The Corner

Romney Whiffs on Income Taxes

Mitt Romney’s new tax proposal manages to combine President Obama’s class-warfare assumptions with a dose of naïve supply-side thinking. It’s a double goof.

Make that a triple goof: Romney says that he wants “a flatter, fairer, simpler tax system” but one that also “retains the existing progressivity,” as though those were not mutually exclusive goals. A flatter tax code by definition would not retain “existing progressivity” — hence the word flatter.

The centerpiece of Romney’s income-tax plan is to 1.) reduce marginal tax rates by 20 percent across the board (not by 20 percentage points) but 2.) offset that lost revenue by limiting deductions and exemptions, except that 3.) such limitations will be imposed only on “high-income folks.” Which is to say, Romney proposes to create a two-tier tax system (not unlike the one President Obama favors) that “cuts taxes” on everybody except the people who pay most of the taxes.

This approach has some shortcomings.

The middle classes — which I’m defining here as the middle three income quintiles — pay very little in individual income taxes. Let’s assume that the Platonic ideal of Romney’s plan is enacted, and that a 20-percent cut in the tax rate produces a 20-percent cut in the actual tax bill. According to the CBO, the average effective individual federal income-tax rate for middle-class households in 2007 was just a hair over 3 percent. (That’s –0.4 for Quintile 2, 3.3 for Quintile 3, and 6.2 for Quintile 4.) A 20-percent cut in their effective federal income-tax rate takes them from a 3 percent rate to a 2.4 percent rate. Let’s say Romney got super-ambitious and slashed their total federal tax burden — income, corporate, excise, payroll, etc. — by 20 percent. That would take them from an average total federal tax payment of 14.1 percent of income to 11.3 percent. For the median U.S. household, that’s a tax cut of $115.37 a month. Not nothing, but not dramatic, either. With an extra $115.37 a month, the median household should be able to offset its recent loss of home equity in about 46 years. But what we’re really talking about here is income taxes, meaning that that savings for the average middle-class household would amount to something on the order of $24.78 a month. Don’t expect that to supercharge the economy.

By way of comparison, the top 10 percent, top 5 percent, and top 1 percent had effective total federal tax rates of, 26.7 percent, 27.9 percent, and 29.5 percent, respectively, with individual income taxes coming in at an average of 17.6 percent, or nearly six times the rate paid by the middle class. It is not as though our tax system is not already lopsided.

Romney plans to cut the taxes of the middle class and make up the difference by raising taxes on the rich, making that lopsided system even more lopsided, and he even embraced the odious Occupy Wall Street “1 percent” language in selling the plan. To what possible end?

His earlier fiscal proposals include some ideas with merit, such as reducing the corporate tax rate and instituting a territorial tax system of the kind that most other countries use for business income. Even better, he has proposed meaningful entitlement reform. Those solid initiatives stand in contrast to the fiscal promises listed in his tax-plan fact sheet, which include such gems as “Cuts Programs That America Cannot Afford” (Why has no one thought of that?) and “Improves Efficiency and Effectiveness.” “America Cannot Afford” about 40 cents of every dollar the government spends, but Romney is not proposing a 40 percent cut in federal spending. A politician who says that he is going to restore fiscal order by eliminating superfluous spending, waste, and inefficiency is just making noises.

Romney’s income-tax proposal is neither fairer nor flatter nor simpler. He embraces President Obama’s magic $200,000 cutoff, as though many households at that level were not already taxed disproportionately, and as though they were a magic goose that will continue to lay golden eggs no matter what.

He would have done far better to adopt a single-rate income-tax proposal that eliminates all exemptions and deductions — for rich, middle class, and poor alike, all of them being American taxpayers — treating all income the same (salary, dividends, capital gains, inheritances, gifts, whatever), and abolishing double-taxation through the corporate tax (corporate profits should be taxed as regular income when they actually hit somebody’s pocket in the form of bonuses, salary, dividends, capital gains, etc.). That probably (though not necessarily) would mean a tax increase for the middle class and a tax cut for higher earners — which would also be true of any tax reform that is flatter and fairer. The middle class pays disproportionately low taxes and collects a disproportionately large share of government transfer payments.

Of course, such a tax program could be structured as a tax cut for everybody — if the president and Congress were willing to do the work on the spending side, which is where the real problem is. 


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