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Romney, Obama Trade Blows Over Income Tax
Source:
tax-news.com
- Sep 18, 2012
by Leroy Baker, Tax-News.com, New York
17 September 2012
While President Barack Obama’s campaign continued its attack on his presidential rival’s ‘unpaid-for tax plan’, a study has come out in support of Mitt Romney’s claim that it would be possible to reduce United States personal income tax rates by 10% without raising middle-class taxes.
Romney has cited the recent study by Harvey Rosen, an economics professor at Princeton University, to prove that his income tax policies are workable. His main conclusion is that, “under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on the upper income classes about the same”.
With respect to the personal income tax, Rosen lists the key elements of the Romney proposal as: the reduction in all marginal tax rates by 20% (reducing the top marginal rate to 28% from the current 35%); repeal of the alternative minimum tax; taxation of dividends and capital gains at a maximal rate of 15%, and elimination of taxes on interest, dividends and capital gains for families whose incomes are under USD200,000; and broadening the tax base by reducing or eliminating various tax preferences.
The Romney campaign, he adds, “has asserted that all this can be done in a way that raises the same amount of revenue as under the status quo (‘revenue neutral’) without raising the tax burden on taxpayers with low and moderate incomes”.
The Brookings Institution’s Tax Policy Center (TPC) recently challenged Romney’s claim, arguing that it is mathematically impossible for the Romney proposal to achieve all these goals.
Early in August this year, the TPC calculated that, under the Romney proposal, high-income taxpayers would receive a tax cut, and given that the proposal is revenue neutral, this would inevitably lead to increased taxes for families with low and moderate incomes. Taxpayers with incomes over USD1m would see their after-tax income increased by 8.3% (an average tax cut of about USD175,000), while the after-tax income of taxpayers earning less than USD30,000 would actually decrease by about 0.9%.
Rosen points out that the TPC paper has set off a spirited debate, particularly because the Romney proposal does not specify in detail just what tax preferences might be eliminated or scaled back in order to broaden the tax base, and much of the debate has focused on what provisions would be politically and administratively feasible.
His analysis, however, introduces a further element, in that he looks at the possible effects of the Romney proposal on economic growth, taking into account the additional income that might be generated. Under plausible assumptions, he finds that a proposal along the lines suggested by Romney can be revenue neutral and not entail an increase in the tax burden on lower and middle income individuals.
Rosen’s conclusion is, in fact, that, eliminating the most widely used deductions by taxpayers earning more than USD200,000 a year, as has been suggested by Romney, on a revenue-neutral basis, would be extremely difficult, while if the income level was reduced to USD100,000, and a 3% economic growth rate was assumed, it would be feasible.
While he notes that the definition of a 'high income' individuals "is in the eyes of the beholder”, he believes that, in any case, “economic growth should take centre stage in the on-going national conversation over tax policy”.
The TPC paper’s conclusions were, at the time, latched onto by President Obama on the campaign trail: “If Governor Romney wants to keep his word and pay for his plan, this USD5 trillion tax cut, the only way to do it is to cut tax breaks that middle-class families depend on. Mr Romney is asking you to pay more so that people like him get a tax cut.”
A memorandum now issued by his campaign team has continued and challenged Romney to be more specific as regards the 'loopholes' he intends to eliminate.
“Romney has proposed USD5 trillion in new tax cuts on top of the Bush tax cuts for the rich,” it reiterates. “He claims that he can pay for these tax cuts by closing loopholes for the wealthy, but he has repeatedly refused to mention even one loophole he would close. According to independent experts, there are simply not enough loopholes for the wealthy he could eliminate to pay for his plan, which means he would need to raise taxes by an average of USD2,000 a year on middle-class families with children.”
Category: General Business
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