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Republican presidential candidate Mitt Romney’s tax plan rests on a set of principles that, taken together, are difficult to reconcile.
Romney wants to reduce individual income tax rates by 20 percent, keep preferential rates for capital gains and dividends, broaden the tax base to limit revenue loss, and retain the tax-burden distribution across income groups.
Those goals are in conflict and will require that Romney consider limiting or eliminating the tax breaks for charitable deductions and home mortgage interest, said Martin Sullivan, contributing editor at Tax Analysts in Falls Church, Virginia.
“As soon as he gets in, he’s going to have to start backpedaling big-time on all of his promises,” Sullivan said. “It’s just not doable under any conceivable, realistic scenario.”
Romney hasn’t provided many details about his tax plan, such as which tax breaks he would curtail or end. He has suggested that tax benefits might be available to middle-income families though not upper-income families, without defining those income levels.
“We’re not going to shift the burden from middle-income people to higher-income people,” Romney said in an April 16 interview with ABC News. At the same time, he said, “I’m not looking for tax cuts for the rich.”
Romney proposes reducing all individual income tax rates, dropping the top rate to 28 percent from 35 percent and the bottom rate to 8 percent from 10 percent. He would end taxation of investment income for households making less than $200,000 a year and keep the 15 percent rate for capital gains and dividends for taxpayers above those levels. He also would eliminate the estate tax and the alternative minimum tax.
Keeping the tax code’s progressive distribution among income brackets may be difficult without compromising some of these objectives. The lower rate on investment income rate is the most significant tax break for the very wealthiest taxpayers, and promising to protect that means that Romney has limited ways to offset the rate cuts for that group.
“The top 5 percent, the top 10 percent, the top 25 percent, we’ll look across the code at the various categories of taxpayers and see if they’re continuing to pay the approximately the same share that they have in the past,” Romney said on CNBC March 7.
Romney will consider all federal taxes, including income, payroll, estate and corporate taxes, economic adviser Glenn Hubbard said in an April 30 interview. Hubbard noted that economists differ on which income groups bear the burden of some of those taxes.
Because almost half of all households don’t pay income taxes, Romney’s proposed rate cuts won’t benefit them and their other taxes would be largely unchanged. Instead, his plan would shift the burden within the upper-income half: those who get more tax benefits now would pay more taxes and those who get fewer would pay less.
Romney, who made $21.6 million in adjusted gross income in 2010, paid a 13.9 percent tax rate, according to tax returns he released, because most of his income came from investments. With a fortune estimated at as much as $250 million, he would benefit from eliminating the estate tax, now 35 percent with a $5.1 million exemption per person.
“He’s the first president who would massively cut his own taxes,” Sullivan said.
In contrast, President Barack Obama has proposed that high- income taxpayers pay higher tax rates on wages, capital gains and dividends. He would limit their deductions and prevent tax increases for married couples making less than $250,000 a year and individuals making less than $200,000.
Under Obama’s most recent budget, taxpayers in the top 1 percent would have an average tax increase of $93,707 in 2013, according to the nonpartisan Tax Policy Center in Washington. The middle 20 percent of taxpayers would receive an average tax cut of $40.
As evidence that Romney’s plan is feasible, Hubbard pointed to a report by the co-chairmen of the 2010 bipartisan fiscal commission, Erskine Bowles and Alan Simpson, which also set a top 28 percent tax rate.
“You have a clear road map in Bowles-Simpson,” Hubbard said.
Unlike Romney’s plan, the deficit commission’s proposal called for eliminating corporate tax breaks alongside rate reduction and ending the break for investment income. It suggested limiting tax breaks for charitable contributions, mortgage interest, retirement savings and health insurance.
The highest earners -- including Romney -- would benefit most from several of his proposals that differ from the Bowles- Simpson approach. Those include repealing the estate tax, cutting the corporate tax rate to 25 percent from 35 percent, and keeping the 15 percent tax rate on capital gains and dividends.
The Tax Policy Center estimated how Romney’s policies would affect different income groups, without the reductions in tax breaks he has yet to spell out.
Under Romney’s plan as announced, the top 20 percent of taxpayers would receive an average tax cut of $16,134, compared with what they are paying now. The top 0.1 percent -- those with incomes exceeding $2.9 million in 2015 -- would get an average tax cut of $725,716.
An estimate being released this week by the Brookings Institution’s Hamilton Project shows how hard it is to cut the top income tax rate without losing revenue or causing the middle class to pay a larger share.
To reduce the top rate to 23 percent -- below Romney’s 28 percent target -- and generate today’s revenue would require eliminating almost every tax break, including those for employer-sponsored health insurance, retirement savings and municipal bonds, capital gains and dividends.
A 27 percent top rate would allow some benefits for mortgage interest and health insurance to remain.
“You can only get rates down so far before you start losing revenues or really changing the progressivity of the tax schedule,” said Adam Looney, the Hamilton Project policy director, who helped develop the analysis. He was an economist at the Federal Reserve Board and the White House Council of Economic Advisers under Obama.
The current income tax system requires higher-income people to pay a larger share of taxes. In 2009, the top 10 percent of taxpayers received 43.2 percent of adjusted gross income and paid 70.5 percent of income taxes. Their percentage of taxes paid is lower if the calculation includes payroll taxes, which pay for Social Security and Medicare.
Ending the tax preference for investment income would reduce the after-tax income of the top 0.1 percent by 7.5 percent, compared with 0.9 percent for all Americans, according to the Tax Policy Center.
A Romney-style plan “theoretically could be progressive between the upper-middle class and the affluent, compared to the middle class,” said Edward Kleinbard, former chief of staff at the congressional Joint Committee on Taxation. “But it will not address the progressivity of the super-affluent with a 15 percent tax rate.”
Retaining the current progressive tax burden without changing capital gains rates is difficult, if not impossible, said Eric Toder, co-director of the Tax Policy Center.
“What you’d have to do is tax gains and dividends as ordinary income, because that’s where the very big preferences are,” he said. “That’s just the math.”
For the group between the top 1 percent and the bottom 50 percent, the outlines of Romney’s plan are more achievable.
“There’s a huge amount of money that can be thrown back into the pot if you’re willing to be very aggressive about personal itemized deductions,” said Kleinbard, now a law professor at the University of Southern California in Los Angeles.
Repealing all itemized deductions would reduce after-tax income by 1.7 percent, by 2.7 percent for the top 20 percent, and by 3 percent for the top 1 percent of taxpayers, according to the Tax Policy Center. That means those breaks are less tilted toward the highest-income taxpayers than the preference for investment income.
Romney made his clearest comments about broadening the tax base at an April 15 fundraiser, when reporters overheard him talking about eliminating the state and local tax deduction and the mortgage interest deduction for top earners’ second homes.
Those changes wouldn’t be nearly enough to make up the revenue loss from his proposed tax cuts.
“I just don’t see where the numbers add up,” Toder said. “Maybe they’ve got something up their sleeve I haven’t seen.”
The focus on maintaining the current distribution of the tax burden is misguided because of income mobility, said Scott Hodge, president of the Tax Foundation, a Washington group that favors a simpler tax code with lower rates. He said more than 70 percent of people on the Internal Revenue Service’s list of the 400 highest incomes between 1992 and 2008 made the list only once.
“Trying to tax any particular group is really trying to tax a snapshot of people as they move through it,” Hodge said.
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