Mitt Romney proposes to make the Federal tax code fairer, flatter, and simpler if he is elected President of the United States. His tax proposal has come under much scrutiny because without factoring in economic growth, limited tax deductions and closing corporate tax loopholes, his plan will cut tax revenues by trillions of dollars. (comparison to Obama’s tax plan)
Romney believes that the current tax system is not optimal in the sense of encouraging growth and broadening the tax base. The basis of Romney’s plan is to generate enough revenue to balance the budget (or eventually balance it) without hindering economic growth, nor having the tax burden fall inequitably on all US taxpayers.
Below are 9 of the major tax changes that Mitt Romney proposes if he is elected as President of the United States as well as possible implications on Government tax revenues.
Change 1: Individual Income Tax Rates
Romney plans to make a permanent 20% across-the-board tax cut to individual income tax rates. Below is a table that compares current income tax rates to Romney’s.
|Romney Rate||Current Rate||Single Income||Married Income|
His plan to cut income-tax rates across the board will provide small businesses with incentives to grow and hire more individuals. Romney believes that cutting income-tax rates would make American companies more competitive globally.
Change 2: Long Term Capital Gains Tax Rates
Currently, the standard tax rate for capital gains is 15% (except 0% for individuals in the 15% income tax bracket and under). Under Romney’s proposal, he would eliminate the capital gains tax for individuals with less than $100K of income ($200K if filing as married). Anyone with income above $100K ($200K if filing as married) would still be taxed at 15%.
Mitt Romney and his economic advisors state that the lower capital gains tax rates can have a big impact on the greater economy. A paper written by Larry Summers, an economist that served under Clinton, stated that eliminating taxes on capital income could raise state output up to 18% and increase consumption up to 16%. Another economist, Allen Sinai, claims that raising capital gains by 5 percentage points will cause economic growth to decrease by .05 percentage points annually, would cut 231K jobs a year, and would have a negative effect on the budget deficit.
Change 3: Dividend Income
The current tax rate on dividend income is 15%. Like the long term capital gains tax, Romney plans on eliminating taxes on dividend income for individuals with less than $100K ($200K if filing as married) of income. Individuals with over $100K of income and over $200K that file are married will continue to pay the current 15% dividend tax rate.
For example, the taxes on capital gains, decreasing these taxes would help increase economic growth. Dividend income is already subject to double taxation as it is because the company that earns the money must pay taxes on their earnings and then shareholders must pay taxes on the dividends they receive from the company’s after-tax earnings.
Change 4: Interest Income
Current interest income is taxed at the individual income tax rates mentioned above. Like the capital gains and dividend income, Romney plans on eliminating taxes on interest income for individuals making under $100K and married couples making under $200K. People making over that amount of money will be taxed at Romney’s revised income tax rates (20% lower than current tax amounts) on interest income.
Romney believes that by eliminating interest income for the middle and lower class would encourage more Americans to save and invest for the long-term. He believes this would free up capital for investment which would then flow back into the economy and help economic growth further.
Change 5: Alternative Minimum Taxes (AMT)
Romney plans to repeal the alternative minimum tax. The alternative minimum tax is a fairly complicated addition to the tax code that does not always work the way it was intended to when it was first implemented. The AMT was originally used to tax high-income households at a higher rate, it now affects millions of middle-class families each year which is mainly due to the fact that it is not indexed for inflation.
A big part of Romney’s tax plan is to simplify the tax code. This is one major change that would simplify taxes for many people. One factor he plans to implement to counteract this change is by limiting the number of deductions taxpayers can take each year (discussed more in detail below).
Change 6: Gift Tax & Estate Tax
Romney doesn’t necessarily plan on making any changes to the gift tax but plans to eliminate the estate tax. Right now the gift tax and estate tax work hand-in-hand. This is a step to help make the tax code fairer and simpler.
With the current law, you are able to give away $13,000 a year (on a per person basis, so $13,000 can be given to 20 friends and not get taxed) without the money being added to your lifetime unified credit of $5.12 million (which is set to go to $1 million in 2013 or possibly $3.5 million if Obama’s plan is passed). This current law makes gives incentives to individuals (with estate values of over $1 million) that know they are close to the end of their life to try to give away their assets to friends and family to decrease the tax liability at the time of their death.
Romney’s plan would close this loophole by making it just as beneficial to die with all of their money in their own name. This change does make the tax code fairer and less stressful for those that are worried about what happens to their wealth after they are gone. If you think about it, why should this money be taxed on death when it has already been taxed by the government at the time that it was earned?
Change 7: Tax Deductions
Romney plans on limiting that amount of deductions that can be taken with each tax return filed. It is not certain which tax deductions will be limited, but he did mention figures from $17,000 to $50,000 and the taxpayer can choose which deductions they would like to claim up to a certain level.
This change will likely have little to no effect on the middle class and below but could significantly reduce the deductions that individuals take in the upper-income limits. This is the one component of his tax plan that would increase taxes on certain people to help make up for the 20% in tax cuts across the board.
His plan to limit tax deductions is a step to making the tax code a bit simpler. This change can be seen as a replacement to the AMT which will be easier to understand and generally target the upper-income individuals as it was originally planned to do.
Change 8: Corporate Tax Rates
The current corporate tax rate is 35% which is one of the highest in the world. Romney plans to cut the corporate tax rate to 25% to allow US corporations to be more competitive internationally and to make America one of the more attractive places in the world for business.
It has been shown that higher corporate taxes do not always bring in more revenue. Higher corporate taxes discourage business activities and encourage practices geared towards tax avoidance. Mitt Romney says, “corporations are people.” He believes corporations represent individuals acting cooperatively to be economically productive. Each dollar earned by the corporation ultimately flows to employees or shareholders. The shareholders include millions of Americans who own stock or have pensions that invest in the American economy.
A study done by the Organization for Economic Co-operation and Development (OECD) found that by lowering taxes on corporations, significant productivity gains can happen by creating economic growth.
Change 9: Territorial Tax System
Romney plans to transition the US to what is called a “Territorial” tax system. Currently, the U.S. operates under a “worldwide” tax system, which means that businesses are taxed at the U.S. tax rate no matter where the income is earned. Individuals as well are taxed by their citizenship and not their residency. Currently, American companies pay taxes in the host country and then profits are sent back to the United States. The company pays the difference between that country and what would have been paid under the U.S. tax rate. The fact that the U.S. tax rates are so high, it creates an incentive to not bring profits back to the U.S. and invest here. This rule benefits other countries and not the United States.
Under the “Territorial” tax system, income is taxed only in the country in which it was earned. This will allow U.S. companies to compete on an even level in other countries and would take away the incentives for U.S. companies to keep profits from coming back to the U.S.
This tax system change has come under much scrutiny because of the potential of reducing corporate taxable income and the possibility it will encourage companies to move their headquarters abroad. Romney plans on making the system actually encourage the creation of jobs in the United States. Romney believes that this could help economic growth by eliminating tax laws that put US companies at a competitive disadvantage.
Potential Impact on U.S. Government Revenue
Mitt Romney claims that his tax plan will be revenue neutral. This means that even with the cuts that he intends to implement, government revenues will remain unchanged from their current levels.
While Romney claims that his plan will be revenue neutral, there are many critics out there that believe it will actually lower government receipts. The most cited criticism of his proposal is the Tax Policy Center’s (TPC) analysis that said his plan would be a reduction of $456 billion a year, which would be about 5 trillion over a 10 year period. The $5 trillion number that was cited by the TPC has been brought up a number of times by the Democrats in the debates. The problem with the $5 trillion number is that it leaves out many critical parts of Romney’s tax plan. The TPC claims that Romney didn’t specify exact detail of how he would increase the tax base, so the TPC analyzed the effects of his “specific” proposals. So the number they arrived at only shows how much base broadening would be needed to achieve his plans targets. Below are some of the major factors that were left out of TPC analysis.
- The potential impact of economic growth (increase in tax revenues)
- The closing of corporate loopholes (increase in tax revenues)
- The capping of individual tax deductions (increase in tax revenues)
- Other miscellaneous tax cuts on the middle class (decrease in tax revenues)
- Cutting some tax credits and exemptions (increase tax revenues)
Taking into consideration these other factors, Romney’s tax plan could be revenue neutral. A close estimate of the tax revenues to be collected is still a very difficult number to calculate because the calculation on additional tax revenues to be collected from the potential economic growth requires complex economic formulas and models.
Many people argue that if you cut taxes in one place they must be raised somewhere else to make up for the difference. This belief fails to take into consideration that with economic growth the tax base will broaden, resulting in more tax revenue. When the economy grows and more taxpayers are created, taxation at lower rates can yield higher tax revenues. As a result, individuals, businesses, and the government are better off.
Even with an overall reduction in tax rates it still is possible for the U.S. Government to take in more or equal amounts of revenue. While the exact details of the Mitt Romney tax plan have not been outlined, the basics of his tax plan are supported by history and economic theory that suggests that GDP and tax revenues can grow with his outlined changes.