Romney's Tax Plan

     

I would like to put my two cents worth into the almost interminable comment on last Wednesday’s Presidential debate. In the first place, even though I have never been a supporter of President Obama, I do not think that he gave as bad an account of himself as both sides have suggested. To me he appeared to have grown and matured in office into something much more than the inexperienced but charismatic community organizer of four years ago.

On the whole, despite disagreeing with most of what he said, I thought the President did a good job but he was simply overwhelmed by the knowledge, experience, competence, and conviction of Gov. Romney. Romney showed that not only did he belong on the same stage as the President of the United States, but that he also belonged in the Oval Office.

On one occasion the President said that it’s just arithmetic or math. Nevertheless, few ever bother to do the math when trillions of dollars are involved. For example, the President as well as most commentators did not appear to grasp what Romney was getting at when he suggested that cutting tax rates was not the same thing as cutting taxes. Let’s look at Romney’s claim that cutting tax rates would not reduce Federal revenues but actually might increase federal revenues.

Federal tax rates use a graduated scale. There are currently six different tax rates: 10%, 15%, 25%, 28%, 33%, and 35%. Here’s how it works. Everyone pays 10% of the first $8700 of taxable income. Income from $8700 to $35350 is taxed at the 15% rate. The tax rate on income from $35350 to $85650 is then taxed at the 28% rate, and so on until the 35% rate is applied to income over $388000.

So, let’s use as an example, an unmarried taxpayer with a taxable income of $85650. Remember, taxable is adjusted gross income minus personal deductions. On the approximately $50000 of taxable income over $35350, this taxpayer would currently pay the 25% rate or $12500. Romney proposes reducing tax rates by 20%, which would bring our taxpayer’s rate down to 20% thereby reducing his tax to $10000. Romney’s plan would save our taxpayer $2500. Multiply that by millions of taxpayers and it adds up.

However, Romney proposes to offset that reduction by eliminating or scaling back some tax deductions or tax credits. Suppose the above taxpayer had a $20000 tax deduction for mortgage interest and real estate taxes. If he was only able to deduct half that amount, he would owe an additional $2500, thereby neutralizing his savings from the reduction in his tax rate.

If the taxpayer’s bill remains the same, and the government collects the same amount of tax, why even bother? In the first place, there is a question of fairness. A tax deduction is worth much more to a taxpayer in the 35% bracket than to one in the 15% bracket. Even Democrats don’t object to this inequity that favors the wealthy.

More importantly, lowering tax rates does stimulate the economy. Gov. Romney tried to explain it last Wednesday and I hope that his running mate will continue in the next debate. History is on their side.

Over 50 years ago, President Kennedy lowered tax rates and Federal revenues grew dramatically. President Reagan did the same thing with the same result when he took office. Finally, even the much-maligned Bush tax cuts did not reduce Federal revenues. In 2002 the government collected 1 Trillion dollars in income taxes and 1.88 Trillion in total revenues. By 2007 Federal income tax collections went up by 50% to over 1.5 Trillion dollars, and total government receipts exceeded 2.5 Trillion. In 2007 the total federal deficit was 160 Billion dollars, the same it had been in 2002. Only with the recession did income tax revenues go down to 2002 levels although total government receipts stayed higher.

Two final notes on the first debate:

First, commentators were shocked that President Obama did not bring up Gov. Romney's 47% comment. I can only guess that the President's advisors must have felt that Governor Romney was prepared to knock that one out of the park. Any major leaguer will knock a 95 mph fastball out of the park if he knows it's coming.

Second, I though that veteran newscaster Jim Lehrer did a fine job of moderating. He allowed the focus to stay on the candidates and kept himself in the background. It was the best debate I have ever watched, and Lehrer had a lot to do with it. ###