Romney's policy dead-end
Mitt Romney has added a new plank to his campaign tax platform: Cut all ordinary tax rates by a fifth. But he’s put a few pretty big hurdles in the way of making sure his plan does not add to the deficit.
Mitt Romney has added a new plank to his campaign tax platform: Cut all ordinary tax rates by a fifth. That would bring the top individual income tax rate down to 28 percent and cut federal revenue by perhaps $200 billion a year. Romney says that a combination of economic growth and base broadening would make up that revenue loss.Skip to next paragraph
The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. The Center is made up of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government. TaxVox is the Tax Policy Center's tax and budget policy blog.
Congress yet to act on funding for roads
Pensions and public schools struggle for tax funding
How America's tax system could be revised to help small businesses
Why isn't there more support for a simple tax code?
What’s behind that 1040? Check out TPC’s interactive tax forms
Subscribe Today to the Monitor
But he’s put a few pretty big hurdles in the way of making sure his plan does not add to the deficit. He would repeal the alternative minimum tax (AMT) and thus eliminate a major backstop against revenue losses from his rate cuts. He’d retain the current 15 percent top tax rate on long-term capital gains and qualified dividends and do away entirely with taxes on that income for households making less than $200,000. And he promises not to increase the share of income tax paid by low- and middle-income households. That means any tax increases would have to fall entirely on the rich.
Assuming no other changes, the 20-percent cut in rates reduces taxes most at the top of the income distribution. The top rate would come down 7 percentage points, compared with just 3 percentage points for the 15 percent tax bracket. As a result, maintaining the tax share paid by the rich requires trimming their tax preferences much more than those of other households.
What could Romney target? The rich benefit disproportionately from three tax preferences: the reduced rates on gains and dividends, exclusions from income, and itemized deductions.
Romney has already taken the first off the table and it’s big—75 percent of the tax savings from low rates on capital gains and dividends go to the top 1 percent, cutting their tax bills by nearly a quarter. As for exclusions, the biggest are employer-paid health insurance premiums and retirement savings, which benefit most taxpayers—only a small fraction goes to high-income households. And Romney says he’d keep major deductions and won’t accept provisions limiting their value for the rich.
That leaves Romney trapped in a policy dead-end. After promising to retain lots of tax preferences, Romney has no clear way to recoup the revenue he loses by cutting rates. So he offers no specific proposals to broaden the tax base—promising those will come later.
Economists generally favor the principles behind Romney’s plan: Lowering rates and broadening the base is good policy. But a plan that cuts rates and only promises unidentified future base-broadening? Not so much.
The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on taxvox.taxpolicycenter.org.