Paul L. Caron

Thursday, September 6, 2012

Tax Foundation: Romney's Tax Plan Is Far Closer to Simpson-Bowles Than Obama's Tax Plan

Tax Foundation logoTax Foundation:  Romney, Obama, & Simpson-Bowles: How Do the Tax Reform Plans Stack Up?:

Among the tax reform plans of the major presidential candidates, Mitt Romney’s proposal to lower rates and eliminate credits and deductions comes far closer than that of President Obama to the widely-praised and bipartisan framework of the Simpson-Bowles tax reform commission.

Mitt Romney’s plan aims for a Simpson-Bowles style reform, with lower rates and fewer tax expenditures, but without additional penalties on saving and investing. The top rate on personal income would be 28% and the bottom rate would be 8%, making the rate structure more progressive than under Simpson-Bowles. In terms of tax expenditures and simplification, Romney has said he would target credits and deductions for “people at the high end” while preserving some preferences targeted at the middle-class such as deductions for mortgage interest and charitable giving.

President Obama’s tax plan, however, is largely at odds with any commonly held notion of tax reform, including Simpson-Bowles. It would result in dramatically higher tax rates, on the order of 50% to 90% higher than the Simpson-Bowles rates on personal income and investment income. While the president has voiced support for eliminating tax expenditures, his specific proposals tend to add more than are taken away, although he has proposed limiting them for high-income earners. Not only does this fail to simplify the tax code, it fails to spur the economy, ultimately resulting in insufficient tax revenue and perpetual deficits.

Real tax reform would produce a tax code that is simple and treats all taxpayers equally. It would also treat all consumption equally, whether that consumption occurs now or, as a result of saving, later. This would best be accomplished by lowering tax rates on saving and investment to match the current zero tax rate on consumption.

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Capital isn't created exclusively through investments.

Capital and labor are both factors of production which are combined to create value. Once that value is created it can either be consumed or invested, regardless of whether the value was created primarily through capital or labor. This is economics 101.

When either capital or labor becomes more expensive (without becoming more productive), the other can be substituted. So if the price of a sewing machine (capital) becomes too high, a clothier can hire more tailors to do hand stitching instead (labor).

By taxing capital at a lower rate than labor, we are encouraging employers to replace workers with machines. And by only applying payroll taxes to U.S. based workers, as opposed to all workers who produce anything that is sold in the United States, we encourage employers to outsource work to other countries.

And by offering low capital gains rates regardless of how many jobs are created, and regardless of whether any of those jobs are created in the United States, we simply give the rich a free lunch.

There's no evidence that lower taxes on investment income and higher taxes on wages leads to more jobs. If anything, it should lead to fewer jobs and more automation or outsourcing, because U.S. labor costs (after taxes) will be higher and the cost of capital will be lower.

Of course, investors don't need to create a single job to benefit from low capital gains rates, nor do they have to create a single job *within the united states*.

If you really want to try to create U.S. jobs, jack up the corporate tax rate and capital gains rate and reduce payroll taxes. Payroll taxes are directly tied to employment. Labor costs would go down and more labor should be used as a factor in production.

Or increase taxes and hire Americans to do work productive work here in America, like building infrastructure or providing healthcare or education or doing scientific research.

What is truly incredible is the suggestion by conservatives that we should cut taxes for the rich and pray that they decide to use the money in a way that will benefit the rest of us. If you actually want to incentivize job creation, any tax benefits need to be *conditional* on confirmed, verified jobs created here in the U.S. that would not have been created without the tax cuts.

Ronald Reagan once said trust but verify.

But apparently Republicans no longer care about verification or facts.

Posted by: Anon | Sep 8, 2012 12:47:56 PM

Some of you don't get it. Lower rates for different types of income is a lets lets have one, two or three brackets and no deductions...flat tax...this is the fairest and no one is getting a capital gains, no exemptions...income taxed at one rate....we don't need tax incentives, exemptions to entice us to invest....its the gain or money.....Republicans and Democrats want to have deductions, exemptions and various rules for various income and situations...keep it simple and we won't have all the lobby money in our tax world and all this discussion.

Posted by: Sid | Sep 8, 2012 8:03:19 AM

Anon said:

"it will lower taxes more for rich guys who get their income from investing"

Hmmmm, investments are what create capital. Capital is used by businesses to procure resources, higher workers to utilize those resources, and produce the goods and services that drive consumer demand. The fact that you attack investments tells me you have no concern for the American worker. When you destroy wealth you destroy jobs. But I'm not surprised at all to see a leftist have no problem with making the poor poorer if that means they get to limit the wealth of the rich. It's the politics of envy versus the values of prosperity, freedom, and liberty.

Posted by: HeftyJo | Sep 7, 2012 2:40:18 PM

Anon is a serial progressive.

Posted by: Woody | Sep 7, 2012 8:14:54 AM

25 Year CPA fails to understand that the headliner is 'Romney plan closer to SB', not 'Romney plan better than SB' (whatever better means). And plain mathematics when looks at the 2 key criterion of any plan (taxes and spending) show that the Obama plan is closer to SB. Clearly, numbers are a threat to 25 year CPA ((whose CPA must not have included a course in basic addition and subtraction).

Posted by: erg | Sep 7, 2012 8:04:49 AM

"The beauty of the Romney tax plan, as stated on his website is that it allows anyone with an Adjusted Gross Income of less than $200,000 to have a zero percent capital gains tax rate."

For anyone but the super rich, top 1% and above, people would have more take-home income if capital gains and dividends rates were increased and the tax rate on wages were lowered.

This could be done in a way that was revenue neutral, just equalize the rates (including payroll taxes) at a level that would generate the same amount of revenue.

The tax code would be far simpler--no need to distinguish between capital gains or losses and ordinary income--and it would be much fairer and more progressive.

The overwhelming majority of people would get a tax cut, and have stronger incentives to work.

A tiny and super rich minority would pay more in taxes. And it's unlikely they would have less incentive to save or invest within the United States--savings and investment rates have gone way down since the Reagan tax cuts, and the Rich are mostly making physical investments and hiring *outside* the United States where labor costs are lower.

Lowering taxes for the rich only starves the U.S. government of the money it needs to educated and train the U.S. workforce and build U.S. infrastructure to make us more globally competitive, while giving the rich more money to spend on propaganda (the Tax Foundation, Heritage), buying up politicians, and exporting U.S. jobs to low wage countries.

Posted by: Anon | Sep 7, 2012 6:52:55 AM

"Progressives should favor tax cuts, because it actually makes the rich pay."

No, progressives should favor tax increases, closing down loopholes, a larger enforcement budget for the IRS, Jail time for tax cheats and their advisors, and international sanctions against tax havens like the Cayman Islands, Hong Kong, Singapore, etc.

Let's treat tax havens the way we treat North Korea and Cuba, and treat people who create tax shelters the way we treat people who launder money for terrorists, and then see if the rich pay their fair share of taxes.

I love the way conservatives dispense such defeatist advice--"you have to give rich people what they want, because they'll always find a way to cheat anyway."

Let 'em cheat if they dare, and then put them in prison and make the civil penalties so high they aren't rich anymore.

Posted by: Anon | Sep 7, 2012 6:46:19 AM

The claim that taxes on income from investment on capital are "double taxation" is absurd.

You aren't being taxed twice on your income. You're taxed once on the wage income and then only on the new income generated by your investments, not on the principal (which would be a wealth tax).

The people who are really taxed twice or more on their incomes are the middle class, who have to pay payroll taxes (social security and medicare) on top of income taxes, and end up paying a much higher rate than the rich who pay capital gains.

And of course, many of the rich pay nothing on their investment income, thanks to the realization requirement combined with step up basis at death.

What really matters is the effective tax rate, which is far higher for the upper middle class than it is for billionaires.

Posted by: Anon | Sep 7, 2012 6:40:50 AM

Mr "nuff said" fails to understand the Romney plan is better than Simpson-Bowles which is better than the resident of the whitehouse's "plan", leaving the Obama so-called plan in last place. Again. Facts and numbers are a threat to liberals unless they can misrepresent them. That's why they do.

Posted by: 25 year CPA | Sep 7, 2012 4:59:14 AM

'If the rates are very high, the rich use tax avoidance schemes by the dozen. If rates are less, then they feel as if paying the full, or closer to the full amount is not a large burden, and therefore are more likely to pay without creating a full employment racket for lawyers and accountants that adds zero wealth to the economy. '

The rich use tax avoidance schemes when marginal rates are low and when marginal rates are high. If capital gains rate are significantly lower (or zero) than income rates, then there is a huge incentive to 'convert' income into capital gains via sophisticated tax avoidance strategies. If anything, it would INCREASE the amount of sophisticated tax avoidance. To add to this, there is the definition of what constitutes income at all, and timing of income and so on.

There is no evidence to suggest that tax avoidance schemes are lower when marginal rates are lower. Indeed, one can see that a reduction in maximum personal income tax rates during the Bush years most definitely did not decrease the amount of tax avoidance.

Posted by: erg | Sep 7, 2012 4:26:57 AM

It's pretty simple. People like me, who would like to use investments as part of their savings, and who are young enough to do so, or in retirement and use investments to produce their entire income would rather only be taxed once on that income, instead of multiple times. The beauty of the Romney tax plan, as stated on his website is that it allows anyone with an Adjusted Gross Income of less than $200,000 to have a zero percent capital gains tax rate. Plus, you need to read some economic theory as well as JFK's speech about cutting tax rates to grow the economy. There is a reason you are posting anonymously, and it is because you don't understand that even progressives should favor tax cuts, because it increases the actual rates the rich pay. If the rates are very high, the rich use tax avoidance schemes by the dozen. If rates are less, then they feel as if paying the full, or closer to the full amount is not a large burden, and therefore are more likely to pay without creating a full employment racket for lawyers and accountants that adds zero wealth to the economy.

Posted by: spqr2008 | Sep 7, 2012 12:08:05 AM

"Anon" is a DNC troll. Facts are poison to him.

Posted by: 30-year tax lawyer | Sep 6, 2012 10:45:37 PM

If only the GOP would adopt S-B. Obama could then accept S-B (and the implicit GOP "offer" by championing S-B). Then we could have a deal with (according to this notion in this blurb) Obama giving up more to get there. Victory GOP (except for the briar patch effect of this song and dance). This would not work if Obama comes out for S-B before the GOP is committed, because the GOP would then see S-B as their new point of departure and would, in any event, not accept something Obama was for. So they have to think Obama does not want S-B (the proverbial briar patch). Then, when the GOP is committed, Obama commits. Deal done. Both sides claim victory and defeat, which is what compromises are all about.

Posted by: Houston Tax Lawyer | Sep 6, 2012 7:55:54 PM

News Flash says "Right wing foundation funded by rich guys . . ."

So then, to an intellect such as yours, the flaws in this analysis must be many and obvious. You may proceed to explain any of them, any time you like.

But since you have already chosen to emit snark rather than provide contrary analysis, I think you really cannot refute the study in any meaningful way. I think you are simply pounding the table, in the attempt to evade issues, not to engage them.

Here's a "News Flash" for you, News Flash - you're not fooling anyone.

Posted by: John Fembup | Sep 6, 2012 7:22:34 PM

Lets forget all the other rows, and focus on the 2 most important ones.

Tax Revenue as a share of GDP in 2015, and Spending as a share of GDP in 2015.

We see the %ages in Obama's plan are much closer to Simpson Bowles.

Nuff said.

Posted by: erg | Sep 6, 2012 3:17:01 PM

News Flash:

Right wing foundation funded by rich guys who want rich guys to pay less in taxes likes Romney's plan better than Obama's plan, because it will lower taxes more for rich guys who get their income from investing (i.e., from being rich) instead of from working for a living.

Next thing you'll be telling me, the Republicans prefer Romney to Obama.

Posted by: Anon | Sep 6, 2012 2:18:10 PM