Taking a closer look at the Romney Tax Plan

373 views

 

 

 

 

I try and stay away from politics in this blog whenever possible – but today it’s not possible

I just read this report from the tax policy center, a nonpartisan think tank run by the Brookings Institution and the Urban Institute.

Here’s a summary of the report:

Absent any base broadening, the proposed reductions in individual and estate taxes specified in Governor Romney’s plan would decrease federal tax revenues by $360 billion in 2015.

These tax cuts predominantly favor upper-income taxpayers: Taxpayers with incomes over $1 million would see their after-tax income increased by 8.3 percent (an average tax cut of about $175,000), taxpayers with incomes between $75,000 and $100,000 would see somewhat smaller increases of about 2.4 percent (an average tax cut of $1,800), while the after-tax income of taxpayers earning less than $30,000 would actually decrease by about 0.9 percent (an average tax increase of about $130) due to the expiration of the temporary tax cuts enacted in 2009 and extended at the end of 2010.

In order to form a revenue neutral plan, the proposed revenue reductions from lower rates must be financed with an equal-value elimination or reduction in available tax preferences. (In our analysis, we assume that eliminating preferences that lower rates on savings and investment is off the table.) Offsetting the $360 billion in revenue losses necessitates a reduction of roughly 65 percent of available tax expenditures. Such a reduction by itself would be unprecedented, and would require deep reductions in many popular tax benefits ranging from the mortgage interest deduction, the exclusion for employer-provided health insurance, the deduction for charitable contributions, and benefits for low- and middle-income families and children like the EITC and child tax credit.

The key intuition behind our central result is that, because the total value of the available tax expenditures (once tax expenditures for capital income are excluded) going to high-income taxpayers is smaller than the tax cuts that would accrue to high-income taxpayers, high-income taxpayers must necessarily face a lower net tax burden. As a result, 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. This is true even under the assumption that the maximum amount of revenue possible is obtained from cutting tax expenditures for high-income households.

Specifically, it is not possible to design a revenue-neutral plan that does not reduce average tax burdens and the share of taxes paid by high-income taxpayers under the conditions described above, even when we try to make the plan as progressive as possible. For instance, our calibration of the upper limit suggests that even by eliminating tax expenditures ‘starting at the top’—where we combine the proposed rate cuts with complete elimination of tax expenditures for taxpayers with income over $200,000—after-tax income would still increase by 4.1 percent among taxpayers with income over $1,000,000 and 0.8 percent for taxpayers earning between $200,000 to $500,000. (That translates to a tax decrease of $87,000 and $1,800 for those two groups.) However, on average, after-tax income for taxpayers earning less than $200,000 would need to decrease by 1.2 percent, an effective tax increase of $500 per household.

8 (Revenue neutrality would require eliminating 58 percent of total tax expenditures for these households.)

The above estimates assume that all available tax expenditures for higher-income households are completely eliminated—tax expenditures that include deductions for charitable contributions, mortgage interest, state and local taxes, and exclusions from income of health insurance and other fringe benefits. To the degree any of these were even partially retained for high-income households, the net tax cuts for high-income households and tax increases for low- and middle-income households would be even larger

I have always mainteined that I’d vote for a flat tax system even if it did cost me a little more each year simply because the cost and hassle of dealing with H&R Block every April.

Now? I’m not so sure. Here’s a nice rant about the report from the guys at Young Turks:

 

 

One Response to “Taking a closer look at the Romney Tax Plan”

  1. Good stuff- Thanks for sharing

Comments are closed.
Previous Posts by kcscott