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Mitt Romney's tax plan feasible, studies show, but at a cost

Romney's proposal would require eliminating all deductions and credits for households with income over $100,000.

September 14, 2012|By David Lauter, Washington Bureau
  • Mitt Romney campaigns in the rain at Lake Erie College in Painesville, Ohio.
Mitt Romney campaigns in the rain at Lake Erie College in Painesville, Ohio. (David Richard / Associated…)

WASHINGTON — Mitt Romney's budget plan would significantly raise income taxes for many families making between $100,000 and $200,000, analyses by leading Republican economists cited by the Romney campaign show.

The Republican analyses were designed to rebut the Democratic charge that Romney's plan would "increase taxes for the middle class." The studies conclude that the plan could work as Romney has said, but that doing so would require eliminating all or most deductions and credits for households with income over $100,000. That would include wiping out such popular tax provisions as the deductions for mortgage interest, charitable contributions and state and local taxes.

Campaign debate so far has largely focused on the 2% of taxpayers with the highest incomes — whose taxes President Obama wants to increase — and those with earnings in the middle range of U.S. incomes. Much less attention has focused on the large number of families whose incomes are twice the national median or higher but whom Romney has defined as part of the middle class.

Taxes provide one of the sharpest contrasts between the two presidential candidates. Obama has made raising taxes on the wealthiest Americans a centerpiece of his campaign. He says that requiring the wealthy to pay "their fair share" is key to making sure the government can meet the country's needs for improved education, upgraded roads and bridges, new industries and other steps to produce future jobs.

His plan is relatively simple. He would allow the George W. Bush-era tax cuts for incomes over $250,000 to expire as scheduled on Jan 1. The tax cuts for those making less would remain in place. Under his plan, the top 1% of taxpayers would see an average tax hike of about $70,000, according to estimates by the Tax Policy Center, a Washington think tank widely cited by both parties.

Romney's tax plan is more complex. He has proposed several measures to reduce taxes, saying that further cuts are necessary to spur economic growth. His plan includes cutting current income tax rates by one-fifth, eliminating the alternative minimum tax, ending estate taxes and wiping out taxes on dividends and interest for individuals with income below $100,000 and couples who make less than $200,000.

Those tax cuts would total between $200 billion and $220 billion a year. To keep the deficit from soaring, Romney has pledged to make the plan "revenue neutral." That means that for every dollar the plan would reduce federal revenue, he would raise a dollar somewhere else — "base broadening," in budget jargon.

Romney has declined to name any of the sources he would tap for new revenue. In a recent "Meet the Press" interview, he denied that his plan would raise taxes on the middle class. "People at the high end, high-income taxpayers, are going to have fewer deductions and exemptions," he said.

Voters should trust that he could achieve his goal without raising middle-class taxes because "five different economic studies, including one at Harvard and Princeton" support his case, he said.

The Harvard study was by Martin Feldstein, former head of the Council of Economic Advisors under President Reagan. In an article first published in the Wall Street Journal last month and expanded on later, Feldstein said that "it is feasible to combine tax cuts and base broadening as Gov. Romney suggests without raising the budget deficit or imposing any middle-class tax increase."

Households earning more than $100,000 "are not the 'middle class,'" Feldstein wrote in the expanded version of his study, noting that incomes over $100,000 put a family well into the upper fifth of U.S. incomes. For those taxpayers, making the plan work would require eliminating all deductions and credits, he found. In addition, he said, Romney probably would need to tax the value of employer-provided health insurance for taxpayers with incomes above $100,000. Currently, the cost of insurance is not included in taxable income.

Romney himself offered a different definition of the middle class Friday, saying in an interview with ABC's "Good Morning America" that "middle income is $200,000 to $250,000 and less."

He also distanced himself from Feldstein's conclusion, saying that his tax plan would spur economic growth and thereby generate more revenue. Feldstein's study "doesn't necessarily show the same growth that we're anticipating," he said, adding: "I haven't seen his precise study."

The Princeton study, by economist Harvey S. Rosen, did analyze growth. Rosen estimated that new economic growth spurred by the tax cuts could generate between $25 billion and $60 billion of additional tax revenue, although the estimates include a lot of uncertainty.

"The honest answer is that no one knows for sure" how much new economic growth would come about, he wrote.

Even with the added growth, Romney's plan would require eliminating many deductions for households with income over $100,000, Rosen's study concluded.

For many wealthier taxpayers, lower tax rates would outweigh the loss of deductions. An analysis by the Tax Policy Center earlier this summer estimated that taxpayers with annual income of $1 million or more would gain more than twice as much from lower rates as they would lose by eliminating deductions. Taxpayers earning between $200,000 and $1 million also would benefit, although the margin would be less lopsided. The ratio flips for households earning below $200,000.

The impact would be particularly negative for taxpayers living in cities and suburbs with high housing costs — and therefore large mortgage deductions — and big state and local tax bills. There's a political impact there: Upper-income people living in large metropolitan areas tend to be Democrats.

david.lauter@latimes.com

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