After we discussed some of the questions surrounding Mitt Romney’s mid-week proposal to achieve the necessary base broadening necessary to pay for his proposed 20% across-the-board tax rate cuts by implementing a $17,000 cap on a taxpayer’s deductions, Bloomberg reached out to me to crunch some numbers in order to determine the impact such a cap would have on a hypothetical family of four.
The Bloomberg article is here, but the full computations are below:
Assumptions:
- Family income is all ordinary income from wages: $150,000
- Family has an outstanding 30 year mortgage at 5 percent with a beginning balance in 2012 of $300,000. This gives rise to deductible mortgage interest for 2012 of $13,666.
- Family lives in Ohio, where it pays real estate taxes on its home of $5,000 annually.
- Family contributes $4,000 to charity.
- Family withholds $6,000 in deductible Ohio state tax from wages
- Family’s taxable income would fall in what is currently the 25% bracket, but would be the 20% bracket under Romney’s proposed 20% across-the-board reductions. The rates would be 8% on the first $17,400 of income, 12% on the next $53,300 of income, and 20% after that.
- Under proposed Obama rates, (Scenario 2), the rates would be 10%/15%/25%.
Analysis:
Scenario 1: Using Romney’s Projected 2012 Tax Rates; No Cap on Deductions
AGI: $150,000
Itemized deductions: $28,666
Taxable Income: $106,535
Exemptions: $15,200
Taxable Income: $106,134
Federal Income Tax: $14,874
Scenario 2: Using Obama’s Projected 2012 Tax Rates; No Cap on Deductions
AGI: $150,000
Itemized deductions: $28,666
Taxable Income: $106,535
Exemptions: $15,200
Taxable Income: $106,134
Federal Income Tax: $18,783
Scenario 3: Using Romney’s Projected 2012 Tax Rates; $17,000 Cap on Itemized Deductions Only; Personal Exemptions Allowed in Full.
AGI: $150,000
Itemized deductions: $17,000
Taxable Income: $133,000
Exemptions: $15,200
Taxable Income: $117,800
Federal Income Tax: $17,208
Scenario 4: Using Romney’s Projected 2012 Tax Rates; $17,000 Cap Applies to BOTH Itemized deductions AND Personal Exemptions
AGI: $150,000
Itemized deductions: $17,000
Taxable Income: $133,000
Exemptions: $0
Taxable Income: $133,000
Federal Income Tax: $20,248
Summary
As you will see, because of the effect of Romney’s reduction in the tax rates by 20%, even when he caps a taxpayer’s itemized deductions — but only his itemized deductions — (Scenario 3: Federal Tax of $17,208), our hypothetical family of 4 will stay pay-less under Romney’s plan than it would under that of Obama (Scenario 2: Federal Tax of $18,783).
When comparing Romney’s plan without a cap (which would be nearly impossible if he plans to keep the rate cuts revenue neutral) to that of his plan with a $17,000 cap on itemized deductions, our family of four saw their federal tax increase by $2,333.
Now, if we assume Romney will cap the benefit of BOTH itemized deductions and personal exemptions at $17,000, as his campaign seems to have indicated this week — our family of four would pay more (Scenario 4: Federal Tax of $20,248) than it would under the Obama plan (Scenario 2: Federal Tax of $18,783). This would also increase our family of four’s taxes by $5,374 when compared to a Romney baseline with no cap, and $1,465 when compared to a Romney baseline where the cap applies only to itemized deductions.
The devil, of course, is in the details, and at this point, they are sorely lacking. On Wednesday night, Romney again referenced the possibility of using a cap to pay for his tax cuts, but this time quoted “$25,000 or $50,000″ as a potential solution, which would obviously change the results dramatically.
Lastly, and perhaps most importantly, the Romney campaign clarified this week that it would not seek to change the current tax-free nature of employer paid health insurance coverage, a change that would have greatly increased the tax burden of the middle class.
