Romney's Overly Optimistic Tax Plan
Yesterday on Coffee & Markets we interviewed Curtis Dubay of the Heritage Foundation on his critiques of the Tax Policy Center’s framing of Mitt Romney’s tax plan. The podcast is here. I agree thoroughly with Dubay’s criticism of the TPC’s approach – the assumptions it makes are designed to place Romney’s plan in the worst possible light, and it’s hard to make the case that’s not intentional.
But in another area, Romney’s tax plan strikes me as trying to have its cake and eat it too, particularly in the wake of his remarks about a deductions cap. As the WSJ notes, “only households that earned less than $45,000 a year averaged less than $17,000 in deductions” – so Romney would be putting in place a cap at that amount necessarily going to raise the tax burden of many Americans who are in the middle class, one that will assuredly NOT be offset by his elimination of cap gains/dividends. Romney later pegged the amounts differently in the debate, so it’s clear he’s still thinking this through (feel free to expand this to all areas of policy), but let’s assume it happens. If it does, Romney will be penalizing upper middle class people who live like he does, and rewarding those who are less charitable.
Tax policy experts like to talk as if populations at the same level of adjusted gross income have similar returns, but this is of course not the case – you can easily have somebody at $100,000 AGI with $50,000 in deductions and another who has only $20,000. Under Romney’s plan, someone with $50,000 is going to feel significantly pinched by the tax man under a new limit compared to the guy with only $20,000 in deductions. In other words, it’s better to live like Joe Biden under this new system.
I asked a tax policy expert to crunch the numbers on a typical household with an individual filer and deduction amounts. Consider them an evangelical suburbanite at the $100,000 level who has a mortgage, tithes, and has some annual medical expenses. Here’s what comes back:
If you make $100,000, have a new $300,000 mortgage @ 4 percent, tithe 15 percent, pay $5,000 in state/local taxes, and have $7,500 in qualified medical expenses, you would pay $12,100 in federal income taxes on AGI of $60,500 w/ deductions of $39,500 (assume 20 percent effective rate). Under the Romney plan, you'd pay $13,280 (new effective rate would be 16 percent on AGI of $83,000), an increase of nearly 10 percent.
I’m very skeptical a Romney administration would be able to pull off a new tax law with these very broad rules (a fixed deduction cap and a relative rate drop) that doesn't raise anybody’s total amount of taxes or their relative burden (the promises Romney has repeatedly made on the trail). In this, I think the critiques from the left are largely correct: I think it’s mathematically impossible to protect everyone from a tax increase, and ultimately, the largest number of people who see a tax increase under this approach are likely to be in the middle and upper middle class.
But the rich would likely shift their activity as well. As Bloomberg points out today, the disincentives for charitable giving under such an approach would be significant for large dollar funders:
For every percentage-point increase in the expense of giving to charity, contributions shrink by 1 percent, according to a 2011 paper that Bakija co-wrote. With Romney’s proposed 20 percent rate cut, because people couldn’t deduct as much, the price of giving for people in the top tax bracket would rise by 10.8 percent. That suggests an equivalent drop in donations even before considering the estate tax repeal and limits on deductions… Last week, he floated an idea to cap all itemized deductions at $17,000… Almost all U.S. taxpayers in the top 1 percent itemize deductions, and that group deducts an average of $173,670 a year... About 78 percent deduct more than $50,000. Anyone with donations exceeding the cap would have no tax incentive to make charitable contributions, Bakija said.
Conservatives excoriated Obama for considering cutting back on the incentive to make charitable donations – indeed, it’s a point of pride among conservatives that the right is far more generous than the left with their personal funds (largely, again, because of tithing). Favoring less government should lead to favoring more private philanthropy and generosity. But you can design a plan because you intend for it to work or you can design a plan to help you get elected. Most politicians choose the latter, for obvious reasons.
This piece is adapted from The Transom, Ben Domenech's daily installment of news and analysis.
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Comments:
Jul '11
Re: Romney's Overly Optimistic Tax Plan
But you can design a plan because you intend for it to work or you can design a plan to help you get elected. Most politicians choose the latter, for obvious reasons.
Sadly, this is the case most of the time.
On a side note, I've given away more in time, write offs, and services than I've ever made in my lifetime. None of this charity has ever been tax deductible. As far as I know, my generation of physicians will be the last to engage in this behavior beyond those who do medical missionary work.
Re: Romney's Overly Optimistic Tax Plan
Well, the government will force you to do it. But then, that's not charity!
Aug '10
Re: Romney's Overly Optimistic Tax Plan
I don't know anyone that tithes 15% - not even Mormons tithe at that level!
If you assume a 10% level of tithing - which is still way more than most people pay - your fictional evangelical would pay $13,100 under the current system which is almost as much as under the Romney plan.
Your example shows how the numbers can be massaged many different ways. That Romney would assume the optimistic end in a campaign is hardly noteworthy.
Sep '10
Re: Romney's Overly Optimistic Tax Plan
Republicans have ceded the discussion of taxes to liberals. As MF pointed out government spending = taxes. Every dollar the government spends is a dollar removed from the free market and since the free market does a superior job of allocating capital it is a dollar that is less wisely allocated than it otherwise would have been. Tinkering with how the money is removed is just that tinkering. Both parties lack the courage to seriously talk about spending an thus content themselves with tinkering. This is clearly big government Democrats forte and until the GOP finds the courage to seriously begin to address out of control spending they will not win the discussion. The current GOP position of stimulating growth by tinkering with tax codes is ridiculous.
Nov '10
Re: Romney's Overly Optimistic Tax Plan
Ben, I Love Coffee and Markets, I race out of the house every morning to listen to you all on my way to work. However, in the last couple of podcasts I have been a little displeased with your performance as to trying to pin the Heritage guy down on this same subject, a failure and your ( I think it was you)sticking up for the unemployment numbers last Friday. Ben, you are too important to the cause and Coffee and Markets , don't go wobbly on us!!!!!
Jun '12
Re: Romney's Overly Optimistic Tax Plan
The lowest cap number I have seen was $25K and that was saying the cap would likely be between $25 and $50K. A number as low as 17K would likely cause a significant tax increase but it would depend upon other variables, e.g. number of personal exemptions, etc. and without most of a bill to look at, figuring out impact on my family is an exercise in futility. If I go back and look at my tax returns since the mid 70s, my income tax liability went up every year, even when there were "cuts", sometimes because we made enough more money to put us into higher bracket, sometimes because we had to pay AMT, and sometimes because changing what was deductible wiped out deduction. The one thing that was certain, was that total federal take ALWAYS increased
Oct '10
Re: Romney's Overly Optimistic Tax Plan
I am getting tired of bearing a higher tax burden than my neighbors who chose to buy an expensive car rather than pay down their mortgage. And as someone who lives in a state with no state income tax, I am fed up with states with out of control budgets who shift their tax burden on to others through the deduction for state income taxes. Right now, a 100k in state income taxes paid to NJ might only cost the NJ taxpayer 65k. The US taxpayer gets left with the rest of the tab.
Apr '11
Re: Romney's Overly Optimistic Tax Plan
Ben Domenech:
I’m very skeptical a Romney administration would be able to pull off a new tax law with these very broad rules (a fixed deduction cap and a relative rate drop) that doesn't raise anybody’s total amount of taxes or their relative burden (the promises Romney has repeatedly made on the trail).
He doesn't say that no individual would pay more under his plan; that would be ludicrous. He says that the top quintile would pay the same amount. Obviously, there would be winners and losers; his tax plan is 1986 redux, reducing deductions, broadening the base, and lowering rates.
As Frozen notes, there would be few charitable givers who are so generous as to be worse off on that basis. You know who most of the losers would be? New Yorkers and others with high state/ local taxes and expensive mortgages and the Theresa Heinz Kerrys who invest in munis. Also, of course, NYC and cities with deficits.
There would, of course be some in the middle class who would be negatively impacted (again, NYC should watch out, along with Bostonians and Rob Long), but overwhelmingly, middle class folks outside blue metropoli would benefit.
Apr '11
Re: Romney's Overly Optimistic Tax Plan
Because if there's one subject that Ryan and Romney have avoided, it's spending and the deficit, right? It's not as if Romney has continuously cut spending in government and elsewhere for decades and Ryan grew to prominence calling for the reining in of government spending. Oh, wait, it is exactly like that? I must have misunderstood.
Oct '10
Re: Romney's Overly Optimistic Tax Plan
I'm not sure if the tax deductions for state and local taxes can be removed, at least not unless we reform other interstate fiscal transfers (such as the Medicaid allocation formula). In truth, some federal transfers favor blue states, while others favor red states, and if we want to remove one that favors blue states we'll have to remove one that favors red states too.
Feb '11
Re: Romney's Overly Optimistic Tax Plan
That's not quite true Todd. You get a federal deduction for any of the available methods states and localities have to raise revenue: income tax, sales tax, and property tax. The state hits you one way or another, and all of those ways are currently deductible.
Feb '11
Re: Romney's Overly Optimistic Tax Plan
James Of England
Ben Domenech:
I’m very skeptical a Romney administration would be able to pull off a new tax law ..... that doesn't raise anybody’s total amount of taxes or their relative burden .....
He doesn't say that no individual would pay more under his plan; that would be ludicrous. He says that the top quintile would pay the same amount. Obviously, there would be winners and losers; his tax plan is 1986 redux, reducing deductions, broadening the base, and lowering rates.
.....
In the debate he also said: "And number three, I will not under any circumstances raise taxes on middle-income families. I will lower taxes on middle-income families. .....I saw a study that came out today that said you're going to raise taxes by $3,000 to $4,000 on middle-income families."
I'm skeptical of the claims too. Romney may be playing games with the wording, and if Obama can muster even a lukewarm argument then Romney could end up in trouble in key states like Ohio. Besides, I'd likely end up as one of the losers you mentioned.
Nov '10
Re: Romney's Overly Optimistic Tax Plan
Copied from an earlier post on the Member Feed: Here is a worry I've had about Romney's plan based on a situation my family encountered. For the last two or three years of my mother's life, she required full-time nursing care that cost an insane amount of money. My father was very nearly spending his entire income on deductible medical expenses while living quite frugally, on savings, himself. This must happen to lots of couples near the end of life. If he hadn't been able to deduct those expenses, he'd have had to be taking large chunks of money out of his savings just to pay his taxes. It would have badly endangered his ability to continue to live decently after my mother died. I know hard cases make bad law, but does this happen to other people, and if so is it a concern?
Apr '11
Re: Romney's Overly Optimistic Tax Plan
Ed G.
In the debate he also said: "And number three, I will not under any circumstances raise taxes on middle-income families. I will lower taxes on middle-income families. .....I saw a study that came out today that said you're going to raise taxes by $3,000 to $4,000 on middle-income families."
I'm skeptical of the claims too. Romney may be playing games with the wording, and if Obama can muster even a lukewarm argument then Romney could end up in trouble in key states like Ohio. Besides, I'd likely end up as one of the losers you mentioned. ·
I don't think it's playing games with the wording; it's the same as Reagan and all other tax reformers have said, and it's true. The group "middle income families" would pay less. The vast bulk of members of the group would pay less. It is not possible to have any kind of reform (other than simple rate cutting) that does not have some victims.
You live in Chicago; I don't know how much you earn, but Chicago only has a 5% state + local income tax rate.
Edited on October 11, 2012 at 5:35amApr '11
Re: Romney's Overly Optimistic Tax Plan
Ed G.
That's not quite true Todd. You get a federal deduction for any of the available methods states and localities have to raise revenue: income tax, sales tax, and property tax. The state hits you one way or another, and all of those ways are currently deductible. · 2 hours ago
Are you under the impression that a similar portion of sales taxes are deducted, as an empirical matter, to the portion of income taxes deducted?
Apr '11
Re: Romney's Overly Optimistic Tax Plan
What is the source of this compulsion you refer to?
Jul '10
Re: Romney's Overly Optimistic Tax Plan
Is this post a joke? No? Tithe at 15%? Gross? Just bought a 300k house, on 100k in earnings? If you did, it was a 350k house 5 years ago and you put fewer than 10 points down.
Is that so? Why weren't you similarly skeptical during the primaries of Rick Perry, Newt, or Herman Cain and their fantastic flat-to-flattish tax plans that wouldn't garner five voters' support in swing states?
Apr '11
Re: Romney's Overly Optimistic Tax Plan
Palaeologus: Is this post a joke? No?....
Is that so? Why weren't you similarly skeptical during the primaries of Rick Perry, Newt, or Herman Cain and their fantastic flat-to-flattish tax plans that wouldn't garner five voters' support in swing states?
You don't need to go back that far. The September 18th Coffee and Markets saw Ben ask why we didn't have the political will to get a flat tax. I think, although I'm less confident that this wasn't Francis, that he did talk about hoping that tax credits for retained, particularly for kids. Since Mitt also likes that and wants to target the upper income deductions, I'm guessing that they're on the same page, credits not being deductions and all.
You're right, though, that when flat taxes, of a more extreme form than Mitt is proposing, were the anti-Mitt position, they were Ben's position. The game is down, but as you can see from comment #19, the deep green bar 3rd from the bottom is taxes.
Apr '11
Re: Romney's Overly Optimistic Tax Plan
In this comment, Ben attacks Mitt for flip flopping away from flat taxes to merely "flatter" taxes.
The reference to flip flopping was because Mitt has been in favor of flattening income tax, but leaving a good deal of cushioning for the middle class, which is essentially his platform today, since at least 1996, when he took out an ad opposing Steve Forbes' insufficiently (in Mitt's view) cushioned tax. Since then, he's criticized some proposals for being overly flat and some for being insufficiently flat, which is flip flopping if you squint right.
Apr '11
Re: Romney's Overly Optimistic Tax Plan
I don't know the mix of income that your father was spending, but it seems worth noting that on top of the $17k his income from savings would have been tax free under the Romney plan, and that for many people in the final years of life most of their income is from savings.