Economics, Taxes and Spending

New Romney tax plan goes the full Reagan

Back in January 1983, the Wall Street Journal published an editorial with the headline “Finally, a Tax Cut,” referring to how the bulk of President Ronald Reagan’s tax reductions didn’t kick in until that year. It was as much an expression of relief as satisfaction.

Well, “finally a tax cut” plan from Mitt Romney. Oh, sure, Romney’s original plan called for cutting corporate tax rates and capital gains tax rates for middle-incomers. It also called for abolishing the death tax. A nice start, but not nearly bold enough for a nation facing the sorts of economic challenges that America does.

Romney 2.0 goes the full Reagan. The plan’s centerpiece: An across-the-board tax-rate cut of 20 percent, returning the top rate to 28 percent, where it was when Reagan left office in January 1989. In addition, the tax rate for people in the lowest income bracket would drop to 8 percent from 10 percent, and to 20 percent from 25 percent for those Americans in the middle, according to the Wall Street Journal.

And how would Romney pay for the tax cuts? Well, the revenue would come through a combination of faster economic growth and new limits placed on deductions, exemptions, and credits—particularly on higher-income Americans. Indeed, if you are going to cut the corporate rate to 25 percent, as Romney proposes, then you really need to get top marginal rates in that ballpark, too, to avoid avoid creating distortions leading to tax shelter mania. (The Obama White House ignores this in its new corporate tax plan. Team Obama would lower the corporate rate to 28 percent, leaving a huge gap with the 40 percent top marginal individual income tax rate it also wants.)

Is the Romney plan as bold and aggressive as those proposed by Rick Santorum (two individual rates, 28 percent and 10 percent, along with a 17.5 percent corporate rate) and Newt Gingrich (a 15 percent flat income tax, 12.5 percent corporate tax, zero investment taxes)? Certainly not, though it remains to be seen how Romney would alter the vast tangle of tax preferences cluttering up the code. But Romney’s plan would have a much better chance of actually being enacted by the next Congress if he becomes the 45th president of the United States. So Romney should get points for realism.

But part of me wishes Romney would have listened a bit more to economic adviser Glenn Hubbard. In a recent Financial Times op-ed, Hubbard proposed a progressive consumption tax which would “drastically” lower tax rates on dividends and capital gains, along with equalizing the tax treatment of debt and equity. Instead, Romney would leave investment taxes at 15 percent for upper-income taxpayers, while eliminating them for families with an annual income below $200,000. Increasing the child-care tax credit would have been another intriguing option.

(Interestingly, Romney might pay more taxes under his own plan. Hubbard told the WSJ that Romney would direct his Treasury secretary—which might be Hubbard himself—to determine if some part of “carried interest” income from investment funds like Bain Capital should be taxed at regular income tax rates rather than at lower capital gains rates.)

Yet take a step back and consider the following: Romney wants to a) slash income tax rates by 20 percent, b) lower corporate tax rates by 30 percent while slashing corporate welfare, c) reform Social Security by gradually raising the retirement age and indexing benefit growth for higher-income retirees to inflation instead of wages, d) create a premium-support Medicare system for younger workers, and e) cut government spending by $500 billion during his first term. If Romney does become the Republican nominee, he would certainly be running on the boldest GOP agenda since Reagan ’80, and maybe ever.

10 thoughts on “New Romney tax plan goes the full Reagan

  1. The substance and boldness of Romney’s proposal aside, what he needs to do is pitch it in such a way that it appeals not just to wonks like you but also and more importantly to the voters whose support he needs in the primaries and the general election.

    And that is where he is (so far) lacking. Classic wonkish tone-deafness, failing to realize that public attitudes are shaped less by the details than whether they hear the sound bite that allows them to envision benefiting as a result.

    Tell the unemployed how this will help them find a job. Tell students how this will improve the job climate for them when they graduate. Tell scared business owners how this will help prevent another recession. Tell homeowners how this will keep their houses from continuing to fall in value.

    If he can’t do so, then he needs another plan.

  2. “If Romney does become the Republican nominee, he would certainly be running on the boldest GOP agenda since Reagan ’80, maybe ever.”

    What?

    This plan puts is embarrassingly timid. Is it better than our current disaster of a tax code? Yes. But instead of fundamental, pro-growth reform, he’s tinkering around the edges. After eliminating deductions, a 20 percent rate cut will probably still result in an effective tax increase. And this plan only came about after Kudlow spent months beating it out of Romney. At the first sign of opposition he’ll dial back everything. That he’d proffer it at the 11th hour before an important primary he’s fallen behind in should say a lot. That he uses the language of OWS to sell the plan should say even more.

    McCain’s tax plan was just as “bold” as this. He ran on cutting the corporate income tax rate to 25 percent, a full repeal of the AMT, cutting the capital gains tax to 7.5 percent (and not just for particular income classes), extending the Bush tax cuts, and a host of spending cuts/new tax credits. And McCain is barely conservative.

    The Dole/Kemp plan was also just as “bold” as this: cutting the capital gains tax 50 percent (to 14 percent), cutting personal tax rates 15 percent, cutting payroll taxes, spending cuts … http://www.dolekemp96.org/agenda/economics/theplan.html

    In fact, this might be the weakest GOP platform since Nixon.

  3. Here is David Frum, a Republican who does get it:
    Here’s what I don’t get.

    Mitt Romney claims that his new proposal to reduce the top rate of federal personal income tax to 28% will not benefit the top 1%.

    I’m going to limit the deductions and exemptions particularly for the higher-income folks. For high-income folks, we’re going to cut back on that, so that we ensure that the top 1 percent keeps paying the current share they’re paying and more.

    How does the math on this remotely work?

    Yes, I can imagine that a scale-back in the deductions for state and local taxes or mortgage interest might conceivably balance the value of the tax cut for a family at the lower edge of the top 1%. But what possible change in the deduction schedule could offset the value of a 7 point tax cut for somebody earning more than $1 million, much less more than $10 million?

  4. I still can’t get past the thought that he’s saying: “Read my lips, here’s my latest response to Conservative apathy to my candidacy”.

    • Nice try moon colonist. In a reality based life, apparently something you aren’t looking in to, Romney leads in votes amongst all classes of conservative.

      Go back to listening to Rush and try not to play with sharp objects as you can get hurt.

      We are going to gently teach you things about what we call the ‘Real world’.

      But I promise we’ll go slow so you don’t overtax your obviously limited gray matter.

  5. Romney’s plan sounds pretty good to me; but how is this “the full Reagan”?
    Correct me if i’m wrong, but capital gains and dividends under Reagan (TRA 1986) were max 28% — far higher than the prevailing 15%.

  6. My objection to the presentation is the caveat that this plan will stick it to the rich. Seriously?
    Anyone with a small business (and a lage tax bill) knows the numbers: the top 10% pay something like 70% of the income taxes. Thinking like that got us the Alt Min tax. Forget it.

    Make a tax plan simple and fair for everyone… get rid of all the crazy deductions (especially the huge corporate ones, and including home mortgage interest), and all that insanity that makes it impossible for normal people to tax-plan or make simple economic decisions. Just let Americans be Americans.
    Lower the corporate rate to mitigate double taxation on dividends and to encourage multinationals to re-patriate cash stuck overseas.

    The policitical class wants to fix all these inequities by creating new complications. Nuts to that. Lower individual taxes, lower corporate taxes, eliminate deductions, and watch growth explode.

  7. The Romney plan fails a supply side analysis of how it would stimulate job formation. The key flaw is that Romney seeks to raise effective taxes in the highest bracket by as much or more than he would reduce the rate. He does this by suggesting he would remove dedcutions for mortage interest, tax free savings, health insurance, charitable donations and state taxes. Such individuals are already subject to the loss of those dedcutions under the AMT which coincidently drives the minimum effective rate for high bracket earners to about 28%. If the issue was just marginal personal income tax rates this give and then take back ruse would not be so problematic. However, Romney acknowledges that 90% of U.S. business enterprises are ‘passthrough’ enterprises which pay income tax on thier owner’s individual tax returns. These businessess employ the majority of American workers. The successful mid size growing Sub-S, LLC and Partnership forms of passtrough enterprises are the prime source of job creation in the U.S. economy. These enterprises that earn profits report those earnings and pay taxes in the higheset personal income tax bracket. So, when Romney says that his plan will stimulate job creation through the 20% across the board reduction of marginal income tax rates, he is being intellectually dishonest in that the job creators are all paying tax in the highest personal bracket and he seeks selectively to remove any deduction from that bracket. This contradiction in structure can only by understood coherently as flowing from a Keynesian paradigm where Romney apparently believes that his marginal reduction of rates to the lower brackets will stimulate aggregate demand. On a supply side analysis which seeks to promote production through increased investment of retained earnings and higher risk incentives the Romney plan is ineffectual and self contradictory.

    I knew Ronald Reagan; this guy is no Ronald Reagan.

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