Posted by Dylan Matthews and Ezra Klein on October 31, 2012 at 9:00 am
The two parties may not agree on much, but they do agree on this: It’s time to reform the tax code.
The last time the tax code got a deep clean was 1986. Since then, it’s been clogged back up with deductions, credits, and loopholes that have made tax time a burden for individuals and tax decisions distortive for businesses. Eliminating many of these special carve-outs would pay for a reduction in tax rates, deficit reduction, or perhaps even both.
But the minute one moves from that vague goal of making the tax code simpler into the knotty questions of what provisions of the tax code ought to be eliminated, the broad consensus breaks down. Should the next president limit the mortgage-interest deduction, and if so, by how much? Should he end the charitable deduction? What about the tax-free status of employer-provided health benefits?
These are the real questions of tax reform, and they’re often hidden by politicians who prefer to talk vaguely of “tax breaks and loopholes.” But if either Obama or Romney attempts to “broaden the base and lower the rates,” those questions will be the only ones that matter.
To help make them clearer, we’ve worked with the analysts at Citizens for Tax Justice, and its sister organization the Institute for Taxation and Economic Policy, to create the Wonkblog Tax Reform Calculator. We in particular thank Matt Gardner at ITEP for running the numbers necessary for the simulation to work. Today’s version allows you to try and pay for Romney’s tax cuts by choosing which deductions and exemptions to eliminate. Tomorrow, we’ll release a simulation based on Obama’s specifications and goals.
Romney’s tax plan
Mitt Romney’s tax plan is less a plan than a set of promises: A 20 percent cut to individual tax rates. A 30 percent cut to the corporate tax rate. No change to overall tax revenues. No cut in the tax burden of the rich. No increase in the tax burden of the middle class. No increase in taxes on savings and investment.
But if those promises are simple to explain, they’re almost impossible to keep simultaneously. And so the scrutiny of Romney’s tax reform plan has been of an odd sort. Rather than asking what policy choices Romney would make to achieve his goals, the debate has focused on whether, as a question of abstract math, his goals are achievable. (The nonpartisan Tax Policy Center’s analysis suggests that they’re not).
This simulator can’t answer that question. In order to keep the calculations manageable, we’ve had to sacrifice so-called “distributional analysis,” which estimates how much different income groups will pay. So this won’t tell you whether you’ve raised taxes on the middle class or cut them on the rich, though hopefully the descriptions and numbers we’ve included for each tax policy choice will give you a rough idea.
What the calculator does do is let you try and raise the $480 billion that the Tax Policy Center estimates Romney’s plan will cost in 2015 by doing exactly what Romney says he’s going to do if elected: Capping or ending deductions and closing loopholes.
It will also let you do what Romney has said he won’t do: Raise taxes. After all, pledges get broken, and if Romney’s plan is going to balance out, he’s going to have to break at least a few of his previous promises. So we’re including a few possible new taxes and tax increases. Some of these are dramatic, like implementing a carbon tax or a European-style value-added tax (or VAT). Others are more modest, like a slight increase in the taxes on alcohol and gas. All the data is courtesy of ITEP, the Congressional Budget Office’s budget options, or the Office on Management and Budget’s summary tables.
Remember that all the policies below serve purposes besides raising revenue. Gas and carbon taxes reduce the threat of global warming, and gas taxes reduce congestion, smog, and other irritants as well. Alcohol taxes deter alcoholism and deaths from drunk driving. The charitable deduction is a crucial lifeline for artistic and philanthropic groups like soup kitchens, regional theaters, and churches, and the mortgage-interest deduction is a key subsidy for homeowners. So keep in mind while playing that you’re not just making Romney’s math balance out. You’re making policy.
Romney's revenue meter
= $1 Billion
You are short by $480 billion
One option Mitt Romney has proposed is capping itemized deductions at either $17,000, $25,000 or $50,000 a year. That would mean that once you've taken, say, $17,000 in deductions, you can't deduct any more, even if you would otherwise qualify for further deductions ($23,000, perhaps). If you'd prefer a more a la carte approach, click on the tab beneath the caps to eliminate deductions one-by-one.
Limit taxpayer deductions to
Limit taxpayer deductions to
Limit taxpayer deductions to
... or expand to select specific deductions to limit or eliminate
Exemptions are types of earnings that are currently not considered taxable income. Subjecting more types of compensation to the income tax could raise a great deal of revenue.
Eliminate health care exemption
Limit state/local bond exemption
Eliminate state/local bond exemption
Close carried-interest loophole
Eliminate tax preference for investment income
Rather than reducing the amount of income that can be taxed, like deductions, tax credits reduce one's tax burden by a set amount. They tend to be more progressive than tax deductions as a consequence, and are often used to implement social policy to benefit poorer households.
Cut Earned Income Tax Credit in half
Cut child tax credit in half
Eliminate private jet credit
Eliminate oil, coal and gas subsidies
Another route Romney could take is creating a new tax altogether. He has pledged not to, but pledges are often broken. These are the most popular proposals for wholly new sources of revenue.
Tax on financial institutions
Broad-based value-added tax
Narrow value-added tax
Increase tax rates
Romney have committed to the rates he wants for the personal and corporate income taxes. But that doesn't mean he can't expand other taxes in the federal code. He has pledged not to raise these taxes but here, as in other areas, pledges are often broken.
Increase gas taxes by 25 cents
Increase alcohol taxes to $16 per proof gallon
Adopt 2009 estate tax rates
Adopt Clinton-era estate tax rates
Increase Social Security payroll tax cap
Increase health care excise tax
Increase Medicare hospital insurance tax
SOURCE: Institute for Taxation and Economic Policy, Congressional Budget Office, and Office of Management and Budget. GRAPHIC: Kat Downs, Ezra Klein, Todd Lindeman, Dylan Matthews and Andrew Metcalf – The Washington Post. Published Oct. 31, 2012.
Washington Post: Make Mitt Romney's tax plan add up!