After examining Romney’s proposal, the nonpartisan Tax Policy Center concluded that households with incomes exceeding $200,000 would receive tax cuts; meanwhile, taxes would rise for the other 95 percent of the population. Taxpayers making more than $1 million would receive an average cut of $87,000; those making less than $200,000 would pay an average of $500 more. Romney denies that he would raise taxes on the middle class but has provided no evidence that the Tax Policy Center’s analysis is wrong.
What can he be thinking?
It’s not just that the politics are poisonous. The economics don’t make sense, either. Many wealthy Americans already have lower-than-average tax rates, because their incomes derive heavily from capital gains (profits on the sale of stocks or other assets) and dividends. These are taxed at a preferential 15 percent rate. Remember the ruckus over Warren Buffett and his secretary? Although the wealthiest 5 percent still pay about 40 percent of federal taxes, it’s questionable whether further reducing their tax burden would bolster the economy.
True, Romney’s basic approach is sound: lowering top rates and offsetting lost revenue by ending tax breaks. Romney would drop the top income tax rate from 35 percent to 28 percent and the lowest rate from 10 percent to 8 percent. This would improve incentives to work and invest. People would keep more of their last dollar of earnings. Reducing tax breaks would make the tax code less of a political candy store used to reward and penalize different groups and industries.
Just which tax breaks would be reduced, Romney hasn’t said. But he has made two decisions benefiting high-income Americans. The first is to repeal the estate tax, which in 2009 applied to only 0.6 percent of adult deaths and raised $21 billion. The second is to retain tax preferences for capital gains and dividends, costing an estimated $85 billion in revenue in 2013. So the wealthy would gain both from lower rates on ordinary income (wages, salaries) and from tax preferences heavily skewed toward them. To keep the package revenue-neutral — raising the same amount as today’s system — would require deeper cuts in middle-class tax breaks.
The political damage from this lopsided tax plan transcends its details. The central appeal of the Romney candidacy is that he would bring a competence to economic policy that would inspire the confidence needed to reinvigorate the recovery. The idea is to present a compelling contrast to Obama, whose low understanding of and meager sympathy for business seem plain and have arguably hobbled economic expansion.
Romney’s tax plan calls into question his claimed superiority. The plan seems crafted mostly to satisfy Republican constituencies, which fervently support ending the estate tax and keeping capital gains rates low. The campaign has pointed to a study claiming that Romney’s plan would increase the economy’s output by 5 percent, $750 billion at today’s prices, after five years. The projection seems a stretch — just numbers generated by a computer model — but it’s also irrelevant because the plan would be dead on arrival in Congress.
Under any circumstances, broadening the tax base by curbing popular breaks would be difficult. Huge constituencies benefit from the deductions for mortgage interest and charitable gifts. Other popular breaks include the income exclusion for employer-paid health insurance and tax credits for college tuition. To cut them so that taxes rise for the poorest 95 percent and fall for the richest 5 percent suggests a form of political suicide unappealing to elected officials.
What’s curious is that, with a few courageous tweaks, Romney could have presented a more credible plan. In 1986, Ronald Reagan supported eliminating the preferential rate for capital gains, which then remained at 28 percent from 1987 to 1997. The economy did fine. Romney might have emulated Reagan by proposing a top tax rate of 30 percent and an end to the capital gains and dividend preferences.
Indeed, these preferences may undermine the economy’s efficiency. Because low capital gains rates apply (illogically) to hedge fund and private-equity managers, we may have too many hedge and private-equity funds. If you subsidize something, you get more of it.
So Romney might have struck a blow for fairness, efficiency, simplicity — and political independence. Instead, he’s made a gift to Obama.