Romney’s Tax Plan Really Does Favor the Rich

By :: January 30th, 2012

Despite evidence to the contrary, there is a lingering view that Mitt Romney’s tax plan would primarily help middle-income households and not favor the rich. Yet TPC’s analysis of the plan clearly showed that high-income households would win big and others would do less well. Poor families would actually lose, relative to the taxes they’re paying this year. What’s really going on?

Romney’s plan has five main components. In order of size, they are:

1. Permanently extend the Bush-era tax cuts. Romney would make the 2001-03 tax cuts and the AMT “patch” permanent for everyone, thus precluding the very large tax increases that would otherwise come at the end of this year. Most households would benefit but the largest tax savings would go to those with the highest incomes.

2. Cut the corporate tax rate from 35 percent to 25 percent. Using its assumption that owners of capital bear the full burden of the corporate tax, TPC found that more than half of the tax savings—roughly $100 billion in 2015 alone—would go to the 1 percent of households with the highest incomes. The assumption is controversial among economists, but even if workers or consumers bear part of the tax burden, high-income households would still enjoy a disproportionate share of the benefit of the lower tax rate.

3. Eliminate income tax on long-term capital gains and qualified dividends for households with income under $200,000. Nearly 80 percent of households already pay no tax on gains and dividends—either because they have no investment income or because they’re in the 15-percent tax bracket or below. This cut—about $40 billion in 2015—can only help the remaining 20 percent. Not surprisingly, the bulk of benefits go to high-income households. And, because the threshold would apply only to non-gains and non-dividend income, households in the top 1 percent would get nearly a tenth of the tax savings.

4. Repeal taxes imposed by the health reform legislation. The healthcare legislation raised the Medicare payroll tax by 0.9 percentage points for couples with income over $250,000 ($200,000 for single filers) and imposed a 3.8 percent tax on investment income for the same taxpayers. Repealing those taxes—worth nearly $40 billion in 2015—would help only the high-income households that would otherwise pay the tax. Not surprisingly, about 80 percent of the benefit would go to the top 1 percent.

5. Repeal the estate tax. Only the wealthiest households pay the estate tax so only they would benefit from repealing it—to the tune of roughly $15 billion in 2015.

One omission from Romney’s plan would raise taxes compared with what people pay this year: not extending the remaining tax cuts created by the 2009 stimulus bill and scheduled to expire at the end of 2012. Because those cuts were initially intended to be temporary, the Romney campaign argues that not extending them wouldn’t be a tax increase. The same logic could apply to the 2001-2003 tax cuts but I don’t hear anyone claiming that letting them lapse wouldn’t count as boosting taxes. In any case, not extending the 2009 tax cuts still in effect in 2012 means that Romney’s plan would, on average, raise taxes for households in the bottom two quintiles, relative to what they're paying this year.

Mitt Romney’s tax plan would cut taxes, by about $180 billion in 2015 alone, relative to current tax policy. And, despite all arguments to the contrary, a disproportionate share of the savings would go to households with the highest incomes.

8Comments

  1. Vivian Darkbloom  ::  1:10 pm on January 30th, 2012:

    ” Using its assumption that owners of capital bear the full burden of the corporate tax, TPC found that more than half of the tax savings—roughly $100 billion in 2015 alone—would go to the 1 percent of households with the highest incomes.”

    It would be very useful if the TPC, when making assertions as to what it found, would direct readers to the place where those findings and the methods used to arrive at them are summarized. I spent about 15 minutes looking to no avail. Perhaps I’ve been looking the wrong place, but why force readers to go to this trouble? The one link provided as a summary of the corporate income tax system per TPC, but the specific asssertion referenced here cannot be found at that link.

    As to that specific assertion, I find it difficult to believe. Per the IRS SOI states for 2010, approximately $278 billion in *gross* corporate income tax was collected (the net number is less, because the gross does not include refunds).

    The statement “roughly $100 billion in 2015′” is, in itself, ambiguous. Is the author referring here to the entire reduction in corporate tax, or only that portion of the reduced collections that are supposed to accrued to the benefit of the top 1 percent? The language clearly suggests the latter, but I find that even harder to believe.

    What I strongly suspect is that the TPC has used data from returns reporting taxable income (dividends and capital gains) and worked the estimate from that. However, if the corporate income tax rate were to be reduced by 10 percent, the primary beneficiaries would likely be individual pension assets (IRA, 401(k) and the like), as well employer pension funds and insurance funds. Not to mention endowment funds, etc. For lower income workers the current burden of corporate income tax they bear through these sort of investments far exceeds their personal marginal income tax rates. Reducing the corporate income tax rate gives the lower end of the scale a larger percentage decrease in tax than anyone else. Not to mention whatever portion of the tax that may reduce their wages….

    This estimate begs for clarification.

  2. Michael Bindner  ::  4:11 pm on January 30th, 2012:

    Romney’s plan, like all the others offered by GOP candidates, are pretty meaningless because any decisions on these issues will likely be made this year unless Obama is made to believe that not extending the cuts will hurt the economy. Whether Obama wins or loses, any extension of the Bush cuts takes 60 votes in the Senate, requiring a GOP pickup of 13 seats (unlikely) or a desire to compromise. Since compromise is likely necessary and wealthy taxpayers are starting to get nervous, expect a deal to be made this year – after the primary deadlines have passed for most congressional elections. If a deal is made this year, there will be no willingness to reopen it after the election.

  3. Brian Dell  ::  1:49 am on January 31st, 2012:

    The Tax Policy Center’s drum beating for a more “progressive” tax code is undermined by the fact that TPC’s perspective seems to flip when doing so is thought to help advance the argument.

    Here the TPC “assumes” “that owners of capital bear the full burden of the corporate tax”. Yet in the post on this blog immediately preceding this post we are told that Mitt Romney’s “effective income tax rate was a Buffett-like 13.8 percent.”

    You see the problem here? A few days ago the TPC assumes that a rich guy (Romney) doesn’t pay corporate tax; any arguments about the incidence of corporate tax is ignored in order to advance the contention that a rich guy has a “very low effective tax rate.” Today we’re told that rich guys DO pay corporate taxes after all.

  4. Matt C  ::  7:36 am on January 31st, 2012:

    If any of the politicians want to make a meaningful tax reform that impacts middle-income earners who save, they should change the foolish tax structures on 401k and other tax-exempt savings plans. It still makes no sense that we incentivize people to save for retirement now by making contributions tax exempt, but then tax the savings at the highest rate possible on withdrawal. Savings should not be taxed, or if they are, the taxes should be substantially lower than the income tax rate.

  5. Scott  ::  10:29 am on January 31st, 2012:

    Very well stated. I find that assumption very inaccurate in more than one way. Corporate taxes are also pushed from employer to employee. In the long term, this would benefit all working Americans and help us compete with foreign countries that currently have much lower corporate tax rates, which would once again benefit all Americans.

  6. Scott  ::  10:35 am on January 31st, 2012:

    TPC’s analysis is only looking at the short-term gains and losses. Where is the discussion on what happens in the long-term if corporations are taxed at a globally competitive rate or the affect on businesses when capital is more available? How many billions would the government receive in taxes if investors were no longer scared to invest in the USA?

  7. Capital gains and earned income: tax it all according to the same rate schedule | Under the Mountain Bunker  ::  11:14 am on January 31st, 2012:

    […] to eliminate capital gains taxes for households with income under $200,000. Roberton Williams explains how this would work in […]

  8. spyware doctor  ::  10:30 am on April 23rd, 2012:

    I’ve heard a lot about Mitt Romney’s tax plan, but your research is the best!