MEMO from Obama for America
MEMO: New Report Shows Romney Tax Plan Raises Middle-Class Taxes
 
CHICAGO – Obama for America released a new interested parties memo today from Policy Director James Kvaal that highlights a report from the Tax Policy Center – a nonpartisan policy think tank – that concludes that Mitt Romney would have to raise taxes on millions of middle-class families with children by more than $2,000 to pay for his $5 trillion tax plan tilted to the wealthiest. While the Romney Tax Hike would ask the middle-class to pick up the tab for tax breaks directed towards the wealthiest, President Obama has a vision for an economy built from the middle out -- where hard work pays off, responsibility is rewarded, and everyone gets a fair shot.

Please click HERE to view the memo online.


August 1, 2012
 
MEMORANDUM TO INTERESTED PARTIES
 
FROM:           James Kvaal, Policy Director
 
SUBJECT:    New Report Shows Romney Tax Plan Raises Middle-Class Taxes
 
Mitt Romney has proposed a $5 trillion tax plan that provides large tax cuts to the wealthiest Americans.  At times, he has claimed that he will pay for his plan by closing tax deductions and other tax benefits, but refuses to say which ones. Today, an independent analysis showed that such a plan would require raising taxes by an average of more than $2,000 a year on middle-class families with children to pay for his massive tax cuts for the wealthiest Americans. As a result, it would raise taxes on millions of middle-class families so he can cut taxes for the most fortunate households.
 
While Romney has refused to specify which tax benefits he would eliminate, he has said that he will protect tax preferences for capital gains and other investment earnings.  As a result, to pay for his plan, Romney would need to cut most or all of the tax benefits critical to the middle class, including the tax-free status of employer-sponsored health insurance, the home mortgage interest deduction, and the child and earned income tax credits. These four middle-class tax benefits alone make up more than half of the revenue available for Romney’s plan, making it literally impossible for Romney to avoid cutting them. And if he wanted to make shallower cuts to these provisions, he would need to cut more deeply in other areas, such as the charitable deduction, the deduction for out-of-pocket medical expenses, tax credits for education and child care expenses, and other middle-class tax breaks.
 
According to Bill Gale, Adam Looney, and Samuel Brown of the nonpartisan Tax Policy Center, a project of the Brookings Institution and the Urban Institute, “any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.” They conclude that:
 
·         Even after eliminating all tax preferences (except those for savings and investment) for high-income families, Romney’s plan would still cut taxes for households earning more than $200,000 by $86 billion a year. Therefore, Romney would have to raise taxes on the middle class by the same amount to pay for his plan, cutting middle-class tax preferences by more than half – 58 percent.
 
·         The Romney plan would raise taxes by $2,041 a year for the average middle-class family with children and income below $200,000 a year.  Among all taxpayers earning less than $200,000 a year – including those without children – it would raise taxes by an average of $539 a year.
 
·         The Romney plan would cut taxes for the highest-income households, providing a $87,000 tax cut for those earning more than $1 million a year and a $247,000 tax cut for those in the top 0.1 percent of income earners, or those earning more than about $3 million a year.
 
These figures are conservative estimates that give Romney the benefit of the doubt. First, these figures are the smallest middle-class tax increases possible under Romney’s plan, assuming that all tax preferences, other than those for savings and investment, would be completely eliminated for households above $200,000 a year. These include the tax benefits for charitable contributions, mortgage interest, health insurance, and state and local taxes. But no major tax reform plan has proposed their complete elimination, and the authors note that completely eliminating these tax benefits may not be politically realistic. Indeed, Romney himself has been critical of limiting the charitable and mortgage interest deductions. If they are partially retained or phased out, the middle-class tax increase would need to be even larger.
 
Second, these figures do not include the extension of the Bush tax cuts for high-income individuals, which would cost nearly $1 trillion over a decade. Romney’s proposals to extend these tax cuts would provide more than an additional $150,000 to households making more than $1 million a year, for a total Romney tax break of roughly $250,000.  For households making more than about $3 million a year, the Bush tax cuts provide an additional $400,000, for a total tax break of roughly $650,000.
 
Finally, Romney’s advisers often claim that tax reform will fuel economic growth that will generate additional tax revenue, offsetting a portion of the cost of his tax cuts – a claim that would not be accepted by independent budget scorekeepers like the Congressional Budget Office or the Joint Committee on Taxation. Yet when Gale, Looney and Brown used an economic model developed by Romney adviser and Harvard professor Greg Mankiw, they concluded that, even assuming “implausibly large growth effects,” the Romney plan “would likely result in a net tax increase for lower- and middle-income households.” Moreover, as American Enterprise Institute scholars Alan Viard and Alex Brill have pointed out in past research, a tax reform plan like the one described in today’s report is unlikely to boost growth because it does not reduce overall taxes. As Brill and Viard note, “lowering statutory tax rates while broadening the income tax base generally does not reduce work disincentives because it leaves the relevant effective tax rates unchanged.”
 
In contrast, President Obama has proposed a responsible plan that will prevent any family earning less than $250,000 a year from facing a tax increase, while reducing the deficit by more than $4 trillion over the next decade. It includes $2.50 in spending cuts for every $1 in revenue increases. And it asks the highest earners to pay their fair share to prevent devastating cuts in investments in the middle class like education, energy, Social Security and Medicare. President Obama has already cut taxes for every working family, enacting tax cuts worth $3,600 to a typical family over his first term, and he will continue to protect middle-class families from higher taxes.
 
HOW THE ROMNEY PLAN WOULD IMPACT FAMILIES
 
$2,500 tax increase for a married couple with two children and income of $100,000. They live in Virginia and pay $6,500 in state income and property taxes, pay $1,700 a month on their mortgage, donate $1,000 a year to charity, and receive health benefits from work worth $15,000 a year. Even though this family would receive a sizable tax cut from the Romney plan’s rate reductions, it would be dwarfed by the cuts to their Child Tax Credit and deductions for mortgage interest, state and local taxes, and charitable giving, and the taxes they would have to pay on their employer-provided health insurance.
 
$2,200 tax increase for a single mother with one child earning $20,000 a year. She would not benefit at all from reduced tax rates, and would see her Child Tax Credit and Earned Income Tax Credit cut by more than half.
 
$500 tax increase for a married couple with an income of $45,000. The couple, which has no children, rents its home and claims the standard deduction rather than itemizing. They are covered by an employer health plan worth $15,000. Even though they claim no other tax benefits, the new taxes they would have to pay on a portion of the value of their health insurance would still be larger than what they would receive from the Romney plan’s rate cuts.
 
$259,000 tax cut for a couple earning $10 million a year.  A married couple with income of $10 million that claims $1.5 million of itemized deductions would get a net tax cut of $259,000.


 
EXPERTS AGREE: HIGHER MIDDLE-CLASS TAXES NEEDED TO PAY FOR ROMNEY’S TAX PLAN FOR THE WEALTHIEST
 
Today’s new analysis from Bill Gale, Adam Looney, and Samuel Brown of the Tax Policy Center is consistent with the conclusions of other tax experts: paying for Mitt Romney’s tax cuts for the wealthy would require raising taxes on the middle class.
 
Erskine Bowles: Romney Was Wrong To Imply That He Could Pay For His Tax Play Without “Affect[ing] People Through The Brackets.” “Republican presidential candidate Mitt Romney’s plan to reduce tax rates would need to be financed by ending widely used benefits such as the mortgage interest deduction, said Erskine Bowles, who was co-chairman of President Barack Obama’s deficit-reduction commission. Romney is ‘partly right and partly wrong’ when he says he can cut tax rates by 20 percent and make up the money by curtailing tax breaks, Bowles said on Bloomberg Television’s ‘Conversations with Judy Woodruff,’ airing this weekend. ‘One area that Governor Romney is wrong is you can’t just affect the top 15 percent’ of Americans, said Bowles, whose bipartisan plan would cut spending and raise taxes. ‘It’s just not enough money there in getting rid of the tax expenditures that only affect the upper-income people. You’re going to have to affect people down through the brackets.’” [Bloomberg, 6/20/12]
 
Committee For A Responsible Federal Budget: Making Romney’s Plan Deficit-Neutral Would Require “Substantial Changes To Many Tax Expenditures, Among The Largest Of Which Are For Mortgage Interest, Charitable Giving, Employer-Provided Health Care, and State And Local Taxes. “The Romney campaign has said that there will be significant enough base broadening to make their plan as a whole (including the spending cuts) deficit-neutral. While they have not named any specifics, it is important to note that doing so would require making substantial changes to many tax expenditures, among the largest of which are for mortgage interest, charitable giving, employer-provided health care, and state and local taxes.” [Committee for a Responsible Federal Budget, 2/23/12]
 
Joint Economic Committee: Closing Tax Preferences For Large Tax Cuts For The Wealthy Would Mean “Tax Increases For The Middle Class.” “Under the Ryan plan, the current progressive tax code would be replaced with just two tax brackets—10 percent and 25 percent… To pay for his tax cuts, Chairman Ryan has proposed reducing several tax expenditures, but has failed to specify which expenditures and by how much. Without providing details, Ryan implies that the wealthiest Americans, those who benefit from the Ryan tax cuts, will shoulder much of the burden. But the reality is much more complicated… The net effect is that a typical household earning between $50,000 and $100,000 and filing jointly will face a tax increase under the Ryan plan of $1,358, assuming the additional income is taxed at a 10 percent rate. If those households end up in the 25 percent tax bracket, their additional tax burden would more than double to $2,938. For households with incomes between $100,000 and $200,000, the tax increase is $2,681.”  [Joint Economic Committee, 6/20/12] 
 
Center On Budget And Policy Priorities: If It Does Not Raise Taxes On Middle-Class Families, Romney’s Plan “Would Fall Far Short Of Raising The Same Amount Of Revenue As Current Policy.” “Governor Romney insists his plan would not raise taxes on middle-class families. If so, given the fiscal impact of cutting the top income tax rates (along with other tax rates) substantially, reducing corporate tax rates by nearly one-third, and abolishing the estate tax and the AMT, the plan would fall far short of raising the same amount of revenue as current policy.” [CBPP, 3/2/12]
 
Tax Policy Center’s Howard Gleckman: Romney’s Tax Plan Would Mean The Tax Code “Becomes Much Less Progressive.” TPC’s Howard Gleckman writes: “Just as vexing, if Congress cuts that bundle of tax breaks [mortgage interest deductions, charitable gifts deduction, and exclusion for employer-sponsored health insurance] across the board while trimming rates by 20 percent and eliminating the AMT, the Tax Code becomes much less progressive. On average, the highest-income 5 percent would pay less tax while those in all other income groups would pay more. About the only way Congress could fix that huge distribution problem would be to raise tax rates on capital gains and dividends—an idea strongly opposed by Romney and most congressional Republicans. [Howard Gleckman, Tax Policy Center, 7/10/12]
 
The Economist Editorial: Any Realistic Closing of Loopholes To Pay For Romney’s Lower Income Income-Tax Rates “Will Hit The Middle Class.”  “Then, in a crude attempt to catch up with his tax-slashing rivals, he pledged to cut all personal income-tax rates by 20%. That would take the top rate of tax down to levels last seen under Ronald Reagan. Mr Romney claims he could pay for this by closing loopholes for the affluent—an excellent reformist idea, but meaningless unless you say which loopholes are going to go. Apart from sketching out a few small ideas to a group of donors, ideas that his aides rapidly downplayed, Mr Romney has said almost nothing about which tax breaks should go. The most likely reason is that any realistic cull of loopholes to pay for his lower income-tax rates (and the lower capital-gains and dividends rates he wants) will hit the middle class.” [Editorial, The Economist, 4/21/12]
 
Fareed Zakaria: If Romney Doesn’t Want His Tax Plan To Balloon The Deficit, “Tens Of Millions of Peoples’ Taxes Will Go Up.”  “You can use euphemisms such as “ending tax expenditures” and “closing loopholes,” but when you do that, someone’s taxes will go up. And when you close big loopholes such as the deduction of mortgage interest — which is the only way to get real revenue — tens of millions of peoples’ taxes will go up.” [Fareed Zakaria, Washington Post, 6/7/12]
 
Washington Post Editorial: Whether It’s Romney’s Proposal Or That From House Republicans, “The Kind Of Tax Reform That Would Be Necessary To Accomplish The Overall Tax Reductions Without Adding To The Debt Cannot Feasibly Be Done By Targeting Upper-Income Taxpayers Alone.” “For example, the nonpartisan Tax Policy Center has estimated that Mr. Romney’s 20 percent cut in marginal tax rates would cost $150 billion — in 2015 alone. What would be gained from the good idea of eliminating the mortgage deduction for second homes? Tax experts peg the figure at $2 billion annually — but that is for all taxpayers. Limiting the benefit to higher-income households, those earning more than $250,000 a year, would reduce that to $1 billion. The same is true of the deduction for state and local taxes. The most recent figures from the congressional Joint Committee on Taxation peg the value of that deduction at $63 billion annually — again, for all taxpayers. Looking at taxpayers earning $200,000 and up, the deduction comes to less than $25 billion. Those are 2010 figures, and the amounts would be higher in 2015, to make a true apples-to-apples comparison, but the fundamental point is indisputable, whether it involves Mr. Romney’s tax proposal or the similarly vague and even more costly ($4.6 trillion over 10 years) proposal from House Republicans. The kind of tax reform that would be necessary to accomplish the overall tax reductions without adding to the debt cannot feasibly be done by targeting upper-income taxpayers alone.” [Editorial, Washington Post, 4/16/12]
 
The Atlantic’s Derek Thompson: If Actually Revenue-Neutral, Romney’s Plan Is One “Where The Bottom 95% Pay More.” “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. [Derek Thompson, The Atlantic, 7/10/12]
 
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See Tax Policy Center
On the Distributional Effects of Base-Broadening Income Tax Reform
Samuel Brown, William G. Gale, Adam Looney
August 1, 2012

This paper examines the tradeoffs among three competing goals that are inherent in a revenue-neutral income tax reform--maintaining tax revenues, ensuring a progressive tax system, and lowering marginal tax rates--drawing on the example of the tax policies advanced in presidential candidate Mitt Romney's tax plan. Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.

Implications of Governor Romney's Tax Proposals: FAQs and Responses
Samuel Brown, William G. Gale, Adam Looney
August 16, 2012

A recent TPC paper examined tradeoffs among revenues, progressivity and tax rates in tax reform. It concluded that, under certain assumptions, any revenue-neutral plan along the lines Governor Romney has outlined would reduce taxes for high-income households, thus requiring higher taxes on other, even if the plan's financing is as progressive as possible, given the available tax expenditures. This paper addresses questions about that study and discusses new estimates that incorporate the taxation of municipal bond interest and the taxation of inside buildup in life insurance vehicles. These additions do not change the basic results.