During the recent presidential and vice presidential debates, perhaps the most noteworthy area of disconnect was President Obama’s and Vice President Biden’s continued insistence that Republican presidential candidate Mitt Romney’s proposal for tax reform represents a $5 trillion tax cut, with Romney and running mate Paul Ryan flatly denying such a proposal exists.
Sadly, neither party was willing to expand upon their positions, leaving the voting public with more questions than answers regarding the impact of Romney’s tax policies.
In order for voters to begin making sense of this $5 trillion divide, however, it is necessary to first understand the framework of Romney’s tax proposal.
If elected, Mitt Romney would reduce the current individual tax rates by 20 percent across the board, resulting in tax brackets of 8 percent, 12 percent, 20 percent, 22.4 percent, 26.4 percent, and 28 percent.
Romney would also completely eliminate the tax on dividends, long-term capital gains, and interest income for married taxpayers earning less than $250,000 ($200,000 for single taxpayers). Taxpayers earning in excess of this threshold would continue to be subject to the existing 15 percent preferential rate afforded long-term capital gains and qualified dividends, while interest income would continue to be taxed at ordinary rates.
Lastly, Romney would eliminate the estate tax and the alternative minimum tax.
The Obama administration has estimated that the reduced rates and eliminated taxes in Romney’s proposals would result in the loss of $5 trillion in tax revenue over the next decade when compared with current law. This foregone revenue, the president contends, would only serve to increase the country’s already bloated deficit.
There’s just one problem with this — Mitt Romney has promised to pay for his tax cuts with offsetting tax revenue raisers, and is selling his proposal as a revenue-neutral, zero-sum proposition. Thus, contrary to the Obama administration’s contention that his plan carries a $5 trillion price tag, Romney argues that his proposal is not a tax cut at all, and will not add a dollar to the deficit.
Unfortunately, while Romney’s plan is heavy on optimism, it is sorely lacking in details. Initially, Romney floated the idea of paying for his tax cuts through “base broadening,” a process in which tax deductions and preferences are eliminated from the law. This serves to subject a greater portion of a taxpayer’s income to tax, thereby offsetting — in whole or in part — the effect of the reduced tax rates.
To date, however, neither Romney nor Ryan have provided details regarding which deductions would be eliminated, leaving others to do the math for them. This ambiguity prompted a now-famous study conducted by the non-partisan Tax Policy Center, which concluded that the three largest individual tax deductions — those for mortgage interest, charitable contributions, and state and local taxes — would have to be eliminated in order to make up the revenue lost as a result of the tax cuts in Romney’s plan. While the study ultimately determined that it was mathematically possible for Romney’s plan to be revenue neutral, removing deductions of this magnitude — and in light of the well-funded special interest groups that support them — would be politically implausible.
Perhaps reacting to the study, Romney recently backtracked from the idea of eliminating deductions and instead posed the possibility of capping deductions at a standard amount, citing $17,000 as a potential cap. During the first presidential debate, however, this number suddenly moved to “$25,000 or $50,000,” leaving even more uncertainty surrounding the proposal. Muddling matters further, when given the opportunity to clarify Romney’s position during the vice presidential debate, Ryan reverted back to the idea of eliminating, rather than capping, deductions.
The vagueness of Romney’s plan is more than frustrating; it is also misleading. For example, a middle-class taxpayer may vote for Romney believing he is voting for a reduction in his top rate from 28 percent to 22.4 percent, leaving him with additional after-tax income. However, depending on which deductions are eliminated or capped in order to make the plan revenue neutral, the taxpayer may actually see his federal tax obligation increase, despite the reduced rates.
Which brings us back to the $5 trillion disconnect between the Democratic and Republican tickets throughout the first two debates. President Obama and Vice President Biden are clearly aware that Romney intends to make his tax proposals revenue neutral, yet both have refused to back off their claim that Romney’s plan would cost the government $5 trillion. Why?
In all likelihood, President Obama and Vice President Biden are responding to Romney and Ryan’s repeated refusal to provide the necessary details regarding the revenue offsets in Romney’s tax proposal by similarly refusing to pretend they exist. Perhaps the Obama administration feels that since the only concrete part of Romney’s tax plan is a reduction in rates that will cost the government a purported $5 trillion in tax revenue, then that is the only part of the plan they should acknowledge.
Sadly, the real loser in this subtle bit of gamesmanship is the voting public, as we are left with little clarity regarding what a Romney presidency could mean for tax policy in 2013.
Tony Nitti, CPA, MST, is a tax partner with WithumSmith+Brown firm, where he specializes in tax planning for high net-worth individuals. A resident of Basalt, Tony writes extensively about online at www.double-taxation.com . He can be reached at firstname.lastname@example.org.