Mitt Romney has been proclaiming his tax plan is designed to lower tax rates in a revenue neutral manner without reducing the share of taxes paid by the wealthiest Americans and without increasing the tax burdens on middle class and poorer Americans. His general theme includes several points:
- Cut all tax rates by 20% in all brackets
- Eliminate a number of deductions
- Provide a boost to the economy to increase revenue through tax collection
Note this is not the same as his five point plan. I'm just talking about the general tax related portions. I don't see how this works and I'm not the only one.
Imagine for a moment that the taxes collected by the IRS form a pie. A very small number of tax payers, the wealthiest 5% or so in America, provide 60% of that pie. Other tax brackets make up the remaining 40%. If you cut all tax rates by 20%, it would be akin to cutting off the outermost portion of that whole pie. The relative sizes of the slice remain the same but you have a smaller pie. He said he doesn't want the rich to pay a smaller share of overall tax revenue, and this is in keeping with that. He says he wants middle class families to not have to pay so much money and this works there too. He wants to do this in a revenue neutral manner and now we have some problems. What next?
Thing is, the US government is pretty hungry and wants that pie. You've made it smaller. We're not revenue neutral. So now we eliminate some deductions. This would add some pie back into the mix. But, and here's a problem that Romney has yet to address, he has not told us what deductions he would suggest eliminating. That's pretty important. At one point, he suggested possibly eliminating the mortgage interest deduction. While his campaign later backed off the idea, that would have been problematic as it would disproportionately affect the middle class he says he doesn't want to hurt. How? Simple... the mortgage interest deduction represents, in relative terms, a larger write off for middle class households than upper class. Take that away and that family is now paying a higher amount of their own money in taxes than they were before. But it gets better.
I watched the debate last night and was surprised that Romney was pitching the idea of eliminating capital gains taxes as a boon to the middle class. The fact is that upper class earners would benefit far more than middle class earners if the capital gains tax were eliminated. So if this were pushed through, not only would middle class families not see much of a positive from this, now the taxes paid by upper class earners are going to go down, quite a bit. For the wealthiest earners, most of their income comes from capital gains, not from regular income. That is why their overall tax rate is so much lower than the rest of us. Eliminate taxes on capital gains and you eliminate taxes on the bulk of the money they earn. All of a sudden, not only is the pie much smaller but that 60% has shrunk a bit too.
The final piece of the puzzle is stimulating the economy. This is where Romney pitches his various plans to help create jobs and increase trade. With more money earned, more taxes will be paid. Great! Except capital gains are now off the table, so the business owners who are now making more money aren't paying any more in taxes. So who is picking up the tab here? Oh, the middle and lower classes of income earners. The ones Romney says he doesn't want to make pay more.
Now, whether you think it is fair that 5% of Americans are responsible for providing 60% of the tax revenue is an entirely different question. The point here is that Romney's plan does not work as he says it does. And the biggest tell is that he refuses to provide any details. There's a lot of hand waving but when it comes down to it, his plan is less of a plan than a wishlist. If he starts laying out details and those details make sense, I'll be the first to agree that it is a workable solution. But until then all I've seen are smoke and mirrors.