Monday, October 8, 2012

Mitt Romney Releases a Detail on His Tax Plan – And This Forum Tests It

Conclusions: Tax Cuts for Low Income Taxpayers and Middle Income Seniors, No Tax Increase for the Middle Class, no Tax Cut for Some of the Wealthy and no Revenue Neutral Tax Plan

[Editors's note:  Somewhat wonkish, as Paul Krugman would say]

After literally months of refusing to release any details on his tax plan, Mitt Romney has finally dropped a hint as to what he might propose.

Mr. Romney offered an example of capping the total number of deductions available to a middle-class family at $17,000. He also said the cap on deductions for wealthier Americans could be less than that figure.

Now all sorts of tax analysis will take place in the aggregate, but to really test tax policy one has to test the plan on specific situations.  So The Dismal Political Economist invented two hypothetical families.

Family A has $1,000,000 in gross income consisting of $800,000 in taxable compensation, $100,000 in capital gains and $100,000 in tax exempt income.  The family has two children, and itemized deductions of $100,000 of interest, $50,000 of state income taxes, $40,000 of property taxes and $40,000 of other deductions.

Family B has $75,000 of gross income consisting of $65,000 of taxable compensation, $5,000 of capital gains and $5,000 of tax exempt income.  The family has two children and itemized deductions of $10,000 in mortgage interest, $3,500 in state taxes, $4,000 in property taxes and $4,000 in other deductions.

Two estimates of income tax liability were made, tax liability under existing rates and tax liability assuming a cap of $17,000 on itemized deductions and a 20% cut in tax rates.  The results were rather surprising.

  1. There was no significant difference between the old and new tax liability for both families with the Romney change.
  2. For those who do not itemize or for those whose itemized deductions are less than $17,000 their tax bills would be cut by 20%.

This means that under this proposal the plan cannot be revenue neutral, because if no one’s taxes increase and a large group of people have a tax decrease, revenues must decrease.  But also under this plan Democrats cannot argue that there is a middle tax increase unless taxes are raised on them to produce a revenue neutral plan. And they cannot argue that this is a tax decrease for all of the rich, although certainly it will be for some of the rich, specifically those that are very wealthy but have limited itemized deductions.  In fact the tax plan is actually a tax cut for low to middle income taxpayers with low deductions.  But under this plan Mr. Romney cannot argue that the plan is revenue neutral.  It will increase the deficit.

Mr. Romney has indicated that he would consider even a lower cap on itemized deductions than $17,000 for high income tax payers.  That won’t do it.  At a 28% marginal tax rate $17,000 of higher taxable income produces less than $5,000 higher taxes for those in the top bracket.  Or, for someone making $1 million the increased effective tax rate is .5%. 

Mr. Ryan, Mr. Romney’s running mate said there wasn’t time to do the math.  He was wrong, there was time and the math does not add up.

Anyone surprised?

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