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:
Oct '10
Re: Romney's Overly Optimistic Tax Plan
James Of England
What is the source of this compulsion you refer to? · 5 hours ago
Liberals complain all the time about fiscal transfers to red states, which they view as allowing them to have lower tax rates; on the other hand, conservatives insist federal deductions for state and local taxes allows blue states to have high tax rates. I don't know what the truth is; Texas pays more federal taxes than it gets back and has a low tax regime, but California also pays more than it gets back, and it has some of the highest taxes in the country.
Oct '10
Re: Romney's Overly Optimistic Tax Plan
Most likely, some policies favor blue states and some favor red states. This is probably a result of corrupt vote-buying in Congress—earmarks come to mind—and since conservatives oppose corrupt vote-buying in principle, purging some of crap on our side is no big deal if we can get at the stuff on the other side.
Apr '11
Re: Romney's Overly Optimistic Tax Plan
The transfers to our side are mostly in the form of wealth redistribution because we're poorer (MS etc.), right? I'd have thought we'd be overjoyed to see that diminished, but I don't see Democrats calling for it. That and military bases, but those are already insulated from partisan politics. I think it's safe to end our tax breaks for rich New Yorkers and, as luck would have it, the one liberal plutocrat who lives in the real America, Warren Buffet.
May '10
Re: Romney's Overly Optimistic Tax Plan
From a political viewpoint, the game is to find the one person in America whose taxes go up as a result of reform and try to persuade the world that he/she is the norm, and thus build a narrative on that base. My taxes went up a little bit in 1987, and I wasn't a real-estate-investment-trust guy, nor did I have credit card interest. There will always be someone whose liability changes.
But the absolutes we are shuffling here are still largely predicated on static analysis- no effects on growth- which is the ultimate basis of Obama's critique. It is thrilling to see our side joining the CBO in the embracing that truism. The degree of impact caused by deduction changes and flattening rates depends entirely on the total levels of revenue produced.
I think that Ben is still trying to convince us that he was right to bet, live, on the air, with no caveats (he has tried to insert a few after the fact), that "the field" would win the nomination over Romney.
Sep '10
Re: Romney's Overly Optimistic Tax Plan
James Of England
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. · 11 hours ago
Try reading the Ryan budget! It reduces the rate of increase in spending- not spending. I repeat it does not reduce spending!! In addition Mr Ryan, who voted for every big government proposal Bush made, for the past two years has actively opposed and help defeat budget proposals that did reduce spending. A person who proposes to continue to increase spending, while working to defeat proposals that reduce it are not serious about addressing spending. Proposing spending increases of 3% instead of 7% is increasing spending. The proposal Romney has on his web page does just that. I am talking about reducing the size and scope of government, not continuing to grow it at a slightly lower rate.
Feb '11
Re: Romney's Overly Optimistic Tax Plan
James Of England
.....
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. · 10 hours ago
Edited 10 hours ago
James, it's the claim that "The vast bulk of members of the group would pay less" of which I'm skeptical. If the plan is revenue neutral and if the overall burden of the top earners won't increase (or decrease), then where is the decrease in the overall middle class burden coming from? How can it be revenue neutral and still decrease the amount paid by one group without a corresponding increase in the amount paid by another group?
Feb '11
Re: Romney's Overly Optimistic Tax Plan
James Of England
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.
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?
I have no impression, as an empirical matter, except that Todd is wrong to complain that others are getting deductions he's ineligible for. Regardless of what people actually deduct, the fact remains that sales tax is deductible, and yes, I do think a properly computed deduction would be comparable to the income tax deduction.
Feb '11
Re: Romney's Overly Optimistic Tax Plan
Palaeologus: 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? · 9 hours ago
The skepticism isn't about the ability to attract votes (all of these plans have that particular weakness), the skepticism is about whether the plan makes sense on its own terms and claims. So your comparison to the flat tax and various proponents isn't really applicable here.
Nov '10
Re: Romney's Overly Optimistic Tax Plan
James Of England
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.
That's an interesting question. I would have to run it by my father to figure out exactly how it would have affected him, but he is an unusual case in that he continues to work a bit, way more than two decades after what most people consider a reasonable retirement age. It might have affected my father more than most seniors for that reason. But those savings that many people including my father have are tax-deferred retirement plans. Would those be immune to income tax, even if the whole idea of them was that you would pay income tax on them when you withdrew the money?
Jul '10
Re: Romney's Overly Optimistic Tax Plan
Ed G.
Palaeologus:
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? · 9 hours ago
The skepticism isn't about the ability to attract votes (all of these plans have that particular weakness), the skepticism is about whether the plan makes sense on its own terms and claims. So your comparison to the flat tax and various proponents isn't really applicable here.
It's applicable. All those plans were semi-gimmicks blatantly designed to win over the GOP primary electorate. Ben's claim here is that Mitt's plan is designed to win the general, but won't actually work as advertised.
I'm wondering why Ben's skeptical eye is singularly fixed on Mitt.
Jul '10
Re: Romney's Overly Optimistic Tax Plan
Aside from which, the difference in the two tax burdens all but disappears if tithing is adjusted, to well, tithing (10%).
Finally, Ben writes that:
Well, duh. Of course the largest number of people (who see either increases or decreases under an income tax change) will come from the largest pool of income tax payers, unless one group is intentionally singled out for a cut or a hike. It doesn't necessarily follow that the relative burden on that group is then increased or decreased.
Oct '10
Re: Romney's Overly Optimistic Tax Plan
Ed G.
I have no impression, as an empirical matter, except that Todd is wrong to complain that others are getting deductions he's ineligible for. Regardless of what people actually deduct, the fact remains that sales tax is deductible, and yes, I do think a properly computed deduction would be comparable to the income tax deduction. · 1 hour ago
My main point is not so much about the type of tax, but the amount of tax. If one state imposes higher taxes on its residents than another state, because those taxes are deductible, a portion of that cost gets shifted to US taxpayers.
States with high taxing and spending need/like the deductibility of state and local taxes.
And no, the sales tax deduction and the state income tax deduction are not comparable.
Edited on October 11, 2012 at 8:29pmMay '10
Re: Romney's Overly Optimistic Tax Plan
liberal jim
..............
Try reading the Ryan budget! It reduces the rate of increase in spending- not spending. .......... In addition Mr Ryan, who voted for every big government proposal Bush made, for the past two years has actively opposed and help defeat budget proposals that did reduce spending. A person who proposes to continue to increase spending, while working to defeat proposals that reduce it are not serious about addressing spending. Proposing spending increases of 3% instead of 7% is increasing spending. The proposal Romney has on his web page does just that. I am talking about reducing the size and scope of government, not continuing to grow it at a slightly lower rate. · 3 hours ago
Is there any sentient person out there who seriously believes that you can reduce the budget in real terms, rather than reducing increases? Show me once in modern times where that has happened, under any Congress or president. That was true before or after the budget reforms of the mid-'70's that instituted the current guaranteed-budget-increases rules.
The most important changes that could be implemented (besides a term limits constitutional amendment) are budget reforms that eliminate the "current services baseline."
Sep '10
Re: Romney's Overly Optimistic Tax Plan
Duane Oyen
liberal jim
..............
Try reading the Ryan budget! It reduces the rate of increase in spending- not spending. .......... In addition Mr Ryan, who voted for every big government proposal Bush made, for the past two years has actively opposed and help defeat budget proposals that did reduce spending. A person who proposes to continue to increase spending, while working to defeat proposals that reduce it are not serious about addressing spending. Proposing spending increases of 3% instead of 7% is increasing spending. The proposal Romney has on his web page does just that. I am talking about reducing the size and scope of government, not continuing to grow it at a slightly lower rate. · 3 hours ago
Is there any sentient person out there who seriously believes that you can reduce the budget in real terms, rather than reducing increases?
Solid argument for getting us to a truly socialist state. Keep up the good work. Your a solid Republican.
May '10
Re: Romney's Overly Optimistic Tax Plan
liberal jim
Duane Oyen
Is there any sentient person out there who seriously believes that you can reduce the budget in real terms, rather than reducing increases?
Solid argument for getting us to a truly socialist state. Keep up the good work. Your a solid Republican. · 2 hours ago
I would, besides being a certified Managerial Progressive, classify myself as living the the real world that we actually inhabit, not Ron Paul's Utopia.
Regardless, what needs to be reformed, I repeat, is the Current Services Baseline.
Feb '11
Re: Romney's Overly Optimistic Tax Plan
Todd
Ed G.
I have no impression, as an empirical matter, except that Todd is wrong to complain that others are getting deductions he's ineligible for. Regardless of what people actually deduct, the fact remains that sales tax is deductible, and yes, I do think a properly computed deduction would be comparable to the income tax deduction. · 1 hour ago
.....
And no, the sales tax deduction and the state income tax deduction are not comparable. · 3 hours ago
Edited 50 minutes ago
Why isn't the sales tax deduction comparable to the income tax deduction?
Feb '11
Re: Romney's Overly Optimistic Tax Plan
Todd
Ed G.
I have no impression, as an empirical matter, except that Todd is wrong to complain that others are getting deductions he's ineligible for. Regardless of what people actually deduct, the fact remains that sales tax is deductible, and yes, I do think a properly computed deduction would be comparable to the income tax deduction. · 1 hour ago
My main point is not so much about the type of tax, but the amount of tax. If one state imposes higher taxes on its residents than another state, because those taxes are deductible, a portion of that cost gets shifted to US taxpayers.
States with high taxing and spending need/like the deductibility of state and local taxes.
.....
I reject the premise that differing deductions on an individual basis results in "subsidies". The same rules apply to everyone, and it tends to even out. Taxpayers who live in blue urban areas earn much higher incomes (on average) than the rest of the country (even for similar jobs) and therefore pay more in taxes; would you also say that they are subsidizing the lower earners with their bigger federal tax liabilities?
Edited on October 11, 2012 at 9:54pmFeb '11
Re: Romney's Overly Optimistic Tax Plan
Palaeologus
Ed G.
.....
The skepticism isn't about the ability to attract votes (all of these plans have that particular weakness), the skepticism is about whether the plan makes sense on its own terms and claims. So your comparison to the flat tax and various proponents isn't really applicable here.
It's applicable. All those plans were semi-gimmicks blatantly designed to win over the GOP primary electorate. Ben's claim here is that Mitt's plan is designed to win the general, but won't actually work as advertised.
I'm wondering why Ben's skeptical eye is singularly fixed on Mitt. · 4 hours ago
The difference is that the various proposals we saw during the primaries were broad outlines or variations on standard alternatives (you may think of them as gimmicks, but I disagree), whereas Mitt is making some claims that may not be simultaneously possible. Besides, if it's true that the plan will be revenue neutral for the middle class as a whole and that some in the middle will gain while others will lose, what's the point of doing it? Why not propose a plan where they all win? Why shuffle the deckchairs?
Feb '11
Re: Romney's Overly Optimistic Tax Plan
Lucy Pevensie
.....
That's an interesting question. I would have to run it by my father to figure out exactly how it would have affected him, but he is an unusual case in that he continues to work a bit, way more than two decades after what most people consider a reasonable retirement age. It might have affected my father more than most seniors for that reason. But those savings that many people including my father have are tax-deferred retirement plans. Would those be immune to income tax, even if the whole idea of them was that you would pay income tax on them when you withdrew the money?
That's a good question Lucy. I doubt that Romney's plan would transform heretofore taxable 401k/IRA distributions into non-taxable, though I admit that I'm not not sure. Otherwise, your father, and the people in the same not-uncommon situation would likely come out losers on the deal.
Apr '11
Re: Romney's Overly Optimistic Tax Plan
Ed G.
Palaeologus: 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
[snip quote]
Is that so? Why weren't you similarly skeptical during the primaries of Perry, Newt, or Cain and their fantastic flat-to-flattish tax plans that wouldn't garner five voters' support in swing states?
The skepticism isn't about the ability to attract votes (all of these plans have that particular weakness), the skepticism is about whether the plan makes sense on its own terms and claims. So your comparison to the flat tax and various proponents isn't really applicable here. ·
I think you're misreading Palaeologos here. He's not complaining about Ben's flip flop on the political realities, but about his reversal on the substance; Ben used to like the substance, and did not raise these substantial questions when he liked the messenger. Palaeologos mentions the political realities as an aside.
Much like Ben attacked Santorum unfairly one one point because he disagreed with him on others. It's all about personalities.
Edited on October 11, 2012 at 11:11pm