Analysis: Romney’s tax plan would shift tax burden to middle and lower-income Americans
Republican presidential nominee Mitt Romney’s self-proclaimed “fairer, flatter, and simpler” tax plan may actually end up increasing the tax burden on middle and lower-income families while significantly lowering taxes for millionaires.
Throughout his campaign, Romney has championed “flattening” and simplifying the tax code by eliminating so-called “tax expenditures” (also known as tax credits and deductions) in order to lower marginal tax rates. All of this, Romney claimed, would be achieved in a revenue-neutral way so that his proposed tax cuts won’t add to the federal deficit.
But a recent analysis by the independent Tax Policy Center found that Romney’s plan would actually result in higher taxes for individuals and families earning less than $200,000 and $250,000 a year, respectively. At the same time, Romney’s tax plan would reduce the amount of taxes paid by high-income households, particularly those reporting earnings exceeding $1 million a year.
“A revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed…would provide large tax cuts to high-income households and increase the tax burdens on middle- and/or lower-income taxpayers,” according to the Tax Policy Center’s report, “On the Distributional Effects of Base-Broadening Income Tax Reform”.
The Tax Policy Center’s finding was based on the fact that in order for Romney cut taxes in a revenue-neutral way, a significant portion – about 65% – of tax credits and deductions that benefit low and middle-income families would have to be eliminated. The report pointed out that “maintaining revenue neutrality mathematically necessitates a shift in the tax burden of at least $86 billion away from high-income taxpayers onto lower- and middle-income taxpayers.”
Although Romney has not specified the tax expenditures he would eliminate, the ones that are most likely on the chopping block include: the mortgage interest deduction, charitable giving deduction, medical expense deduction, state and local tax deduction, child and childcare tax credits, education tax credits, Earned Income Tax Credit (EITC), exempting employer health insurance from being taxed as income, and the partial exemption of Social Security benefits.
“These are extremely popular tax breaks, not just for the taxpayers who benefit directly from lower tax bills, but also from other parties who benefit indirectly such as charities and their constituents, or the home building industry,” according to the TPC study.
Overview of Romney’s tax plan:
The key tax cuts proposed by Romney include:
- permanently extending the 2001 and 2003 Bush tax cuts for everyone;
- lowering the marginal income tax rates by 20%;
- eliminating taxes on capital gains, interest, and dividend incomes for individuals making less than $100,000 a year or couples earning less than $200,000 a year;
- maintaining the current capital gains tax rate of 15% for the top income brackets. (Capital gains are earnings that result from the buying or selling of properties, stocks or bonds.);
- repealing the estate tax (also dubbed the “death tax”) for properties and inheritances worth more than $5 million;
- repealing the Alternative Minimum Tax (AMT);
- reducing the corporate tax rate to 25%, a 10% cut from the current 35%. The OECD average is 27.8%;
- and repealing the Affordable Care Act tax on high-income earners.
According to the Tax Policy Center, the marginal tax rates under Romney’s plan would change to:
- 8% for income between $0 – $8,900, a 2% decrease from the current rate*
- 12% for income between $8,900 – $36,150, 3% decrease from the current rate
- 20% for income between $36,150 – $87,550, a 5% decrease from the current rate
- 22.4% for income between $87,550 – $182,600, a 5.6% decrease from the current rate
- 26.4% for income between $182,000 – $397,000, a 6.6% decrease from the current rate
- 28% for income above $397,000, a 7% decrease from the current rate
*Note that the current rates include the Bush-era tax cuts which are set to expire on Dec. 31, 2012.
Tax Policy Center’s findings on Romney’s tax plan:
Romney’s tax cuts would cost the federal government $360 billion in 2015, according to the Tax Policy Center. So for his plan to be revenue-neutral, Romney would have to eliminate $360 billion in tax credits and deductions to offset the tax revenue losses. Doing so would “broaden” the tax base or subject more types of incomes to taxes.
With or without the elimination of tax expenditures, Romney’s tax plan would disproportionately benefit the top income earners. People reporting more than $1 million in yearly income would see their after-tax income increase by 4.1% with the base broadening measures. However, people earning less than $200,000 would actually see their after-tax income drop by 1.2% with the elimination of tax credits and deductions.
Read more: Romney insists he paid at least 13% in taxes
This means that a person earning more than $1 million a year would see a tax cut of about $87,000 but a person earning less than $200,000 would see a tax hike of at least $500.
The Tax Policy Center estimated that people earning between:
- $0 to $30,000 could see a tax increase of about $183;
- $30,000 to $50,000 could see a tax increase of about $431;
- $50,000 to $75,000 could see a tax increase of about $641;
- $75,000 to $100,000 could see a tax increase of about $884;
- $100,000 to $200,000 could see a tax increase of about $1,339.
Moreover, since 57% of the tax credits and deductions benefit families with children, eliminating them would increase taxes on middle-class and low-income families. The Tax Policy Center estimated that people with children earning less than $200,000 would pay on average $2,000 more in taxes under Romney’s plan.
Read more: America’s growing income inequality
“Because many of the largest tax expenditures benefit middle- and lower-income households, deep reductions tax expenditures can alter the distribution of the tax burden,” according to the Tax Policy Center. “Given the [Romney's] proposed tax rates and proscription against reducing tax expenditures aimed at saving and investment, cutting tax expenditures will result in a net tax cut for high-income taxpayers and a net tax increase for lower- and/or middle-income taxpayers—even if individual income tax expenditures could be eliminated in a way designed to make the resulting tax system as progressive as possible.”
Given the adverse impacts on middle and low-income individuals and families, the TPC concluded that Romney’s tax plan would have little or no impact on stimulating economic growth.
“While lower tax rates provide a stronger incentive for employment and saving, base-broadening measures would increase the portion of Americans’ income that is subject to tax, and this would create incentives that would work in the other direction,” the analysis noted. “At the end of the day, the net effects on labor supply and saving behavior would likely be small.”
List of tax ‘expenditures’ that could be eliminated under Romney’s tax plan:
- Exclusion of worker and employer ESI contributions for health plan premiums (current employees and retirees)
- Exclusion of worker and employer ESI contributions for dental, vision, and supplemental premiums
- Exclusion of worker and employer ESI contributions for HSA and Medical Flexible Spending Accounts
- Exclusion of worker and employer ESI contributions for dependent care flexible contributions and other excludable contributions
- Partial exclusion of Social Security benefits
- Educator Expenses
- Self-Employed Health Insurance
- Foreign Housing Allowance
- Other Above the Line Deductions
- Education Expenses Deduction
- Student Loan Interest Deduction
- Rent Passive Loss
- Sales Taxes
- State and Local Taxes
- Medical Expenses
- Itemized Deduction
- Mortgage Interest
- Charitable Contributions
- Casualty & Theft Losses
- Miscellaneous Itemizations
- Hope Education Credit
- Lifetime Learning Credit
- American Opportunity Credit
- Dependent Care Credit
- Credit for the Elderly or Disabled
- General Business Credit
- AMT Credit Foreign Tax Credit
- Earned Income Tax Credit
- Child Tax Credit
- TaxPolicyCenter.org: On the Distributional Effects of Base-Broadening Income Tax Reform – August 2012 (PDF)
- TaxPolicyCenter.org: Comparison of rates for Obama’s proposal, Romney’s proposal, current policy, pre-2001 tax law
- TaxPolicyCenter.org: Understanding TPC’s Analysis of Governor Romney’s Tax Plan
- TaxPolicyCenter.org: The Romney Tax Plan
- MittRomney.com: Tax Policy (PDF)
- WhatTheFolly.com: Republican National Convention 2012: Platform Committee voted against preserving the mortgage interest tax deduction
- WhatTheFolly.com: Romney insists he paid at least 13% in taxes
- WhatTheFolly.com: Romney’s tax controversy shines spotlight on tax code that favors wealth over wages
- WhatTheFolly.com: How the 2001 and 2003 Bush tax cuts benefit the wealthy
- WhatTheFolly.com: CBO report shows extending Bush tax cuts will raise deficit
- WhatTheFolly.com: America’s growing income inequality
- WhatTheFolly.com: White House pushes for corporate tax reform
- WhatTheFolly.com: CBO blames high unemployment on weak consumer spending
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