Tax VOX

President Barack Obama delivers his State of the Union address on Capitol Hill in Washington. Obama proposed targeted tax breaks in his speech. (Saul Loeb/AP)

Obama’s tax deform agenda

By Howard Gleckman, Guest blogger / 01.25.12

For a while there, I thought President Obama was going to embrace tax reform in his State of the Union address.  Instead, following the lead of his predecessors, he offered a laundry list of new tax subsidies, bragged about some old ones, and said almost nothing about a top-to-bottom rewrite of the Tax Code.

Here’s just a partial list of the targeted tax breaks Obama promoted: Tax credits for clean energy and college tuition, as well as tax cuts for small business that create jobs, domestic manufacturers, high-tech manufacturers, and companies that close overseas plants and move production back to the U.S.

At the same time, he’d require individuals making more than $1 million to pay an effective income tax rate of at least 30 percent, in part by eliminating their ability to take many deductions. And, he’d use the tax code to punish companies that do business overseas, creating a new minimum levy that is supposed to assure that all multinationals pay some U.S. tax.

Obama’s embrace of the tax code as a vehicle to pick winners and losers sounded more than a little discordant in a speech whose theme was “everyone gets a fair shot and plays by the same set of rules.”  Not so much in a tax code where you get special rules for the government’s favored activities.

As Obama was tossing out his tax baubles, I kept wondering about those firms that somehow didn’t get on his gift list. I can just imagine lobbyists’ cell phones abuzz from furious clients wondering why they weren’t getting a tax break of their very own.

For instance, think about a start-up software company that has to compete with an established firm. Because new businesses rarely make money in their first years, extra tax deductions do them no good. By contrast, a more established competitor, especially if it can qualify for Obama’s high-tech tax break, would benefit—perhaps substantially.

The multinationals’ minimum tax would be entirely unworkable. Even if Congress passed the levy, which it won’t, those firms will find ways around it. Minimum taxes are Band-Aides for a flawed tax system. The solution is not to create a new penalty for firms that learn to manipulate the law, it is to fix the basic law in the first place.

If Obama wants to prevent companies from gaming the system, he could lower the corporate rate and eliminate tax preferences. He raised this in last year’s state of the union address but did nothing about it. That’s too bad. With a low enough domestic tax rate, companies would have less incentive to shuffle income overseas.

Or he could go in the opposite direction and eliminate deferral, the practice that allows multinationals to avoid U.S. tax until they bring earnings back to the U.S. But this minimum tax seems to be a half-measure that may play to his populist base but will achieve little.

I suppose it is inevitable that a president beginning his fourth year in office and facing a deeply divided Congress would go small-bore. After all, there will be no fundamental tax reform in the current environment and even proposing such a step would only open him to criticism from the usual suspects in housing, non-profits, finance and other industries that are very happy with the system as it is.

Still, it is a shame that, instead, Obama would make things worse.

Barack Obama speaks in the East Room of the White House in Washington. According to Gale, the federal government must reduce the deficit by creating tax revenue, broadening the tax base, and eliminating tax loopholes for the wealthy. (Haraz N. Ghanbari/AP/File)

Fixing the budget means higher taxes

By William Gale, Guest blogger / 01.24.12

If we are going to reduce the medium- and long-deficit, new tax revenues must be part of the solution. And those taxes must be progressive and as conducive to economic growth as possible.

Historical revenue levels will not be sufficient to fund the federal government in the future. We will need to control the ballooning costs of Medicare, Medicaid, and Social Security. However, because their enrollment will be growing with the aging population, additional revenue still will be needed.

Past major budget agreements included both revenue increases and spending cuts because using both sides of the budget provides a sense of fairness and shared sacrifice. Americans prefer a balanced approach to spending cuts alone

Interestingly, raising taxes has proved more effective at restraining spending than allowing the government to finance its outlays with deficits. Under presidents Reagan and George W. Bush, taxes fell but spending rose. Spending fell only in the 1990s, when President Clinton and Congress raised taxes. This makes sense, since raising taxes to pay for current spending makes it clear to taxpayers that there is a cost to current spending, whereas the cost of deficit financing, while real enough, are obscured by the fact that it is does not create current tax liabilities.

Done right, higher taxes will not destroy the economy. In 1993, top income tax rates rose to 39.6 percent, and the economy flourished for the rest of the decade. Even the massive tax increases during and after World War II-amounting to a permanent rise of ten to fifteen  percent of GDP-did not hamper U.S. economic growth. 

The best way to raises taxes is to broaden the tax base by reducing the number of specialized credits, deductions, and loopholes. For example, limiting the tax benefit of itemized deductions to 15 percent would affect mostly high-income households and raise more than $1 trillion over the next decade without raising marginal tax rates.  

New revenues should come from a progressive tax, which means the tax burden on high-income, high-wealth households needs to rise. Last year’s debt deal contained only spending cuts that place almost the entire burden of closing the fiscal gap on low- and middle-income households but have little or no impact on high-income households.

Over the past 30 years, the share of total household income for the top one percent of the income distribution more than doubled. Yet, those high-income households have seen their average tax burden fall, not rise, during that period. 

The claim that these tax  increases will harm small business is often overstated. Most income for high-income households is not business income. Yet, a recent Treasury report shows that just 1 percent of small business owners would be affected by a “millionaire’s surtax.” And even those firms face effective tax rates likely to be zero or negative since they can immediately and fully deduct the cost of new investment, even as they finance it WITH tax-deductible debt.  

In addition to income tax reform, our leaders should move the United States toward a system that taxes consumption (using a value-added tax for example) and nonrenewable and polluting energy use (by increasing gasoline taxes or implementing a carbon tax).

The VAT exists in about 150 countries worldwide. It can raise substantial revenue, is easily administrable, and is minimally harmful to economic growth. In addition, a pre-announced, phased-in VAT could accelerate economic recovery. Concerns about regressivity and transparency can be addressed, and concerns that it would fuel an increase in government spending are overstated. 

Long-term challenges related to energy production and consumption and long-term fiscal challenges can be addressed together. A far-reaching, upstream carbon tax can reduce the deficit and our dependence on foreign oil, protect the environment, lower the costs of healthcare, and encourage the development of clean, sustainable energy sources without the need for costly, inefficient energy subsidies. In the absence of a full-blown carbon tax, raising the gas tax offers many of the same advantages.

None of this means the United States needs to move to European levels of taxation. But between the very low tax revenues we raise now-the lowest share of the economy in six decades-and the high levels of taxation in other developed countries, there is room to raise revenue in a way that achieves serious medium- and long-term deficit reduction and supports a reasonable level of government.

Mitt Romney speaks during a roundtable discussion about housing issues in Tampa, Florida January 23, 2012. Romeny manages his investments out the Cayman islands, but he is not the one that benefits the most from this arrangements. (Brian Snyder/Reuters)

Why does Mitt Romney manage his investments from the Caymans?

By Steven Rosenthal, Guest blogger / 01.23.12

Mitt Romney’s holdings in the Cayman Islands have generated lots of interest in investment funds that are managed from the U.S. but incorporated in foreign jurisdictions.   But taxable U.S. investors like Romney don’t get much benefit from such funds.  The real winners are U.S. tax-exempt entities, such as charities, pension funds, university endowments, and IRAs, as well as foreign investors.   And investment fund managers can benefit too.

Here’s why:  When tax-exempt investors make money that is separate from their tax-exempt purpose, they are subject to a special tax, known as the “UBIT” or the unrelated business income tax.  A special rule also deems all debt-financed income to be unrelated business income.  Because deals put together by private equity firms are often heavily leveraged (as are investments by hedge funds), debt-financed income often is generated.

If a tax-exempt entity were a partner in one of these deals, it would be taxed as if it earned the income that was earned by the partnership and, thus, be subject to the UBIT. 

But tax-exempts (including individuals who invest through their IRAs) can avoid this tax by investing in a corporation which, in turn, invests in the partnership (or invests directly in the deal).  The tax-exempt’s income from its investment then comes either as dividends or capital gains, neither of which is subject to the UBIT.  But there is a problem:  If the corporation were based in the U.S., it would have to pay corporate-level tax on the earnings from the partnership, thus lowering returns to the tax-exempt.  But, if the corporation located in a tax haven, it would owe no tax (U.S. or foreign) on the earnings.

Similarly, foreign investors could use a corporation to block tainted income from a partnership.  Normally, foreign investors would be subject to tax on U.S. income that is effectively connected to a U.S. trade or business.  But a foreign investor who received distributions from another foreign corporation or realized gains from the sale of its stock could avoid any direct U.S. tax and would not have to file any U.S. returns.

Setting up as a foreign corporation may also benefit the investment fund managers by allowing them to defer compensation.   By now, most readers of Tax Vox know that these managers often are paid for their services with profits of a partnership (“carried interest”).  But they can also be compensated with a contractual right to payment from a foreign corporation which, like carried interest, can be based on an investment fund’s performance. 

Income from a carried interest often is taxed as capital gains rather than as ordinary income, and thus enjoys a lower rate (15 percent v. 35 percent).  But the tax is owed right away.  The contractual right is taxed as ordinary income, but generally is deferred until the manager is actually paid.  If the investments are throwing off long-term capital gains, the manager may prefer to be paid through carried interest.  But if the fund is turning over frequently and thus generating lots of short-term gains (which are taxed at ordinary rates anyway), the manager may prefer a contract payment that is deferred—and taxed later.

These arrangements don’t entirely wipe out every investor’s tax liability. U.S. taxpayers, such as Romney, pay tax on their income regardless of where they earn it, so they can’t avoid U.S. tax by investing in Cayman entities.  In addition, although U.S. taxpayers generally are not taxed on income derived through a foreign corporation until the income is distributed as a dividend, U.S. investors often must accrue income currently if the foreign corporation primarily has passive income or assets or U.S. owners.   

Of course, investment funds may want to incorporate abroad for non-tax reasons, such as fewer regulations and less disclosures.  But tax advantages are a major factor.  Despite the headlines, tax-exempt investors, and fund managers, and not U.S. taxable investors often benefit most from these arrangements.

Republican presidential candidate and former U.S. Senator Rick Santorum takes a photo with a group of children, after speaking during a Values Voter rally at Mount Pleasant Memorial Park in Mount Pleasant, South Carolina January 19, 2012. Santorum's tax policy would slash taxes on households making $40,000 or more, greatly expanding the federal deficit. (Chris Keane/Reuters/File)

Santorum's tax plan: Cuts for (nearly) all

By Howard Gleckman, Guest blogger / 01.20.12

Rick Santorum, who may have won the Iowa caucuses after all, favors a huge broad-based tax cut that would massively increase the budget deficit. According to new estimates by my colleagues at the Tax Policy Center, the former Pennsylvania senator would cut taxes for nearly all households making $40,000 or more. But the impact on the deficit would be enormous: He’d cut taxes by roughly $1 trillion in 2015 alone.

Unlike Mitt Romney, who would slash taxes for those with high-incomes while raising taxes for many low- and moderate-income households, Santorum would boost after-tax incomes for the vast majority of Americans. Only a handful would pay more than they do today.

For individuals, Santorum would start by extending the 2001-2010 tax cuts that are due to expire at the end of this year. But he’d go far beyond that. He’d collapse today’s six tax brackets to just two—10 percent and 28 percent. He’d triple the personal exemption for children, cut taxes on dividends and capital gains from 15 percent to 12 percent, and repeal the Alternative Minimum Tax, the estate tax, and the tax increases in the 2010 health reform law.  

For companies, he’s cut the corporate tax rate in half, to 17.5 percent, and allow full first-year expensing of capital equipment. Domestic manufacturing companies would owe no taxes at all. Multinationals could bring profits back to the U.S. at a 5.25 percent tax rate. They’d owe no taxes at all on repatriated earnings they invest in plant and equipment.    

As always, measuring the effect of the Santorum tax plan depends on whether or not you assume the 2001-2010 tax cuts are extended. But either way, both the tax cuts for high-income households and the increase in the deficit would be enormous.

Even if you assume the 2011 law is made permanent, the top 0.1 percent (who make more than $2.9 million and average $8.4 million) would get an average tax cut of more than $1.3 million in 2015. By contrast, a typical household making less than $20,000 would get a tax cut of $39. Middle-income households making between about $50,000 and $75,000 would get a tax cut of about $2,000. This largess would add about $900 billion to the deficit in 2015.

If you prefer to compare the Santorum plan to a world where the 2001-2010 tax cuts have expired, they look even more generous. The top 0.1 percent would get an average tax cut of $1.7 million. Those making less than $20,000 would see their taxes cut by $265, and those in the middle would get a tax cut of $3,500. Santorum would increase the deficit by $1.3 trillion in 2015 compared to a budget without the Bush/Obama tax cuts.       

The TPC analysis of Santorum’s tax plan comes with the usual caveats. It is static, and thus does not include new revenues generated by economic growth. Much of the benefit to high-income households would come from Santorum’s deep cuts in corporate taxes since TPC assumes those taxes ultimately are paid by owners of capital.

One final caveat: Santorum’s plan includes few details. For instance, while he proposes two individual tax rates, he does not say what the brackets are. Normally, TPC works with the campaigns to clarify these specifics, but the Santorum campaign did not respond to TPC’s requests for information. Thus, the estimates include some heroic assumptions.

Still, like his opponents in the race for the GOP’s presidential nomination, Santorum is proposing extremely generous tax cuts at the price of big increases in the budget deficit.

Too many state budgets have a "grasshopper" mentality, but perhaps the federal government can encourage them to be more ant-like in their money management, (Andy Nelson/The Christian Science Monitor/File)

A federal umbrella for state rainy days?

By Brian Galle, Guest blogger / 01.19.12

As state legislatures return for what promises to be yet another difficult budget year, they ought to be starting to refill their rainy day funds–those accounts that set aside money for future hard times. That’s a tough decision. After all, for the past three years, states have been raising taxes and cutting spending just to keep their budgets balanced. Why would any elected official want to do more of both?

But there are good reasons why they should and why, perhaps, the federal government should help encourage some prudent saving on the part of states. 

Here’s the problem: Ideally, states should try to stimulate their economies during recessions, or at least avoid raising taxes, eliminating public-sector jobs, or cutting other spending.  But balanced budget rules make recessions exactly the time when revenues crash and states must cut spending–just when residents need services the most. Rainy day funds can help prevent that death spiral. While most states do try to save in good times, most have drained their reserves over the past few years. Few states save enough to cover revenue shortfalls during recessions. 

It’s no surprise. Politicians prefer to spend money and keep taxes low to win reelection. Cutting spending and raising taxes to save for the future is rarely a winning political strategy.  And taxpayers may assume that they will retire somewhere else before the next recession, and prefer tax cuts over saving during good times. Besides, Americans are not very good about saving for the future.    

In a new paper, forthcoming in the Indiana Law Journal, Kirk Stark and I explain why national policymakers should care about the states’ rainy days and suggest some ways to help fill them.

Given its own fiscal mess, why should the federal government care about states? Because we live in an interconnected economy where state problems rapidly become national problems. Besides, national government should step in to prevent human suffering when local governments can’t.  For example, ARRA (the federal “stimulus” legislation) gave states additional money for Medicaid, education, and expanded unemployment programs. But there is a downside: If states come to expect federal “bailouts” whenever they get in fiscal trouble, they’ll almost certainly be less careful with their own funds. .

However, small amounts of federal money could encourage states to become more self-reliant.  For example, the federal government might exploit the fact that officials and voters all prefer goodies now and pain later. Why not offer states a relatively small bonus today, in exchange for their commitment to save later—a sort of “Save More Tomorrow” for states?  Enforcing that promise would be tricky, but so is managing any federal/state program. 

Information might also be a surprisingly useful tool as well. One reason politicians don’t keep their budget promises is because voters have trouble sorting out who’s naughty and who’s nice.  An independent federal agency could rate states on their preparation for fiscal emergencies, giving voters credible information to evaluate candidates. While the rating agencies do some of this, having a federal agency publicly scoring savings might encourage states to concentrate on building up their rainy day fund balances.

If states were characters from Aesop’s Fables, they’d be more grasshopper than ant. So think of it like this: With a little help from the federal government, maybe more states could find their inner ant.

Brian Galle is an assistant professor at Boston College Law School. From June to December, 2011, he was a visiting fellow at the Urban-Brookings Tax Policy Center.

The U.S. Capitol building is seen in this file photo. Members of Congress have returned from recess, and the unfinished business of the payroll tax cut battle and deficit reduction is waiting for them. (Carolyn Kaster/AP/File)

Congress is back, and more combative than ever

By Howard Gleckman, Guest blogger / 01.18.12

The least popular Congress in memory is back.  I, personally, am thrilled.

After a year in which lawmakers did almost nothing besides (barely) keeping the government running, this session promises hardly more.  Tax policy will be at the center of much of the partisan squabbling, but it is hard to imagine Congress achieving more than a temporary truce in its ongoing battle over last year’s unfinished business.

That skirmishing starts with the 2011 payroll tax cut which, after a bruising battle last December, Congress extended only to the end of February. It also includes about four dozen other temporary tax cuts that expired last December 31. On the spending side, lawmakers must resolve controversies over extended unemployment benefits and Medicare physician payments—the so-called “doc fix”– that also must be addressed by March. 

 But all that will just be a warm up for what promises to be an awful year-end when lame-duck lawmakers will face their own version of an ugly triple witching hour.

They’ll have to decide what to do about the expiring Bush-era tax cuts that were extended at the end of 2010 by President Obama and a Democratic Congress, as well as several of Obama’s own temporary tax cuts. And they need to extend the “patch” that protects 25 million households from the Alternative Minimum Tax.

There’s more: They’ll also have to figure out what to do about the automatic across-the-board spending cuts that are supposed to be the price of Congress’ failure last year to cut the deficit by $1.2 trillion. And Congress will have to vote yet again on a debt limit extension. All of this will likely happen in a lame-duck Congress that must negotiate with Obama, who either will have been reelected or will himself be on the way out the door. 

My best guess is that the payroll tax cut ( as well as unemployment benefits and the doc fix) will get extended through the end of the year with surprisingly little controversy. Here’s why: There is a good chance that Mitt Romney will be well on his way to winning the GOP presidential nomination by the end of January. And Romney will let congressional Republicans know that the payroll tax flap needs to go away for the duration of his campaign.

This will not make the House GOP rank-and-file—the Braveheart Caucus—very happy. But Hill Republicans suffered some pretty serious self-inflicted wounds late last year when they tried to explain why they were on the wrong side of what Democrats gleefully characterized “a tax increase on 160 million working Americans.” It is hard to imagine that, in the end, they’ll buck both Romney and their own leadership by resisting a 10-month extension.

That leaves the musical question: How will Congress pay for an extension of the payroll tax cut as well as extended unemployment benefits?

Democrats seem to have abandoned their millionaire surtax and may be reverting to Obama’s original idea—a mix of cats-and-dogs tax hikes and some modest spending reductions. In the end, that will be good enough for the GOP leadership that, like Romney, wants the payroll tax mess to disappear.         

And so it will—until after the election. Then, at the end of the year, the payroll tax, unemployment benefits, the doc fix, and the other temporary tax cuts will get tossed into the lame-duck fiscal salad along with the rest of the spoiled fruit that passes for policy these days. That’s when, after doing essentially nothing from February through December, Congress will have a food fight for the ages.

Republican presidential candidate Mitt Romney talks with media during a campaign stop at Cherokee Trike and More in Greer, S.C., Thursday, Jan. 12, 2012. The controversy over Romney's actions with Bain Capital have reignited the debate over private equity firms and how they are taxed. (Michael Justus/AP/Spartanburg Herald-Journal)

What Carlyle and Bain Capital can teach us about taxes

By Howard Gleckman, Guest blogger / 01.13.12

The on-again, off-again battle over how to tax the compensation of private equity managers may be on again, thanks to the confluence of two seemingly unrelated events.

The first is the controversy over the role of Bain Capital, the investment partnership whose founders included Republican presidential hopeful Mitt Romney. The second is the disclosure by another firm, The Carlyle Group, of how its top executives are compensated.

Both have heightened the focus on what these outfits do and how they are taxed. Bain and Romney, of course, have come under withering criticism from Newt Gingrich and Rick Perry who allege the firm’s investment strategy has led to reams of pink slips at companies it acquired.

That story is much more complicated than Romney’s opponents suggest. Nonetheless, it has lots of people thinking about what private equity does.  

Also this week, Carlyle disclosed its executive compensation in some detail, providing a rare glimpse into how investment firm managers are paid. Combined with the Bain flap, it will surely reopen the five-year old debate over the special tax treatment these partnerships receive through a mechanism known as carried interest or, in short, “the carry.”

The carry allows general partners in investment deals to receive compensation in the form of tax-advantaged capital gains, which are taxed at 15 percent, rather than as salary, which would be taxed as ordinary income with a top rate of 35 percent. This happens because the managers are paid with a fee (up to 2 percent) plus 20 percent or more of their investor’s profits. Those profits are taxed as capital gains even though the general partners may have little or no money of their own at risk in the deal.

Carlyle’s disclosure opens a small window into how this works. In 2011, its three founders were each paid about $140 million. But they received just $275,000 in salary and another $3.5 million in the form of a bonus (also taxable at ordinary income rates). But each also got $134 million—or 96 percent of their compensation–from investment profits. Much came from the carry and is taxable at 15 percent.

It is difficult to know exactly how much of that compensation was performance-based and how much came from fees. But if all of it were taxed as capital gains, and assuming the partners pay at the top ordinary income rate of 35 percent, they’d each save $27 million.         

The story gets more complicated thanks to the reason why Carlyle disclosed the compensation of its founders. It did not do so, it is fair to say, with enthusiasm. But disclosure is the price the firm’s owners must pay to go public, which is their intention.

That raises the high-stakes question of how to tax the proceeds from the sale of a partnership interest in one of these firms.  This would apply where the entire partnership dissolves, as Carlyle soon will. It may also apply when an individual partner in a firm, such as Romney, cashes out. The New York Times reports that Romney continues to receive a share of investment profits from Bain, although he retired almost 13 years ago.

Should these profits be taxed as capital gains, ordinary income, or some of each? Legislation kicking around Capitol Hill takes the last approach, although different bills use different formulas. Carlyle may want to go public under current law to avoid what could well be a higher tax bill if Congress ever cracks down on the carry.      

This week’s news may make that more likely, especially since lawmakers are scrambling to find revenue to pay for efforts to extend both last year’s payroll tax cut and four dozen other expiring tax breaks. On the other hand, Congress has been trying for five years to address what seems to be an obvious inequity in the law and has gotten nowhere.

A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this file photo. Tax-deferred 401(k) plans, commonly thought to mainly benefit high-wage workers, may have low-wage workers seeing more money than previously thought. (Issei Kato/Reuters/File)

Tax-deferred 401(k) plans good news for workers

By Howard Gleckman, Guest blogger / 01.11.12

Tax-deferred 401(k) plans may be a better deal for low-income workers than economists thought, according to new research by my Tax Policy Center colleague Eric Toder and Urban Institute senior research associate Karen Smith.

While high-income workers may get a bigger tax break from their 401(k)s, they also face a short-term trade-off. That’s because their employers tend to offset their contributions to these plans by paying them less in wages. But Eric and Karen found while lower-wage workers get less of a tax benefit than their higher-paid colleagues, their wages fall by much less for every dollar their employer contributes to their retirement plan.

Until now, economists assumed salaries of low-wage workers fully offset employer payments to their (k) plans. But Eric and Karen found that may not be true for lower-wage workers. Thus, while they enjoy both their employer’s contribution and a modest tax reduction, their employer doesn’t reduce their cash wages to fully offset those benefits. Bottom line: Total pre-tax compensation for low-wage workers who participate in 401(k)s increases while it remains about the same for those making more money, who get all their benefits from tax-savings.

To understand what’s happening, think about this phenomenon in two pieces. First, the tax break:  An employee’s contribution to her 401(k) plan is tax deferred. She pays no tax upfront on wages that she contributes, but  is taxed when she withdraws the money after she retires. Usually, though, she’ll be paying tax at a lower rate since her income in retirement is likely to be lower.

Most important, she gets to earn money tax-free within the retirement plan. And that can be a big benefit.

However, the ability to exclude both contributions and earnings from income is much more valuable to someone in the 35 percent bracket than to a co-worker in, say, the 15 percent bracket.

The second part of the story is what happens to wages. The traditional theory has been that a dollar of fringe benefits (such as a retirement plan or health insurance) reduces wages by a dollar, leaving total compensation unchanged.

But by matching workers’ earnings histories to their retirement plan contributions and other fringe benefits as well as other worker charateristics, Eric and Karen found that wages for low-income workers hold up much better than those of high-earners when their employers increase their contributions to (k) plans.

And sometimes, the difference is dramatic. For example, if an employer increases its contribution by $1 for workers already in a plan, that extra benefit replaces only 11 cents of wages for a low-income woman but 99 cents if she is in a high-income family.

Why the difference? Eric and Karen figure it’s because many low-income workers benefit less from a dollar their employer contributes to their retirement plan than from an extra dollar of cash wages and thus place less of a value on their 401(k). For instance, their own contributions reduce their ability to pay for ordinary living expenses, employer contributions cut their future Social Security benefits (since they don’t count in Social Security benefit calculations) and, because they are in relatively low tax brackets, they gain little from their ability to defer tax on their earnings.

Eric and Karen acknowledge their results are preliminary. But their results tell policymakers that encouraging people to contribute more to to their 401(k)s could increase the total compensation of low-wage workers. And that’s an important message.

In this photo taken Thursday, Jan. 5, 2012, Republican presidential candidate former Massachusetts Gov. Mitt Romney speaks in Salem, N.H. Romney's proposed tax agenda would benefit wealthy households the most and add hundreds of billions to the deficit. (Matt Rourke/AP)

Romney's tax plan: Big benefits for the wealthy, higher deficits

By Howard Gleckman, Guest blogger / 01.05.12

A new Tax Policy Center analysis finds that Mitt Romney’s tax plan would cut taxes for millions of households but bestow most of its benefits on those with the highest incomes. At the same time, it would significantly cut corporate taxes and add hundreds of billions of dollars to the deficit.

Compared to current law (assuming the Bush/Obama tax cuts expire as scheduled at the end of this year), Romney would cut taxes by $600 billion in 2015 alone. Relative to a world where those tax cuts remained in place, he would add about $180 billion to the deficit in that year.

In many ways, Romney’s tax plank is a fairly mainstream Republican offering. No major tax reform. Certainly no 9-9-9-like proposal to replace the current revenue system with a consumption levy. And while Romney is proposing huge tax cuts, they are more modest than those of his rivals. Newt Gingrich’s tax package, for instance, would add $1 trillion to the deficit in 2015.  Still, a $600 billion tax cut is worthy of note.

For individuals, Romney starts by making permanent both the 2001 and 2003 tax cuts and the “patch” that protects millions of middle- and upper middle-income households from the Alternative Minimum Tax. 

At the same time, he’d end President Obama’s 2009 stimulus tax reductions, including Obama’s more generous versions of the child tax credit and earned income credit—both aimed at helping low-income working families. He’d also repeal the tax increases included in the 2010 health reform law.

But Romney doesn’t stop there. He’d make capital gains, dividends, and interest income tax-free for those making less than $200,000  and repeal the estate tax (though he’d retain the gift tax).

He’d cut the corporate rate from 35 percent to 25 percent, make the research and experimentation tax credit permanent, and temporarily allow firms to continue to write-off the full cost of capital investment as soon as they acquire the property. Multinationals would get a temporary tax holiday for overseas profits they bring back to the U.S.

Compared to current law, about 44 percent of those making between $10,000 and $20,000 would get a tax cut that would average about $274. No one in that income group would pay more, but more than half would see no change in their tax bill.

Nearly all middle-income households would get a tax reduction. Among those making $50,000 to $75,000, the average tax cut would be about $1,800.

But much of the largess goes to those with the highest-incomes. Households making more than $1 million would get an average tax cut of almost $300,000, largely because, as owners of capital, they’d receive the bulk of the benefit of Romney’s very generous corporate tax reductions. While those making $1 million-plus pay about 20 percent of all federal taxes, they’d receive more than 28 percent of Romney’s tax cuts.

The story is a bit different if you start by assuming the Bush/Obama tax cuts are made permanent. Compared to that already-generous law, the average tax cut for all households shrinks from $3,500 to about $1,000 and a sizable number of low-income families would see their taxes go up. 

For instance, about 15 percent of those in the $10,000 to $20,000 income group would get an average tax cut of about $140, but 20 percent would get hit with an average tax increase of $1,000, mostly because Romney would bring back the less generous versions of those refundable child and earned income credits.

About one-third of those in $40,000 to $50,000 group would get a tax cut that would average about $400, but about one-six would face a tax increase of nearly twice as much.

Almost everyone who makes more than $1 million would get a tax cut averaging roughly $150,000. As a group, they’d receive nearly half the benefit of Romney’s tax plan. 

Romney says he’d rewrite the entire tax code–someday. But he doesn’t say how or when. Until he does, a Romney Administration’s revenue agenda would look a lot like President George W. Bush’s, just more so.