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Posts Tagged ‘mitt romney’

When I want to get my fill of nonpartisan tax discussion, there’s nothing that gets the job done quite like the Tax Policy Center. It’s always filled with rich, creamy tax goodness, and today is no exception.

As we’ve pointed out on more than one occasion, the biggest problem we have with Republican presidential candidate Mitt Romney’s tax proposals is whether it’s realistic to believe that they can be instituted on a revenue-neutral basis, as Romney claims.

As a reminder, Romney would slash the current tax rates by 20% — leaving us with a maximum individual income tax rate of 28% — while also eliminating the tax on interest, dividends, and capital gains for those earning less than $200,000. Romney has promised to pay for the cuts by broadening the tax base by eliminating popular deductions, but he’s never clarified what deductions would have to go. Nor have we ever seen a study formally quantifying 1) the cost of the proposed rate cuts in terms of lost revenue, and 2) the offsetting revenue that can be gained by putting an end to some of the larger deductions; namely, the deductions for mortgage interest, state and local taxes, and charitable contributions.

As we wrote back in May, the concern is not whether broadening the base enough to offset the revenue lost from rate cuts is mathematically possible, but rather whether its realistically feasible given all the factors working against eliminating deductions: special interest groups, the need to curry votes, matters of public policy, etc…

Well, the brilliant minds at the Tax Policy Center have once again done the dirty work for us. They took a good, hard look at the theory of broadening the base enough to pay for a 20% across-the-board tax cut, though they did so without formally examining Romney’s specific proposal.

To start, the Center echoes our concerns about the reality of cutting popular deductions, while adding some additional roadblocks to the equation:

1. Lower rates reduce the value of most tax preferences. Nearly all tax expenditures are in the form of deductions, exclusions, exemptions, deferrals, or preferential rates, all of which are valuable only to the extent they allow taxpayers to avoid regular statutory tax rates. If tax rates are cut, the value of these tax preferences goes down as well. Thus, cutting tax rates reduces the amount of offsetting revenue that cutting tax preferences can raise.

[Ed note: this is the tax equivalent of the dog chasing its tail. As the rates get cut, so does the revenue raised from cutting $1 of expenses. To illustrate, if tax rates are currently 35%, a $100 mortgage deduction would yield $35 of lost revenue. However, if the tax rates are cut to 28% and the mortgage deduction is eliminated, while you are losing 7% tax revenue on the income side, you are not gaining up $35 of revenue by getting rid of the mortgage interest deduction. You’re only gaining $28, the value of the deduction under the new tax rate.]

2. Some tax preferences may be hard to curtail for political or administrative reasons. For example, cutting back widely used and popular preferences such as the deductions for mortgage interest and charitable contributions may be politically difficult. If such preferences can’t be curtailed as part of a realistic tax reform, it becomes harder to find the revenue needed to pay for lower tax rates.

[Ed note: this has always been Issue #1 I have with the Romney proposal. Is he really going to win election, immediately cut the rates, and then tell his Republican constituents to bid farewell to their beloved mortgage interest deduction? Doubtful.]

3. Cutting back on tax preferences may alter the distribution of the tax burden in ways that are deemed unacceptable. Finding a combination of lower rates and cutbacks in tax preferences with acceptable distributional effects can prove quite difficult.

[Ed note: Stated differently, cutting tax rates and broadening the tax base usually leads to a disproportionate result: the taxes of the wealthiest taxpayers are usually reduced to a much larger degree than lower and middle class taxpayers.]

4. A tax reform that includes wholesale, immediate repeal of a significant portion of tax preferences would significantly disrupt existing economic arrangements in ways that might be deemed unfair. Instead, some preferences might be only partially curtailed, and some cutbacks might phase in, possibly over an extended period of time. In addition, taxpayers would likely change their behavior to lessen the impact of these cutbacks. All of these “real world” effects would likely reduce, perhaps substantially, the revenue gains from cutting tax preferences.

[Ed note: For example, if the charitable contribution deduction were to disappear on January 1, 2013, human nature would dictate that people would give less to charity in 2013, reducing the value of the eliminated deduction.]

The Center then examines whether the base can be broadened enough to offset the revenue caused by the rate cuts by comparing a proposed tax regime with a top rate of 28% with LTCG and dividends continuing to be taxed at 15%, titled “Current Policy with Reduced Rates,” with two different baselines:

1. One where the current law continues (maximum rate 35%/LTCG rate of 15%), titled “Current Policy,” and alternatively

2. One where the Bush tax cuts expire (maximum rate 39.6%/LTCG rate of 20%), titled “Current Law.”

The Center determines that under each alternative, the individual income tax revenue expected to be generated during 2015 is as follows:

Current Policy with Reduced Rates: $1.0 trillion

Current Policy: $1.3 trillion

Current Law: $1.7 trillion

[Ed note: This would seem to indicate that Romney’s plan would cause a reduction of $0.7 trillion in revenue as compared to the revenue generated should the Bush tax cuts expire, and a $0.3 trillion reduction in revenue over current policy. However, the Tax Policy Center’s analysis does not incorporate the fact that Romney would eliminate the tax on interest, dividends, and capital gains for those earning less than $200,000, a factor that would likely widen this disparity greatly.]

Making Up the Lost Revenue When Compared to Current Policy

The Center next determines that in order to offset the $0.3 trillion in revenue from a Current Policy baseline by cutting the rates, 72% of the following deductions would have to go:

  • Mortgage interest,
  • Charitable contributions,
  • State and local taxes,
  • Medical expenses,
  • All above-the-line deductions,
  • Exclusion for employer provided health insurance,
  • Education, energy, and other credits expect those related to children and low-income families,
  • The exclusion for income earned abroad.

Of course, 72% of each deduction wouldn’t have to go, but some combination of these expenses must be eliminated so that 72% of the benefit under Current Policy is eliminated. Either way, that’s a damn lengthy list with some high profile deductions on the chopping block. Take even one of the deductions in the group off the table, of course, and the percentage of the remaining deductions that have to be eliminated skyrockets.

Predictably, cutting the rates by 20% compared to current policy and eliminating 72% of these deductions would actually serve to decrease the net tax burden of the wealthiest 20%, while increasing the tax burden of the remaining 80%. Because this country has long prided itself on having a progressive tax system, this would be a tough pill for 80% of Americans to swallow.

Making Up the Lost Revenue When Compared to Current Law

Things get much more daunting, however, when the Center takes on the task of making up the $0.7 trillion in lost 2015 revenue caused by reducing the rates when compared with Current Law. To gain that much back in base broadening, 75% of the following preferences would have to be eliminated in addition to 100% of those listed previously:

  • The special 20% capital gains rate that would apply under current law
  • The deduction or exclusion of contributions to retirement accounts
  • The exclusion of investment income accrued in retirement accounts
  • The exclusion of interest on tax-exempt bonds.

Summary

I’m no genius, but it would appear to me that reducing the current tax rates by 20% while maintaining revenue neutrality is next to impossible. In a country where the preferential tax treatment afforded private equity fund managers continues to exist for no justifiable reason other than the significant support it garners from deep pocketed lobbyists, it is absolutely inconceivable to me that any president could be expected to push through so many high-profile tax preferences when each presents its own endless string of powerful supporters. And even if he could, unless the resulting tax distribution maintains its current progressivity, it’s going to be a very tough sell in this era of budding “class warfare.”

Of course, those guys at the Tax Policy Center are geniuses, so why not get their take on what they found:

With sufficient base broadening, tax rates under both Current Policy and Current Policy with Reduced Rates could raise the same amount of individual income tax revenue as Current Law. However, meeting that goal under Current Policy would require a sharp curtailment of mortgage interest, charitable contributions, and employer-provided health insurance. Hitting that revenue target under Current Policy with Reduced Rates would be even harder. It would require curtailment of these same popular tax expenditures as well as substantial reductions of additional tax expenditures, such as the special rates for capital gains and dividends, the exclusions for retirement contributions and earnings, and possibly such items as the earned income tax credit (EITC), the Child Tax Credit, and the exclusion of some or all Social Security benefits for low- to moderate-income beneficiaries. From a political perspective, matching Current Law revenue would be difficult, if not impossible.

Read the entire paper here.

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In an article published today, Bloomberg echoes a concern we previously voiced here, questioning where Mitt Romney intends to conjure enough offsets to the $5 trillion in lost revenue resulting from his proposed tax rate cuts to keep the proposal revenue neutral. Publicly, Romney has been adamant that his rate cuts would not increase the deficit, and thus there must be $5 trillion in additional tax revenue to be had in cutting certain tax breaks.

The problem, as it has been pointed out time and time again, is that there simply isn’t $5 trillion in tax revenue to be had in broadening the tax base. At least not without both:

1) eliminating the rather popular tax-exempt health care, charitable contributions, state and local taxes and mortgage interest, and

2) increasing the tax liability of the middle and lower class, which Romney has stated he would like to avoid.

We’ve always found this to be the biggest shortcoming in Romney’s proposal. While a 28% maximum rate sounds appetizing — as do 0% capital gains, dividends, and interest rates for those earning less than $200,000 — with a steadily mounting deficit, how can Romney propose to both cut tax rates and decrease the deficit if there isn’t enough base broadening to be done?

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My father-in-law came to visit this week, and over Friday night pizza, the conversation turned to politics; specifically, Mitt Romney’s much-ballyhooed 13.9% effective tax rate in 2010.

Being a tax guy, I wanted my father-in-law to understand exactly why Romney’s rate was so low given his $21,000,000 of AGI, which required a primer on the taxation of carried interest. [For your own primer, click here.]

As the discussion advanced, my father-in-law understandably struggled to understand why the profits received by private equity fund managers on their carried interest were taxed any differently than, say, the wages he earned over his 40-year career working for an insurance carrier.

Even after I advanced the standard arguments for a 15% rate on carried interest — the equity fund manager’s risk, the uncertainty of the profit stream, the “sweat equity” element, etc… — my father-in-law’s opinion remained blissfully simple:

“It still sounds like compensation to me.”

Now, my father-in-law is a staunch Republican in every way, shape and form. But yet, he failed to see how a 15% tax rate is justified on the income received by fund managers to do what they do: manage funds. Of course, my father-in-law is not the final arbitrator on such matters: after all, this is the same man who once advised me to buy a house located squarely within the Delaware River’s floodplain.

So perhaps you should decide for yourself. To facilitate your decision-making process, the Wall Street Journal has published this point/counterpoint on the carried interest tax issue, with Michael Graetz, a professor of tax law at Columbia Law School, arguing for carried interest to be taxed as ordinary income, while David Tuerck, executive director of the Beacon Hill Institute and a professor and chairman of the economics department at Suffolk University in Boston, argues that the preferential capital gains rates should be preserved.

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In the not-too-distant future, it’s entirely possible that jet packs will replace Segways as America’s preferred mode of personal travel, online dating will create matches so perfect as to eliminate the thrill of romantic conquest, and Republicans will rule the White House, Senate, and House of Representatives.

Martin Sullivan, who writes about tax as well as anyone, takes on the final possibility and reaches a surprising, but completely accurate, conclusion: even if Mitt Romney wins the presidential election this November and Republicans keep the House and retake the Senate, Romney’s proposed sweeping tax cuts are unlikely to become law.

And why not?

Because as we discussed here, tax cuts come at the price of reduced revenue, and given the current and budgeted deficit, lost revenue is something America can ill afford at the moment.

As a reminder, Romney is proposing to extend the Bush tax cuts, while also tacking on a 20% across-the-board reduction to each marginal rate. In addition, he would eliminate the tax on interest, dividends and capital gains for taxpayers earnings less than $200,000, eliminate the estate tax and the AMT, and cut the corporate rate to 25%.

Even if Democrats continue to control the Senate, Romney would be able to circumvent having his proposals blocked in the Senate by presenting them as “budget reconciliation bills,” essentially giving Romney carte blanche to enact any desired tax legislation.

But as Sullivan posits, Romney’s cuts are unlikely to become law due to their staggering price tag: $480 billion in lost revenue in 2015 alone. To enact his proposals without adding to the deficit, Romney would have to generate tax revenue elsewhere. To that end, he has privately disclosed his desire to broaden the tax base by eliminating some popular deductions, but Romney would have to do away with all of the popular deductions listed below, and many more, to cover the cost of his cuts. These deductions represent a mix of those backed by special interest groups (the mortgage deduction), and those that promote philanthropy (the charitable contribution deduction.)  As a result, as Sullivan points out, “there is nothing in history to suggest that this is even a remote political possibility.”

Table 1. Official Revenue Estimates of Major Tax Expenditures

Tax Expenditure Fiscal 2015

Deduction for mortgage interest $113 billion
Charitable deduction $57 billion
Deduction for state and local taxes $85 billion
Exclusion for employer-provided health benefits $176 billion

Source: Joint Committee on Taxation, ‘‘Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015,’’ Jan. 17, 2012, Doc 2012-894, 2012 TNT 11-21.

Sullivan goes on to nicely summarize the reality of our current economic morass and its impact on tax policy:

And that means that even if Romney wins and Republicans are running Congress, it is unlikely Washington will go on a tax cutting frenzy. Republicans may be unconstrained by Democrats, but they will be constrained by themselves. Basebroadening tax reform is not a battle of partisan politics but of special interest politics. And special interests will still be alive and well after a Republican sweep. If the Republicans try anything too gimmicky with how they score the tax cuts, alarm bells will sound in the bond market — something a president with close ties to Wall Street is unlikely to tolerate.

No doubt there will be spending cuts in social programs, but one must believe most of the savings will be devoted to deficit reduction. This is not 1981. This is not 2001. The next president, regardless of whether it is Obama or Romney, must put federal finances on a sustainable path. It is hard to see how a President Romney could propose a plan that significantly cuts taxes. If his plan must be revenue neutral, or close to it, the amount of rate reduction it can achieve will be severely limited.

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Public perception is a silly thing. President Obama and Republican presidential candidate Mitt Romney have both publicly released their 2011 tax returns (estimated in Romney’s case), and the response to each man’s resulting tax liability can best be summarized as:  

Obama = 23.4% effective tax rate, man of the people

Romney = 15.4% effective tax rate, scourge of humanity

But the truth is, both men simply played the hand they were dealt, properly reporting their items of income and deduction in accordance with the tax law. Sure, Romney’s income was largely subject to the preferential 15% tax rate currently applied to qualified dividends and long-term capital gains, but that’s no fault of his own; rather, it’s a product of legislation enacted before Romney even became a political figure.

Don’t believe me? Check out this illustrative, interactive flowchart prepared by the geniuses over at the Tax Policy Center, showing exactly why each candidate paid what they paid in federal income tax:

http://www.taxpolicycenter.org/taxtopics/2012candidatestaxreturns.cfm

As I’ve written before, you’re certainly entitled to be angry that Romney paid a mere 15.4% tax rate on $21,000,000 of adjusted gross income; just don’t be mad at Romney. His tax rate was not the result of complicated tax planning, he was simply the beneficiary of the nonsensical tax loophole afforded private equity fund managers in the form of “carried interest,” compounded by the 15% rate on certain investment income enacted by President Bush in 2001 and 2003.

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After the latest round of tax reform one-upmanship displayed by the presidential candidates — specifically President Obama revealing his plan to cut the corporate rate to 28% and Mitt Romney’s promise to chop individual rates by 20% across the board  — we can once again update our side by side comparison of the tax proposals floated by President Obama, Newt Gingrich, Mitt Romney, and Rick Santorum.

So with the caveat that these promises are subject to change every time a candidate gets tongue-tied during a debate, click here for a PDF of the comparison: 2012 Presidential Candidates – The Tax Proposals

Alternatively, below are JPEGs. Click to enlarge.

Page 1

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Covering President Obama’s recent tax proposals has given me a firm appreciation for what it must have been like to be a sports reporter during the latter stages of Brett Favre’s career, when journalists breathlessly covered whether he would retire or continue playing, despite the fact that everyone knew damn well Favre would show up to camp a week late and start another 16 games. And what I’ve learned is this: it’s a rather empty feeling to spend day after day analyzing a story the ending to which was preordained before it even began.

But that’s where we are with tax reform in this country. Everything is happening, but nothing’s happening. Last week the president unveiled his plans for individual tax reform, and today it’s corporate tax reform, but regardless of what’s said or written, we all know nothing will be passed unless the president wins re-election, and even then these proposals — as currently constructed — are a long-shot to ever become law.

Anyhoo, what follows is a summary of President Obama’s appeal for corporate tax reform, released today. And while the headlining proposal — the promise to reduce the maximum corporate tax rate to 28% —  is likely to win some appreciation from the Republican party, there are enough high-profile revenue raisers in the plan, such as the elimination of tax preferences for the oil and gas industry and the imposition of a “minimum tax” on a U.S. corporation’s worldwide profits, to guarantee that the president’s corporate proposals will be shelved right along with his plan for individual tax reform until after the election.

The president’s plan can be separated into three distinct categories: general corporate reform, manufacturing industry reform, and international reform.  

General Corporate Reform

While the president’s pitch to lower the maximum corporate tax rate from 35% to 28% is sure to get the most publicity, understand that the intention is for this lost revenue to be paid for by broadening the tax base, i.e.., eliminating deductions. The president (correctly) points out that our current tax system — replete with innumerable deductions, exclusions and preferences — benefits certain industries over others. Take a gander at the following table, which illustrates the effective tax rate paid by different industries in 2007 and 2008, even though they were all subject to the same 35% marginal rate:

 

The president believes that while eliminating deductions and preferences, care should be taken to equalize the benefits of the code across all industries.  To that end, he has placed a number of provisions on the chopping block, calling for the following changes:

  •  Elimination of “Last in first out” accounting. Under the “last-in, first-out” (LIFO) method of accounting for inventories, it is assumed that the cost of the items of inventory that are sold is equal to the cost of the items of inventory that were most recently purchased or produced. This allows some businesses to artificially lower their tax liability.
  • Elimination of oil and gas tax preferences. The president’s framework would repeal the expensing of intangible drilling costs, and percentage depletion for oil and natural gas wells. .
  • Reform treatment of insurance industry and products The president’s framework would close this loophole and not allow interest deductions allocable to life insurance policies unless the contract is on an officer, director, or employee who is at least a 20 percent owner of the business.  
  • Taxing carried (profits) interests as ordinary income. The framework would eliminate the loophole for managers in investment services partnerships and tax carried interest at ordinary income rates.
  • Eliminate special depreciation rules for corporate purchases of aircraft. This would eliminate the special depreciation rules that allow owners of non-commercial aircraft to depreciate their aircraft more quickly (over five years) than commercial aircraft (seven years).
  • Addressing depreciation schedules. Current depreciation schedules generally overstate the true economic depreciation of assets.
  • Reducing the bias toward debt financing. Reducing the deductibility of interest for corporations should be considered as part of a reform plan. This is because a tax system that is more neutral towards debt and equity will reduce incentives to overleverage and produce more stable business finances, especially in times of economic stress.

 Manufacturing Industry Reform

 While the president asserts that all industries should be treated equally, the plan then goes on to bestow certain preferences specifically on the manufacturers by proposing the following:

  •  Effectively cutting the top corporate tax rate on manufacturing income to 25 percent and to an even lower rate for income from advanced manufacturing activities by reforming the domestic production activities deduction. The president’s framework would focus the current I.R.C. § 199  deduction more on manufacturing activity, expand the deduction to 10.7 percent, and increase it even more for advanced manufacturing. This would effectively cut the top corporate tax rate for manufacturing income to 25 percent and even lower for advanced manufacturing.
  •   Expand, simplify and make permanent the R&D Tax Credit. The president’s framework would increase the rate of the alternative simplified  credit to 17 percent.  
  •  Extend, consolidate, and enhance key tax incentives to encourage investment in clean energy.

International Reform

It is in the international arena that the president’s proposals most deviate from those of his Republican counterparts. While Mitt Romney and Newt Gingrich have loudly called for a move to a “territorial” tax system, whereby U.S. corporations would only pay tax on U.S. income, leaving other nations to trust foreign profits, President Obama wants to expand the current corporate tax regime to tax profits earned by foreign affiliates of U.S. corporations before they are repatriated to the U.S. This is sure to be a sticking point in any future negotiations, as some powerful lobbies will not take kindly to the idea of a minimum international tax rate.

 The president’s proposals include the following:

  •  Require companies to pay a minimum tax on overseas profits. Specifically, under the President’s proposal, income earned by subsidiaries of U.S. corporations operating abroad must be subject to a minimum rate of tax. This would stop our tax system from generously rewarding companies for moving profits offshore. Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country. This minimum tax would be designed to balance the need to stop rewarding tax havens and to prevent a race to the bottom with the goal of keeping U.S. companies on a level playing field with competitors when engaged in activities which, by necessity, must occur in a foreign country.
  • Remove tax deductions for moving productions overseas and provide new incentives for bringing production back to the United States. The President is proposing that companies will no longer be allowed to claim tax deductions for moving their operations abroad. At the same time, to help bring jobs home, the President is proposing to give a 20 percent income tax credit for the expenses of moving operations back into the United States.
  •  Other reforms to reduce incentives to shift income and assets overseas. The Framework would strengthen the international tax rules by taxing currently the excess profits associated with shifting intangibles to low tax jurisdictions. In addition, under current law, U.S. businesses that borrow money and invest overseas can claim the interest they pay as a business expense and take an immediate deduction to reduce their U.S. taxes, even if they pay little or no U.S. taxes on their overseas investment. The Framework would eliminate this tax advantage by requiring that the deduction for the interest expense attributable to overseas investment be delayed until the related income is taxed in the United States.

Of course, the chess match continues. In response to the president’s plan for corporate reform, the rise of Rick Santorum, and his recent slip in the polls, Mitt Romney changed his stance on the maximum individual tax rate today, proposing to reduce it to 28% (as part of a 20% cut of all rates across the board) as opposed to simply extending the Bush tax cuts (which contain a 35% maximum tax rate), as he’d proposed earlier in his campaign. Romney also went on to promise a free Chalupa to anyone who votes for him.* Desperation, as they say, is a stinky cologne.

*this may not have happened

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