Advisers like Rubio tax plan's simplicity, but shudder at details

Plan would cut almost all tax deductions, but also would eliminate taxes on estates and capital gains, dividends

Mar 6, 2015 @ 10:31 am

By Mark Schoeff Jr.

Investment advisers like the idea of streamlining the tax code, but they worry about the details of the plan put forward earlier this week by potential presidential candidate Sen. Mark Rubio, R-Fla., and Sen. Mike Lee, R-Utah.

The senators introduced a proposal Wednesday that would establish two individual tax rates — 15% for incomes up to $75,000 and 35% for earnings above that level — and would eliminate all tax deductions except those for mortgage interest and charitable giving.

The plan also would end the estate tax and taxation of capital gains and dividends. On the corporate side of the tax ledger, it would consolidate all business taxes into a 25% rate, a ceiling that also would apply to businesses that pay taxes through their owner's personal income tax return.

“I like the simplicity,” said Lisa Kirchenbauer, president of Omega Wealth Management. “We are overdue for tax reform. From a numbers standpoint, it's going to take some time to understand [the plan].”

Ted Sarenski, chief executive of Blue Ocean Strategic Capital, praised the senators for trying to address what he says is a pervasive problem he hears from callers to a local television show he's a part of in Syracuse, N.Y.

“The average person is so confused by our tax code,” Mr. Sarenski said. “[Mr.] Rubio's proposal simplifies everything so much. Simplification is a step in the right direction.”

Although advisers embrace the idea of whittling down the country's massive tax laws, when they take a closer look at the Rubio-Lee plan, they have concerns.

Juan Ros, lead adviser at Lamia Financial Group, said reducing the number of tax brackets from the current seven to the two Mr. Rubio and Mr. Lee propose means that the 35% rate begins way too early on the salary scale at $75,000.

“That seems pretty high,” Mr. Ros said. “It's just a few percentage points lower than [the current highest rate] now at 39.6%.”

The senators put their plan out as a white paper and hope to turn it into legislation as Congress begins to debate comprehensive tax reform.

“The vast and overwhelming majority of Americans will see significant tax relief here,” Mr. Rubio, who is mulling a presidential campaign, said at a Capitol Hill press conference on Wednesday. “Our hope here is to trigger economic growth. We believe economic growth will help all Americans to improve how much money they make by creating better-paying jobs.”

Mr. Ros endorsed the senators' effort but cautioned that more work needs to be done to flesh out the proposal.

“At least there's some proposal on the table as opposed to nothing,” Mr. Ros said. “There's more positive than negative, so I would give it a 'B.' There's certainly room for improvement.”

The plan has to be analyzed for its total impact on the economy in order to reach a conclusion about its efficacy, Mr. Sarenski said. For instance, what effect would eliminating deductions for state and local taxes have on the nation's demographics?

“How does that affect high-tax states like New York, where you have high income and property taxes?” said Mr. Sarenski, also a CPA. “Do people move? Do businesses move?”

Sen. Lee acknowledged that for the plan to survive, he'll have to take on skeptics who want to save their cherished tax breaks from the chopping block.

“We're trying to narrow it down to what most Americans rely most on in the code,” he said at the Capitol Hill press conference. “In order to achieve the level of simplicity that we need, we concluded it was appropriate to narrow it all down to these two deductions [mortgage and charitable]. If you ask most Americans, hard-working Americans would tell you they would like more simplicity, and that's what we're trying to achieve.”

Another element of the Rubio-Lee plan is likely to sit better with advisers. It would ensure that businesses organized as C corporations and S corporations, or pass-throughs, pay the same tax rate. Skeptics of corporate-only tax reform argue that lowering the corporate tax rate without addressing businesses that operate off of their owner's tax return would give an unfair advantage to the traditional business model.

Many financial advisers operate their practices as pass-throughs.

“We want them to have parity in the tax code with big businesses because that's where a significant amount of our business activity is occurring in America today,” Mr. Rubio said.

The senators downplayed questions about how to pay for the tax reductions. They said the plan must be viewed within the context of generating high economic growth and being paired with a similar effort to cut federal spending and reduce the deficit.

It's a mistake not to pay for the tax cuts, said Chris Chen, a wealth strategist at Insight Financial Strategists.

“A plan that is not revenue neutral would be destabilizing for the economy and for all of our financial futures,” Mr. Chen said.

Mr. Rubio said more work will be done on the plan.

“This is not a take-it-or-leave it offer,” he said. “But I think it is a massive first step toward what I hope will be the kind of pro-growth, pro-family tax reform that our nation needs.”

[Correction: An earlier version of this story indicated the Rubio-Lee plan would eliminate retirement savings tax deferrals as well, which is incorrect.]

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