Tax Policy Center, a well respected fiscal think tank, reveals that former Mass. Gov. Mitt Romney’s tax plan lacks base-broadening details necessary to offset serious shortfalls in Federal tax revenues. TPC’s analysis of “Tax: Fairer, Flatter, and Simpler”, as the Romney plan is entitled, contains an objective summary of details and impacts to expect from adopting his proposed tax changes.
In brief, Romney has proposed the following tax law changes in his tax plan:
- Permanently extend the 2001-03 tax cuts
- Further cut individual income tax rates
- Repeal the alternative minimum tax, or AMT
- Eliminate taxation of investment income for most individual taxpayers
- Eliminate the estate tax
- Reduce the corporate income tax
- Repeal certain tax provisions in 2010 health reform legislation
- Broaden the tax base by reducing tax preferences
In its present from, the Romney plan fails to specify what tax preference changes will be proposed to broaden the tax base enough to make up for huge reductions in tax collections. Those reductions result from proposed tax cuts. Based on details available for analysis, the Romney plan virtually guarantees a draconian nose-dive in tax revenues.
According to TPC, Romney’s tax plan would lower the federal tax liability by about 24 percent, approximately $900 billion in calendar year 2015, using current law as a baseline. This assumes a baseline assumption that all 2001-10 tax cuts expire. Using current policy as a baseline, Romney’s plan would lead to a reduction in liability amounting to about $480 billion in 2015. This assumes that 2011 law provisions to be permanent, with a few minor exceptions.
Individual rate changes are the most visibly controversial of his proposals. Romney would permanently extend all the 2001 and 2003 tax cuts now scheduled to expire in 2013, and cut individual income tax rates by an additional 20 percent. In reducing the six current income tax rates by one-fifth, the plan would bring the top rate down from 35 percent to 28 percent, and the lowest rate from 10 percent to 8 percent. The accompanying repeal of the AMT would increase the tax savings from the rate cuts. Absent the repeal, AMT would reclaim much of the tax savings for higher rate income.
Romney’s plan would also eliminate tax on long-term capital gains, dividends, and interest income for married couples filing jointly with income under $200,000 — $100,000 for single filers and $150,000 for heads of household.
Romney would let the tax provisions of the 2009 stimulus act expire, subsequently extended through 2012.
His plan would:
- Expire the American Opportunity tax credit for higher education
- Expire the refund-ability of the child credit
- Expire the expansion of the earned income tax credit (EITC)
He would repeal the federal estate tax, while continuing the gift tax with a maximum tax rate of 35 percent.
According to Romney, his plan would recoup the revenue lost from rate reductions by reducing or eliminating unspecified tax breaks hence exposing more income to taxation. However, he has supplied no information on which preferences would be reduced.
Romney claims that the reductions in tax breaks, in combination with moderately faster economic growth resulting from the stimulus of lower tax rates, will make his proposed rate changes revenue. Low and middle income taxpayers would incur no higher shares of total tax obligation than they do now.
Regarding tax provisions in 2010 health reform legislation, scheduled to take effect in 2013, the Romney plan would repeal permanently the 0.9 percent tax on wages. It would also end the 3.8 percent tax on investment income of high-income individual taxpayers.
Corporate taxation also would undergo various changes. The Romney plan would:
- Reduce the corporate income tax rate from 35 to 25 percent
- Make permanent the credit for research and experimentation
- Extend full expensing of capital expenditures for one year
- Allow a “tax holiday” for the repatriation of corporate profits held overseas. (Distinguish this from repatriated earnings, which the plan does not specify as to tax treatment or rate.)
Romney has indicated he would reduce the corporate rate even further in the long term, broaden the corporate tax base, instate measures for tax simplification, and convert the U.S. corporate tax into a territorial system.