Does Mitt Romney’s Plan Go Far Enough on Capital Gains Taxes?

by Reihan Salam

Howard Gleckman has a post on Mitt Romney’s proposed middle-class capital gains tax cut at TaxVox:

Romney’s plan is interesting because, as it happens, relatively few middle-class households report capital gains, and those that do generally pay only a pittance.

For instance, the Tax Policy Center estimates that households making less than $50,000 pay an average of less than $10 in taxes on investments. That’s no surprise since most have no gains, and those few who do have been paying at a zero rate since 2008 (if you’re in the 10 or 15 percent brackets, gains are generally tax-free).

Even those making between $100,000 and $200,000 pay an average of just $400. And most of them would likely be better off if Congress extends the payroll tax holiday than if it eliminates their investment taxes.

The real beneficiaries of a zero rate on gains are the highest-income taxpayers. Those in the top 1 percent of the income distribution (who have an average pre-tax income of nearly $7 million) would enjoy a $350,000 tax cut thanks to such a change. As my colleague Bob Williams noted in a recent Tax Vox blog, 15 percent of people in that rarified income group make two-thirds of their money from gains. In current Republican parlance, they are the “job creators” who will pour that higher after-tax income into new American jobs.    

That’s why former hedge-fund operator Romney will surely disappoint those in the GOP who argue for a zero rate on capital for all. 

Gleckman concludes that it is very hard to see how a capital gains tax cut focused on under-$200K households would boost the economy:

Will cutting investment taxes for middle-income households boost the short-term economy, as Romney claims? It is hard to see how. The extra ten bucks that goes to a typical family making less than $50,000 sure won’t create much new demand. The better question is whether extending a zero cap gains rate to higher-income (but not super- high-income) households would encourage more investment in the short run.

My sense is that Romney’s proposal is an independent-friendly, pro-savings measure that is designed to serve as a bridge to a more comprehensive tax reform. In Seeds of Destruction, Glenn Hubbard and Peter Navarro propose  an ambitious tax overhaul than would replace the personal income tax with a progressive consumption tax modeled David Bradford’s much-admired, but politically hard-to-sell, X tax proposal. Hubbard, of course, is one of Romney’s chief economic advisers, and it’s clear that he played a major role in crafting the Romney plan. 

The middle-class capital gains tax cut is not, in my view, a sufficiently ambitious proposal, but I appreciate the fact that Romney recognizes that a real tax overhaul can only happen in negotiation with Republican and Democratic lawmakers. Jon Huntsman’s plan, while admirable in many respects, particularly in its treatment of capital income, makes no concessions to political reality. It is useful as an intellectual lodestar, but perhaps it promises to much. Provocatively, Gleckman suggests that Romney’s plan “veers a bit to the left of the new Republican orthodoxy,” which suggests a gesture in the direction of the broader American electorate. There’s much to be said for the underpromise and overdeliver approach. 

Ross Douthat offers a smart take on Romney’s tax proposal:

Instead of trying to pretzel a capital gains tax cut into a measure aimed at the middle class, Romney would be better off combining his proposed corporate tax cut with a genuine middle class tax cut — whether in the form of a permanent payroll tax reduction, a family-friendly tax reform, or something else along those lines. But that would require precisely the kind of step away from current right-wing thinking, and off the tightrope, that he’s obviously desperate to avoid.

Another possibility is that embracing a family-friendly tax reform would allow Romney to connect with less-affluent, non-college-educated voters, a constituency with which he’s had difficulty in the past. That might be too transactional a reading of the primary electorate, but we shouldn’t dismiss the possibility out of hand. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.