Wall Street Journal op-ed ahead of his speech in North Carolina.

Bush’s idea of taxing carried interest at his highest proposed rate of 28 percent, rather than at the lower capital gains rate of 23.8 percent, could draw the most consternation from Republicans, making such an overhaul difficult to pass through Congress without bipartisan support. Wall Street donors and lobbyists have fought for decades to prevent such changes, and they were vocal in their opposition on Wednesday.

“Increasing taxes on carried interest would discourage growth and investment and would make our tax code more complex and less fair,” said James Maloney, a spokesman for Private Equity Growth Capital Council, which lobbies for the industry. “Instead of increasing taxes on private equity, venture capital and real estate investment, it is our hope that as the debate over tax reform unfolds, presidential candidates will utilize the opportunity to encourage, not undermine, long-term investment in the United States.”

While Bush’s plan embraces some of Trump’s populist language, he also took a subtle jab at his rival, suggesting that the billionaire tycoon’s idea of using tariffs to protect American companies is an affront to conservatives.

“Liberals will tell you that we need walls and tariffs to protect U.S. businesses from international competitors,” Bush wrote. “The liberals are wrong; we need tax reform.”

Democrats pounced on Bush’s proposals on Wednesday as a strategy that would most benefit the rich and impose new costs on the middle class, and they compared his tax cuts to those enacted by his brother, former President George W. Bush.

“More massive tax cuts for the wealthy and corporations, all while exploding the deficit or shifting the burden onto the middle class – an even more extreme plan than his brother’s,” said Holly Shulman, a spokeswoman for the Democratic National Committee.

American Bridge, a Democratic super PAC, pointed out that Bush’s proposals would pose little hardship for hedge fund managers because they would be facing a lower personal income rate anyway.

What impact Bush’s proposals would have on the deficit remains unclear. A Bush spokeswoman would not say how long he projects it would take to achieve 4 percent economic growth or how the lost tax revenue would be accounted for in the short term.

But Bush has suggested that he will be tough on spending. On the campaign trail he often touts his reputation as “Veto Corleone” in Florida, and when comparing himself to his brother in an interview with Stephen Colbert on Tuesday, he said he was the thriftier sibling.

“He should have brought the hammer down on the Republicans when they were spending way too much,” Bush said.

This story was originally published September 9, 2015 at 5:42 PM with the headline "Bush’s tax plan would slash rates while closing some loopholes."