How tax reform could shape the GOP field

As they search for a 2016 presidential candidate, Republican voters face a choice on taxes: Reform the existing system, or start a new one?

It's a question of practicality as well as philosophy. Even incremental change on tax policy isn't easy. Still, it's easier than overcoming inertia, fear of change, and the forces of opposition that would mobilize to protect the basic structure of the existing system.

Some candidates haven't specified their tax plans yet. But the breadth of the Republican field ensures that the party's rank-and-file will have plenty choices on both sides. And taxes will certainly be a topic front-and-center at the next GOP debate on Oct. 28, hosted by CNBC in Boulder, Colorado.

Republican presidential candidates (L-R) U.S. Sen. Ted Cruz (R-TX), Ben Carson, Donald Trump and Jeb Bush participate in the presidential debates at the Reagan Library on September 16, 2015 in Simi Valley, California.
Getty Images

Given GOP hostility toward Washington in general and the Internal Revenue Service in particular, some candidates emphasizing their outsider status and boldness have lined up to behind a brand new system.

Sen. Ted Cruz of Texas has asked fellow Republicans to imagine an end of the IRS, replaced by a flat tax that would let Americans file their returns on a post card. He has not yet laid out a specific plan.

Retired neurosurgeon Ben Carson has called for a flat tax modeled after the biblical exhortation to "tithe" 10 percent of a person's income.

Sen. Rand Paul of Kentucky advocates a 14.5 percent flat tax for individuals and corporations.

And former Gov. Mike Huckabee of Arkansas backs an elimination of both the personal income tax and Social Security payroll tax in favor of the "fair tax," a national sales tax of 23 percent.

Their plans tout the fairness of charging everyone the same rate, and an end to the complexity of the tax code. Taxing consumption rather than investment, as Huckabee's would, matches a common prescription from economists for improving economic growth.

They also have two big vulnerabilities. One is the prospect that they will increase the deficit, a controversial proposition for a party that has attacked President Barack Obama so fiercely over the national debt. The other is that they exacerbate income inequality by granting larger tax cuts to the affluent than to the working class.

The incremental reformers in the Republican field face the same critiques.

Former Gov. Jeb Bush of Florida proposes to cut the top personal tax rate to 28 percent from 39.6 percent, and the top corporate rate to 25 percent from 35 percent. Taxes on capital gains and dividends would fall to 20 percent, while the estate tax would disappear.

To benefit ordinary workers, he would nearly double the size of the standard deduction and take some 15 million families off the tax rolls altogether. Bush acknowledges this would increase the deficit in the short-term — his economic advisers say $1.2 trillion to $3.5 trillion over 10 years — but calls that worth it to boost economic growth for the long term.

Sen. Marco Rubio's plan would also increase the deficit in the short run, though he argues that it would generate enough economic growth within a decade to produce a surplus when combined with spending cuts. Rubio's plan would cut the top personal rate to 35 percent, while eliminating taxes on not just estates but also capital gains and dividends. The corporate tax rate would drop to 25 percent.

Ben Carson
Ben Carson: 6-month tax hiatus for overseas profit
Donald Trump
Trump, should he fall behind: 'Well, I'm not a masochist'
Joe Biden
Why Joe Biden should delay his decision

Real estate magnate Donald Trump, true to form, insists his tax plan would prove most dynamic of all. He would cut the top business tax rate from the current 35 percent to 15 percent. He also wants to cut it to that level for unincorporated firms that pay their taxes through the personal tax code.

Trump would reduce the top personal rate to 25 percent, and the top rate on capital gains and dividends to 20 percent. His tax brackets would take some 30 million additional families off federal tax rolls. Estate taxes would be abolished.

Trump argues that his plan does not unduly benefit the wealthy, citing his decision (echoing Bush) to eliminate the "carried interest" loophole that allows the labor income of some hedge fund managers to be taxed at lower capital gains rates. The conservative Tax Foundation, however, estimates that the proportional income gains under his plan would be at least twice as large for the top 10 percent of earners as the bottom 10 percent.

Like Rubio, Trump insists his plan would increase revenue enough through economic growth that with the help of spending cuts, he could eliminate the budget deficit. The economy would "take off like a rocket ship," he said.