ASK Republicans how best to reform taxes, and they will inevitably mention Ronald Reagan.

In 1986 the Gipper slashed levies on earnings; the highest income-tax rate tumbled from 50% to 28%. At the same time, Reagan simplified taxes by closing loopholes and killing off exemptions. Today’s Republican presidential contenders would dearly love to repeat the trick.

But they have given up a key ingredient in the recipe. The 1986 reform cost nothing, mainly because taxes on businesses went up. In stark contrast, today’s Republican tax plans are jaw-droppingly expensive.

American taxes are a mess. There are seven different rates of federal income tax, up from three after Reagan’s reform (in Canada there are four; in Britain, three). Endless exemptions and deductions cost just over 7% of GDP. These distort incentives and benefit mainly richer folk, but are hard to keep track of because their cost stays off the government’s books. Filling in tax returns takes the average non-business filer eight hours and costs $110 every year. By one recent estimate, the inconvenience costs of filing add up to 1.3% of GDP.


Business taxes are no better. At 39%, the tax on corporate profits is the highest in the OECD. In reality, businesses pay less because of a whirlwind of incentive-distorting exemptions. Want to invest in America? Issue shares to finance your project, and your marginal tax rate ends up at 38%. Load up on risky debt and the rate plummets—in fact, you will benefit from a 6% subsidy. Across industries, average tax rates range from 40% for making software to 15% for building mineshafts. The World Bank and PricewaterhouseCoopers, an accounting firm, ranks America’s tax system 53rd in the world, wedged between Jordan and Vanuatu. It takes American businesses 87 hours, on average, to pay their taxes; in France it takes just 26 hours.

Tax reform, then, is essential, and Republicans have embraced the cause. Among the presidential candidates, Jeb Bush has proposed the most detailed plan, and is cheered on by a crew of right-leaning economists. One thing keeping the plan on the shelf is that Mr Bush lags behind in the polls.

But thanks to its detail—and the scrutiny poured on it as a result—it is a useful benchmark.

Mr Bush rightly wants to reduce the number of income tax bands, to three. In doing so, though, he calls for a whopping reduction in the top rate of income tax to 28%, from 39.6% today. Mr Bush would slash the corporate tax rate to 20% and all but abolish the tax incentive to borrow.

Today, if a firm buys a new computer or piece of machinery, it can knock the cost off its tax bill only incrementally as the new equipment loses value; but under Mr Bush’s plan it could deduct the full cost up-front. That should encourage investment.

The plan is hugely expensive. Before accounting for its economic effects, it would cost $6.8 trillion, or 2.6% of GDP, over a decade, according to the Urban-Brookings Tax Policy Centre, a think-tank. About two-thirds of the bill comes from income-tax cuts. Cuts for high-earners are costly, because the highest-earning 1%—who would see a 12% increase in after-tax income under the plan—produce almost half of income-tax revenues. By 2026 the $715 billion annual cost of the plan exceeds the projected budget for national defence.

The plan would wrench on purse-strings that are already stretched. By 2025 government health-care and pensions programmes will have nearly 60% more beneficiaries than in 2007. Mr Bush, like most Republicans, wants to increase rather than cut defence spending. And non-defence day-to-day spending has already been slashed by 22% in real terms since 2010.

Mr Bush’s plan, then, looks unachievable. Incredibly, though, it is one of the most modest in the pack. Donald Trump, who tops opinion polls, wants to cut income taxes still further; under his plan, the top rate of tax falls to 25%. Whereas Mr Bush would nearly double the standard deduction, the amount that can be earned before paying income tax Mr Trump would quadruple it. The Donald would cut business taxes more aggressively, too. Though he talks about raising taxes on hedge-fund managers by removing the “carried interest” provision, Mr Trump’s cuts to income tax are so deep that the provision barely matters. In all, reckons the Tax Policy Centre, Mr Trump’s plan is almost 40% more expensive than Mr Bush’s.

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Where to look for realism? Marco Rubio offers more modest income-tax cuts, but would eliminate most taxes on capital gains and company dividend payments. Many economists view these taxes as inefficient. Yet capital is mostly the preserve of the well-off: only a fifth of adults who earn less than $30,000 tell pollsters they have stockmarket investments, compared with nearly nine in ten who earn more than $75,000. Citizens for Tax Justice, an advocacy group, reckons Mr Rubio’s plan would make the pockets of the top 1% of earners bulge more than Mr Bush’s would.


Ted Cruz has the boldest plan. The Texan senator promises to replace all income taxes—including payroll taxes which fund Social Security and Medicare payments—with a 10% flat tax. Business taxes would be replaced with a value-added tax of 16%. This plan is roughly as expensive as the Bush plan, before accounting for its economic effects, according to the Tax Foundation, a right-leaning think tank. But it would be still more generous to the highest earners, as value-added taxes are less progressive than income tax.

The candidates all say their plans will increase economic growth, boosting tax-revenues and dramatically bringing down costs. Mr Bush’s cheerleaders say his plan will add 0.5 percentage points to growth each year, knocking two-thirds off the so-called “static” cost. Mr Trump claims—with a straight face—that his plan is revenue-neutral.

Done right, reforming and simplifying taxes would boost growth. Yet the gargantuan cost of the plans comes from