Explainer: Will Mitt Romney Raise Taxes on the Poor? What About Obama?

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A new study finds that Mitt Romney’s partially detailed tax plan would necessarily increase the tax burden on low- and middle-income Americans while lowering tax rates for the wealthiest.

The report from the non-profit Brookings Institution and Tax Policy Center evaluated the available information about the Republican candidate’s proposed “revenue-neutral” tax reform. Romney has been specific about wanting to reduce individual income tax rates by 20 percent across the board, but his campaign has been less than forthcoming about which tax deductions, credits, and loopholes he would close in order to make up the revenue lost by lowering rates.

The problem, Brookings and TPC find, is that given which tax expenditures Romney has said are on and off the table, there’s no way closing loopholes for the top earners will pay for the reduction in the top tax rate. You don’t even need to know which ones he’ll close—there aren’t enough to begin with.

“Offsetting the $360 billion in revenue losses necessitates a reduction of roughly 65 percent of available tax expenditures,” the report says, noting that such a reduction would be unprecedented, and would require axing or shrinking many popular tax benefits that help lower-income earners.

“The size of the tax cuts is just larger than the potential revenues that could be gained from cutting things like the mortgage interest deduction, the exclusion for employer-provided health insurance, the deduction for charitable contributions, and other provisions like that” for the richest Americans, said economist Adam Looney, who co-authored the study.

Romney has painted himself into a corner by promising to preserve or augment tax incentives for saving, which means low-to-no taxes on capital gains. Because Romney says he will not try to recover revenue by taxing capital income, Brookings and TPC assume that his plan is to throw out tax credits that generally benefit those in lower tax brackets.

“The child tax credit, the deduction for state and local taxes, the mortgage interest deduction—everything on your Schedule A, almost everything on the front page of your 1040 is kind of on the table,” Looney said.

Under Romney’s plan, after-tax income for those making less than $30,000 a year would decrease by about 0.9 percent, Looney found, while those with incomes over $1 million would get an 8.3 percent bump in after-tax income.

Reagan-esque reform?

In an election cycle where every Republican candidate has invoked Ronald Reagan, it’s fitting that Romney’s tax plan in some ways resembles the Gipper’s.

The Tax Reform Act of 1986 lowered the top income tax rate from 50 percent to 28 percent, while raising the lowest tax rate from 11 percent to 15 percent. To help pay for the massive cut for wealthier Americans, President Reagan worked with Democrats and Republicans to close loopholes and raise corporate tax rates.

“There was a cleaning up of the tax code in a pretty dramatic way that hasn’t happened since,” said William McBride, chief economist at the non-profit Tax Foundation. “It was kind of a tax cut for individuals paid for by a tax increase on corporations.”

Mitt Romney isn’t offering any tax increase on corporations, though, which is why Adam Looney assumes that lower-income Americans will shoulder that burden. McBride took issue with the Brookings/TPC study for concluding this would have to be the case.

“There are ways around that,” McBride said, “but I will agree that as a practical matter it's very difficult to go about doing what Romney plans to do without raising the tax rate on low- and middle-income folks.”

Looney said that while Romney’s proposals appeared to be in the spirit of the 1986 reforms, putting them into practice would present different obstacles now than there were over 25 years ago.

“There was a lot of low-hanging fruit in the tax system in 1986,” Looney said. “The top rate was something like 50 percent,” which made it easier to argue that it should be lower, “but there also were a lot of pretty egregious loopholes that primarily benefited exactly those taxpayers. It was pretty easy to point to some egregious tax shelter that only benefitted millionaires, so you could take it away from a millionaire and give them a lower rate and on net they’d end up paying the same amount in taxes. But today there just aren’t things like that anymore.”

Devil in details

When and if Romney ever unveils which deductions and credits he’d get rid of, the blowback from Democrats and even some Republicans could be tremendous. Perhaps it doesn’t mean anything that he hasn’t been specific about those tax expenditures—but it sure looks like he doesn’t want to talk about them while there’s still an election to win. They might be the ones Brookings/TPC assumes: in other words, the ones that are most popular, primarily benefit the poor, and therefore are hardest to kill.

Looking to squash this speculation about Romney's plan, a Romney campaign spokesman told the Washington Post that this was just another one of President Obama’s “liberal studies calling for more tax hikes and more government spending.”

“It’s interesting that they’re not commenting on the assumptions of the model, the numbers, the analysis itself,” Looney responded. “We’ve kind of bent over backwards to make it not just fair but more than fair. If there’s something they think we did wrong, let me know. We’ll try to fix it.”

William McBride has also been critical of the study, arguing that Brookings/TPC took an incomplete view of whether lower rates for the wealthy and higher burdens for low- and middle-class earners was necessarily good or bad economic policy in the grand scheme of things.

"Even if it’s lacking specifics at this point on closing loopholes, the campaign has at least stated they intend to do that, and at the same time specified lower rates,” McBride said. “So we have two of the major components of fundamental tax reform in Romney’s plan. I believe that was not acknowledged by TPC.”

UPDATE: Obama responds

On Friday morning President Obama cited the Brookings/TPC study in a speech about tax reform.

Following Senate passage of an extension of the Bush tax cuts for all income under $250,000, and the House rejecting that proposal in favor of extending the tax cuts for all income levels, Obama charged Republicans with "holding middle class tax cuts hostage" unless the wealthiest Americans would also get a cut.

"This week we've learned that some in the Republican Party don't want to stop there," Obama said, and referenced the findings from Adam Looney's study. "Their plan would actually raise taxes on 25 million hard working families by about $2,000 each."

"That's not just top-down economics, that's upside-down economics," Obama continued.

Throughout the speech, Obama took care to call his proposal a tax cut for "the first $250,000 of every family's income," a detail that doesn't make it into every conversation and speech about tax rates. Raising the top tax rate on income over $250,000 wouldn't change the rate of taxation for the first $250,000.

"Even someone who makes more than $250,000 is still getting a tax break on the first $250,000," Obama said. "Understand? Even if you make $200 million, that first $250,000 is still paying lower taxes."