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Right Turn
Posted at 12:39 PM ET, 02/22/2012

Romney’s tax plan: Not Obama, not Santorum, maybe doable

Mitt Romney has rolled out the remainder of his tax plan that he previewed in part in September when he presented his jobs plan. A conservative tax policy wonk on Capitol Hill told me it is “in line with remarkable policy consensus built among conservatives over past couple of years.”

The Romney team released a summary, promising: “To repair the nation’s tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government.”

It contains these basic components:

Make Permanent, Across-The-Board 20 Percent Cut In Marginal Rates. This bold stroke reduces the tax on the next dollar of income earned for all taxpayers. The new top rate of 28 percent returns to the top rate signed by President Reagan in 1986.
Pro-Growth. These tax cuts — relative to President Obama’s proposal to raise the tax rates on the most successful business owners — will increase wages in non-corporate businesses by 6 percent, increase investment by 10 percent, and increase business receipts by 16 percent. . . .
Mitt Romney will maintain the current 15 percent rate on income from qualified dividends and capital gains. He will cut taxes further on lower- and middle-income Americans by ensuring that families with an annual income below $200,000 will pay no taxes on income from capital gains, interest, and qualified dividends. These low tax rates will create powerful incentives for Americans to save and invest, while spurring business investment and economic growth.

He also promises to abolish the inheritance tax and the alternative minimum tax.

Moreover, in contrast to Obama who wants to get more revenue from corporations and create a whole new tax on American corporations’ overseas profits, Romney wants to do the opposite with a plan designed, according to a Romney adviser with whom I spoke earlier, to promote growth and not to raise more revenue. As he specified before, he will cut the corporate rate to 25 percent. He will also make the research and development credit permanent. Most intriguing is his proposal on shifting to a territorial tax system:

The United States taxes income on a worldwide basis, regardless of where it is earned. This worldwide system of taxation sets the U.S. apart from most other OECD countries, which have converted to territorial systems of taxation. Japan and the United Kingdom are two countries that recently traded their worldwide tax systems for territorial systems. This switch will promote U.S. interests in two key ways:
Encourages Domestic Investment Of Foreign Profits. The U.S. system of worldwide taxation (particularly when coupled with the U.S.’s high corporate rate) has the perverse effect of making reinvestments of foreign profits in the U.S. more costly than reinvestments made abroad. A territorial system will avoid the threat of further taxation from precluding a decision to reinvest profits at home.
Makes U.S. Companies More Competitive In The World Marke t. The worldwide system burdens the foreign operations of U.S. companies with an added layer of tax not borne by their foreign competitors that are headquartered in the local markets or in other countries with territorial tax systems. This second layer of tax makes U.S. companies less competitive in foreign markets. A territorial system that helps U.S. companies compete in foreign markets will create jobs in the U.S. as well.

A Romney adviser provided some additional details to me. With regard to individual taxes, Romney will consider all “base broadeners” to pay for the reduction in tax rates. That means a rollback, cap or elimination of some tax breaks for those in the new top (28 percent) bracket. The Bowles-Simpson commission pointed to a variety of possibilities, all of which would be up for consideration. In other words, Romney, unlike some who back flat tax proposals, does not want to see the tax system become less progressive.

With regard to the treatment of capital gains, Romney doesn’t accept the criticism that the tax break for non-wealthy tax payers is meaningless. In fact, with the spread of IRA’s and 401k’s, middle-class taxpayers have become robust investors. By extending this rate reduction, Romney’s plan in essence gives them the encouragement to invest outside the confines of 401k and IRA plans (with their limits on withdrawal and contribution amounts).

Perhaps most noteworthy are the aspects of the plan that take on the underpinnings of crony capitalism. The plan aims to minimize the degree to which the tax code distorts economic choices, according to a Romney adviser. Put differently, corporations are not going to get rewarded for hiring the best lobbyists to get the optimal carve-outs in the tax code. Unlike Obama and Rick Santorum, there is no special tax rate for manufacturing corporations. The market will decide where investment is optimal.

On the territorial tax plan, the idea is to assist American corporations in competing against foreign corporations that already operate under a territorial system. If we want to be a global economy, it makes little sense to stick corporations with a different tax rate and/or to restrict their ability to move profits back home.

Romney seems to have gone for a tax reform plan not unlike that of Rep. Paul Ryan (R-Wis.). It flattens the code, broadens the base and tries to get government out of the business of picking winners and losers. Romney, like Ryan, did not go for the flat-tax rate. And unlike some Republicans, he’s made adjustments so as not to shift the tax burden down to middle- and lower-income taxpayers. But what is most significant, I think, is that he rolled it out with a reminder of his very significant spending cuts and entitlement reforms. On his tax reform rollout, he also includes a list of his spending reductions including repeal of Obamacare, block-granting Medicaid, Social Security reform (“for younger generations, gradually raise the retirement age and index the growth in benefits for higher-income retirees to inflation instead of wages”), and Medicare reform (“for younger generations, create a premium support system that gives each senior the freedom to choose among competing private plans and traditional fee-for-service Medicare”).

Taken in its totality, it is the most detailed of any of the candidates’ plans. While it won’t satisfy the most enthusiastic supply-siders, it moves the code and the budget in the right direction. And, in stark contrast to Obama and Santorum, Romney doesn’t make the tax code worse by adding special give-aways. It is reflective of who he is — a center-right candidate.

By  |  12:39 PM ET, 02/22/2012

Categories:  2012 campaign, Budget, Taxes

 
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