Wednesday, August 1, 2012

Romney's Tax Plan - Making the Wealthy Wealthier

The Tax Policy Centre of the Brookings Institute recently released a paper entitled "On the Distributional Effects of Base-Broadening Income Tax Reform", an examination of the tradeoffs among the goals that are part of revenue-neutral income tax reform.  The objectives of the reforms are to maintain tax revenues, ensure a progressive tax system and lower marginal tax rates, in other words, Republican Presidential candidate Mitt Romney's plan for overhauling the tax system.  Here is a summary of the research done by the authors, Samuel Brown, William Gale and Adam Looney.

Mitt Romney's tax proposals include lowering marginal tax rates substantially, eliminating the alternative minimum tax (AMT) and maintaining all tax breaks for both investments and savings.  More specifically, Mr. Romney proposes the following:

1.) An extension of the Bush-era tax cuts.

2.) A reduction of individual income tax rates by 20 percent.

3.) Elimination of taxation on investment income of most taxpayers including individuals earning less than $100,000 and couples earning less than $200,000

4.) Elimination of estate taxes.

5.) Reduction of the corporate tax rate.

6.) Repealing the alternative minimum tax and high-income taxes enacted in the health-reform legislation of 2010.

7.) Maintaining the provisions in the tax code that promote savings and investment.  These include preferential rates on capital gains and dividends, exemption of income accrued in qualified retirement and other similar accounts, exemption of interest on state and local bonds and the exclusion of capital gains on home sales.

The authors suggest that these changes would reduce federal tax revenues by $456 billion in 2015, although the Republicans claim that by broadening the tax base and collapsing the income tax rates into two brackets (10 and 25 percent, a 20 percent drop in the top marginal rate), revenue will remain neutral.

I bet that you can't guess who would benefit the most from Mr. Romney's plan?

The authors' calculations show that taxpayers with incomes over $1 million would see their after-tax income increased by 8.3 percent with an average tax cut of about $175,000.  Taxpayers with incomes between $75,000 and $100,000 would see their incomes increase by a paltry 2.4 percent with an average tax cut of only $1,800.  Taxpayers earning less than $30,000 annually, would actually see their incomes decrease by 0.9 percent or $130 as a result of the expiration of temporary tax cuts.

Here is a graph showing the effects of the tax cuts on various income groups without an accompanying broadening of the tax base:

If the Romney tax plan is enacted with an accompanying broadening of the tax base, here is the impact on the income level of various income groups:

In order to maintain tax neutrality, the authors calculate that a shift in the tax burden from high-income taxpayers to lower- and middle-income taxpayers totals at least $86 billion.

This analysis seems to once again prove that, despite what Americans are being led to believe, the elite among us certainly know how to look after themselves.  Unfortunately, the authors of this research show that Main Street America is paying the price.


  1. If the current tax structure is maintained; then there is no reason for the rich to pull their dollars out of their corporations.

    Didn't you just have an article on how corporate taxation is sub 10% for the Fortune 500s?

    Simplified and efficient tax codes are always rejected by many on the grounds that "The rich will save more money"! But if you don't keep a competitive tax code; you'll just chase away your tax base to the next jurisdiction. (Example: Look at Ontario today!)

  2. To play a cliched card: both sides have it wrong.

    The problem with systems like Romney's plan isn't that it's keeping tax rates competitive (which is a good thing, as Anonymous points out); it's HOW it's balanced on the back of the lower classes. If the rich can't pay for everything, neither can the poor.

    The 99% plan, meanwhile, really does attempt to punish the rich, not 'for being rich' but for 'the sins they've done against the poor', which really isn't much better. It actually results in a similar issue to trying to eliminate the safety net due to 'welfare queens'. People who abuse the system just adapt for whatever changes you make and abuse that. Meanwhile, you punish the more legitimate ones.

    To put it in 'tax the rich' terms, the companies with negative tax rates will just find new ways to keep their rates: by leaving the country if need be. Meanwhile, companies who already pay 30%+ will pay even more under they are dragged down.

    A tax code that's (using random numbers to show proof of concept and NOT deciding on real tax rates) 15% with few loopholes means those that game the system will have less incentive to abuse. It worked for the music industry who faced horrible piracy maintaining $15 CDs until they opted for $1/song downloads: the 'free pirated version' still exists, but people opt for the easier $1 option instead.

    The lower rate with less loopholes/deductions results in more 0% tax companies paying their 'fair share' as liberals put it, while making us no longer the most tax heavy for those companies that pay the full amount, which is what conservatives want.

    It beats attempting to get cash from those making under 40k, the 'half of america that doesn't pay taxes'.

    As a side note: the 15% capital gains tax. Any way we can get some research into how that has changed our economy? I'm concerned that it might be causing people to dump money into already well-established large corporations since they are 'safe' and keep money away from smaller upstarts. That keeps the stock market stable, but hurts the economy by reducing the number of new businesses and makes those that exist more vulnerable to the 'big boys'.

    Perhaps instead of encouraging everyone to dump money into the same few companies, a higher tax rate would result in the rich aiming for riskier, but necessary new prospects or else getting out of the stock market and create new companies of their own.

  3. Wow. So cutting taxes benefits... tax payers!? Who'd have thunk it... ;-)