Don't Tax Me, Bro!

One of the main elements of the Mitt Romney presidential campaign is his proposal to cut personal income tax rates by 20%.  Romney is careful to point out he intends to offset the rate cut by eliminating individual deductions, such as home mortgage, but somehow it's all going to work out:  Taxpayers will pay less, but the government will receive the same amount of revenue.  It isn't true, of course, and Democrats are correct to point out Romney's proposal doesn't add up. 

Here's what Romney's proposal means for individual taxpayers:

70% of taxpayers do not itemize deductions, which appears to mean the larger portion of taxpayers can simply receive full credit for a 20% rate reduction on their taxes.  Not true because of three words:  Alternative Minimum Tax.  A 20% reduction in tax rates pushes the AMT farther down into middle class wage earners.  Be aware that the Romney proposal does not address the AMT.  If you're thinking Congress will pass an AMT patch (which raises the AMT minimum income eligibility), as they have done in previous years, forget about it.  The AMT patch is being held hostage by dueling spending bills in Congress.

If you are among the 30% who do itemize deductions, deductions will be capped, except for people in the highest tax brackets because Romney also proposes eliminating all capital gains, interest and dividend taxes.  In 2011, middle income wage earners received only 3% of their income from capital assets, while 70% came from wages.  By contrast, the top 1% received 35% of their income from capital assets, while only 30% came from wages.  Since Mitt Romney reported no income from wages on his tax return last year, the effective tax rate for him, and others like him, would fall to near zero under his proposal.

Romney's 20% across the board rate reduction is actually a plan to allow the wealthy to pay less tax while shifting more of the tax burden to the middle class.

Here's what Romney's proposal means for government revenues:    

Even the most conservative economists admit the elimination of deductions, even if all of them were to be eliminated, does not pay for a 20% across-the-board reduction in tax rates.  Estimates of a government shortfall go as high as 5 trillion dollars.  What Romney is counting on is that tax cuts will promote economic growth to make up the difference.  There is no data that supply side economics actually works.  There is plenty of evidence to the contrary, however.

The history of tax cuts does not favor the Romney proposal.  The Reagan tax reform act of 1986 slowed the economy to negative economic growth.  George H.W. Bush and Clinton both raised taxes and the economy boomed.  The George W. Bush tax cuts, over time, contributed to economic collapse.  Romney's proposal is a recipe for disaster, both for individual taxpayers and the economy. 

Bruce Bartlett, who served in the Reagan and George H.W. Bush administrations, may have said it best, "I think he (Romney) and his advisers simply made up a proposal that was everything to everybody without checking for internal consistency." (NY Times, Aug. 21, 2012)

And, that is a view from Missouri.