The two parties may not agree on much, but they do agree on this: It’s time to reform the tax code.
The last time the tax code got a deep clean was 1986. Since then, it has been clogged up with deductions, credits and loopholes that have made tax time a burden for individuals and tax decisions distortive for businesses. Eliminating many of these special carve-outs would pay for a reduction in tax rates, deficit reduction or perhaps even both.
But the minute one moves from that vague goal of making the tax code simpler into the knotty questions of what provisions of the tax code ought to be eliminated, the broad consensus breaks down. Should the next president limit the mortgage-interest deduction, and if so, by how much? Should he end the charitable deduction? What about the tax-free status of employer-provided health benefits?
These are the real questions of tax reform, and they’re often hidden by politicians who prefer to talk vaguely of “tax breaks and loopholes.” But if either President Obama or Mitt Romney attempts to “broaden the base and lower the rates,” those questions will be the only ones that matter.
To help make them clearer, we’ve worked with the analysts at Citizens for Tax Justice, and its sister organization the Institute for Taxation and Economic Policy, to create the Wonkblog Tax Reform Calculator. We in particular thank Matt Gardner at ITEP for running the numbers necessary for the simulation to work. Today’s version allows you to try and pay for Romney’s tax cuts by choosing which deductions and exemptions to eliminate. Tomorrow we’ll release a simulation based on Obama’s specifications and goals.
Romney's tax plan
Romney’s tax plan is less a plan than a set of promises: A 20 percent cut to individual tax rates. A 30 percent cut to the corporate tax rate. No change to overall tax revenues. No cut in the tax burden of the rich. No increase in the tax burden of the middle class. No increase in taxes on savings and investment.
But if those promises are simple to explain, they’re almost impossible to keep simultaneously. And so the scrutiny of Romney’s tax reform plan has been of an odd sort. Rather than asking what policy choices Romney would make to achieve his goals, the debate has focused on whether, as a question of abstract math, his goals are achievable. (The nonpartisan Tax Policy Center’s analysis suggests they’re not.)
This simulator can’t answer that question. In order to keep the calculations manageable, we’ve had to sacrifice so-called distributional analysis, which estimates how much different income groups will pay. So this won’t tell you whether you’ve raised taxes on the middle class or cut them on the rich, though hopefully the descriptions and numbers we’ve included for each tax policy choice will give you a rough idea.
What the calculator does do is let you try and raise the $480 billion that the Tax Policy Center estimates Romney’s plan will cost in 2015 by doing exactly what Romney says he’s going to do if elected: Capping or ending deductions and closing loopholes. The simulation doesn't include literally every deduction or exemption in the code. But it includes all of the major ones -- including some Romney has taken off the table, like the preferential rate for capital gains income.
It will also let you do what Romney has said he won’t do: Raise taxes. After all, pledges get broken, and if Romney’s plan is going to balance out, he’s going to have to break at least a few of his previous promises. So we’re including a few possible new taxes and tax increases. Some of these are dramatic, like implementing a carbon tax or a European-style value-added tax (VAT). Others are more modest, such as a slight increase in the taxes on alcohol and gas. All the data are courtesy of ITEP, the Congressional Budget Office's budget options or the Office on Management and Budget's summary tables.
Remember that all the policies below serve purposes besides raising revenue. Gas and carbon taxes reduce the threat of global warming, and gas taxes reduce congestion, smog and other irritants as well. Alcohol taxes deter alcoholism and deaths from drunken driving. The charitable deduction is a crucial lifeline for artistic and philanthropic groups such as soup kitchens, regional theaters and churches, and the mortgage-interest deduction is a key subsidy for homeowners. So keep in mind while playing that you’re not just making Romney’s math balance out. You’re making policy.
SOURCE: Institute for Taxation and Economic Policy, Congressional Budget Office, and Office of Management and Budget. GRAPHIC: Kat Downs, Ezra Klein, Todd Lindeman, Dylan Matthews and Andrew Metcalf - The Washington Post. Published Oct. 31, 2012.