Why Romney's Plan Could Mean Higher Taxes for All but the Richest

President Obama's tax plan isn't perfect. Romney's proposal is so much worse.615_Romney_College_Reuters.jpgPresident Obama and Mitt Romney don't agree on much. But their tax proposals have something in common. They look an awful lot like the Bush tax cuts.

Or, at least, they both use the Bush tax cuts as a canvas. Obama's plan would keep all the Bush tax cuts (which he's already extended) except for the rates on income above $250,000. Romney wants to extend the Bush law into perpetuity and cut each marginal tax rate by an additional 20 percent. That plan alone could increase the 2015 deficit by about 70% -- not cool for a fiscal conservative. So Romney says he'd also reform the tax code to make up the lost revenue.

Sounds simple enough. It's not. In fact, this idea might be even more politically improbable than a plan to raise taxes.

Finding enough holes in the tax code to make up for the money Romney is giving up with lower marginal rates is a nearly impossible challenge, the Tax Policy Center concluded in their new paper. Meeting that challenge would either mean raising taxes on investment income or cutting tax benefits so deeply that all but the rich pay more.

Romney's 20 percent haircut would cut $320 billion in taxes in 2015, compared to today's rates. One-third of $1 trillion is a lot of money to make up by eliminating tax spending, especially when you consider that most tax spending items are untouchable. Romney wouldn't want to raise taxes on investment or retirement. He probably wouldn't try to pare back the deductions that primarily affect the poor, such as the the Child Tax Credit and the Earned Income Tax Credit.

That leaves a handful of big tax spending items, such as deductions for home mortgage interest, charitable contributions, state and local taxes, medical expenses, and more. Romney would have to reduce these kind of tax spending items by 72 percent "to prevent the rate cuts from adding to the current policy deficit (assuming people don't change behavior)," Howard Gleckman at TPC writes.

The outcome is higher taxes for all but the rich. In TPC's illustration, Romney's plan would raise taxes on every income group except for the top 5 percent. The blue tips in the graph below show you what happens to effective tax rates in a revenue-neutral Romney tax plan. When the right bar is higher than the left bar, that's where Romney's tax rate is higher than today's tax rate.
Screen Shot 2012-07-10 at 3.09.37 PM.png
The nice thing to say about Romney's tax plan is that, since high tax rates discourage work, savings and investment, lower tax rates could theoretically create more work, savings, and investment. The not-so-nice and more-true thing to say about Romney's tax plan is that a proposal built around lower marginal income tax rates and even lower investment taxes can end with two scenarios. The first is everybody pays lower taxes, government revenue plummets, and we blow up the deficit. The second is a revenue-neutral plan where the bottom 95% pays more.

President Obama's tax plan isn't perfect. Romney's proposal is considerably more imperfect.


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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