Can Governor Romney both (1) cut taxes on high-income taxpayers by 20%, and (2) make the cuts revenue neutral by limiting itemized deductions by either (a) $50,000, or (b) $50,000 but without any limit on mortgage interest or charitable deductions?

This post [1] is based in part on information in my book, The Obama vs. Romney Debate on Economic Growth: A Citizen’s Guide to the Issues.  The book, which is written in a question and answer format, was published in September 2012 by iUniverse and is available through Barnes & Noble and Amazon as a softcover (ISBN 9781475940695), hardcover (ISBN 9781475940701), and e-book.  Several excerpts from the chapters are available on the book’s Web site, and you can follow my discussion of issues arising after the publication of the book on the book’s Blog.

* * *

On August 1, 2012, the Tax Policy Center published a paper entitled On The Distributional Effects Of Base-Broadening Income Tax Reform.  The paper analyzes the distributional effects of Governor Romney’s individual income tax proposals, which the study describes as follows:

This plan would extend the 2001-03 tax cuts, reduce individual income tax rates by 20 percent, eliminate taxation of investment income of most taxpayers (including individuals earning less than $100,000, and married couples earning less than $200,000), eliminate the estate tax, reduce the corporate income tax rate, and repeal the alternative minimum tax (AMT) and the high-income taxes enacted in 2010’s health-reform legislation.[2]

The paper contains the following summary of the Center’s analysis of these proposals by Governor Romney:

Our major conclusion is that a revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed – including reducing marginal tax rates substantially, eliminating the individual alternative minimum tax (AMT) and maintaining all tax breaks for saving and investment – would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers. This is true even when we bias our assumptions about which and whose tax expenditures are reduced to make the resulting tax system as progressive as possible. For instance, even when we assume that tax breaks – like the charitable deduction, mortgage interest deduction, and the exclusion for health insurance – are completely eliminated for higher-income households first, and only then reduced as necessary for other households to achieve overall revenue-neutrality– the net effect of the plan would be a tax cut for high-income households coupled with a tax increase for middle-income households.

In addition, we also assess whether these results hold if we assume that revenue reductions are partially offset by higher economic growth. Although reasonable models would show that these tax changes would have little effect on growth, we show that even with implausibly large growth effects, revenue neutrality would still require large reductions in tax expenditures and would likely result in a net tax increase for lower- and middle-income households and tax cuts for high-income households.[3]

During the Presidential Debate on October 3, 2012, Governor Romney reiterated his claim that he can both (1) decrease the rates for high-income taxpayers by 20%, and (2) decrease such taxpayer’s tax expenditures in an amount sufficient to make up for the revenue lost from the rate cut.  Thus, he claims to be able to accomplish the rate cuts on a revenue neutral basis.  He also said that there are six studies refuting the TPC study, but these studies have been questioned.[4]  During the debates the Governor suggested that itemized deductions might be capped at $50,000.  Later in a CNN interview with Wolf Blitzer, he said that he would not eliminate the mortgage interest deduction or the charitable deduction.

The following tables are designed to test the Governor’s claim of revenue neutrality by looking at joint filers for 2009 with average adjusted gross incomes (AGI) and average itemized deductions for the following AGI levels: (1) $1 million to $1.5 million, and (2) $10 million or more.  The tables are prepared on the assumption that all of the income is taxed at ordinary rates.  This should be a conservative assumption because it is taxing all income at the highest rates, not giving a rate break for capital gains or dividend income.

Table A shows that with a $50K cap on itemized deductions, the average joint filer in the $1 million to $1.5 million AGI level would have had a tax savings of 9.5% percent of the taxes otherwise due under the current Bush tax cuts.  See Line 9, Column C.  With a $50K cap and without a limitation on mortgage interest or charitable deductions, there would have been a tax savings of 15.4% of such taxes otherwise due.  See Line 9, Column D.

Table B shows that with a $50K cap on itemized deductions, the average joint filer with $10 million or more of AGI would have had a tax savings of 6.1% percent of the taxes otherwise due under the current Bush tax cuts.  See Line 9, Column C.  With a $50K cap and without a limitation on mortgage interest or charitable deductions, there would have been a tax savings of 15.4% of such taxes otherwise due.  See Line 9, Column D.

This analysis shows that Governor Romney cannot both cut taxes on high-income taxpayers by 20% and make the cuts revenue neutral by limiting itemized deductions by either (1) $50,000, or (2) $50,000 but without any limit on mortgage interest or charitable deductions.

   Table A, Romney Plan Applied to the Average Joint Filer with Income between $1 Million and $1.5 Million   

[A] $1,000,000 under $1,500,000 of   AGI [B] Current Law [C] Romney Debate Plan – 20% Rate   Reduction with a $50,000 Cap on Itemized Deductions [D] Romney Plan from Wolf Blitzer   Interview-20% Rate Reduction with Allowance for Charitable and Mortgage   Interest Deductions and a $50,000 Cap on Other Itemized Deductions
1 Average AGI $1,204,015.29 $1,204,015.29 $1,204,015.29
2 Average Itemized Deductions $173,119.49 $50,000.00 $118,834.63*
3 Average Taxable Income (Line 1 less   Line 2) $1,030,895.80 $1,154,015.29 $1,085,180.66
4 Tax on Income from $0-$379,150, the   threshold for the 35% rate $102,574.00 $82,059.20 $82,059.20
5 Taxable Income in top bracket (Line 3   less $379,150) $651,745.80 $774,865.29 $706,030.66
6 Tax Rate 0.35 0.28 0.28
7 Tax with Respect to High Income (Line   5 multiplied by Line 6) $228,111.03 $216,962.28 $197,688.59
8 Taxes Due (Line 4 plus line 7) $330,685.03 $299,021.48 $279,747.79
9 Tax benefit or (detriment) of Romney   plan NA $31,663.55,   9.5 percent of Taxes Due under Current Law See Line 8, Column B $50,937.2415.4   percent of Taxes Due under Current Law See   Line 8, Column B

Source: Unless otherwise stated, information from Lines 1 and 2 came from IRS Table 1.2 All Returns: Adjusted Gross Income, Exemptions, Deductions, and Tax Items, by Size of Adjusted Gross Income and by Marital Status, Tax Year 2009 (http://www.irs.gov/uac/SOI-Tax-Stats—Individual-Statistical-Tables-by-Size-of-Adjusted-Gross-Income)

*Information came from IRS Table 2.1  Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2009 (http://www.irs.gov/uac/SOI-Tax-Stats—Individual-Statistical-Tables-by-Size-of-Adjusted-Gross-Income)

   Table B, Romney Plan Applied to the Average Joint Filer with Ordinary Income of $10 Million or More 

$10,000,000 or more of AGI Current Law Romney Debate Plan – 20% Rate   Reduction with a $50,000 Cap on Itemized Deductions Romney Plan from Wolf Blitzer   Interview-20% Rate Reduction with Allowance for Charitable and Mortgage   Interest Deductions and a $50,000 Cap on Other Itemized Deductions
1 Average AGI $29,022,707.88 $29,022,707.88 $29,022,707.88
2 Average Itemized Deductions $4,310,229.50 $50,000.00 $1,831,913.55*
3 Average Taxable Income (Line 1 less   Line 2) $24,712,478.38 $28,972,707.88 $27,190,794.33
4 Tax on Income from $0-$379,150, the   threshold for the 35% rate $102,574.00 $82,059.20 $82,059.20
5 Taxable Income in top bracket (Line 3   less $379,150) $24,333,328.38 $28,593,557.88 $26,811,644.33
6 Tax Rate 0.35 0.28 0.28
Tax with Respect to High Income (Line   5 multiplied by Line 6) $8,516,664.93 $8,006,196.21 $7,507,260.41
8 Taxes Due (Line 4 plus line 7) $8,619,238.93 $8,088,255.41 $7,589,319.61
9 Tax benefit or (detriment) of Romney   plan NA $530,983.536.1%   percent of Taxes Due under Current Law Line 8, Column B $1,029,919.3211.9   percent of Taxes Due under Current Law Line 8 Column B

Source: Unless otherwise stated, information from Lines 1 and 2 came from IRS Table 1.2 All Returns: Adjusted Gross Income, Exemptions, Deductions, and Tax Items, by Size of Adjusted Gross Income and by Marital Status, Tax Year 2009 (http://www.irs.gov/uac/SOI-Tax-Stats—Individual-Statistical-Tables-by-Size-of-Adjusted-Gross-Income)

*Information came from IRS Table 2.1  Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2009 (http://www.irs.gov/uac/SOI-Tax-Stats—Individual-Statistical-Tables-by-Size-of-Adjusted-Gross-Income)


[1] I thank my research assistant, Stephen Anderson of Penn State Law, for his assistance with this analysis.

[2]  Tax Policy Center, On The Distributional Effects Of Base-Broadening Income Tax Reform, 2-3 (Aug. 1, 2012).

[3] Id. at 1.

[4] See e.g., Josh Barro, The Final Word on Mitt Romney’s Tax Plan, Bloomberg, Oct 12, 2012, available at http://www.bloomberg.com/news/2012-10-12/the-final-word-on-mitt-romney-s-tax-plan.html .

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