Saturday, August 04, 2012

Why is Bowles-Simpson more progressive than Romney's "very similar" plan?

Yesterday, the New York Times' Jackie Calmes provided a bracing model of how to reality-check a politician's ridiculous claim:
Mr. Romney said “my plan is very similar to the Simpson-Bowles plan.” The Romney proposal, however, has little in common with that bipartisan deficit-reduction proposal from a majority on the fiscal commission that Mr. Obama created in 2010. The Simpson-Bowles plan called for reduced income tax rates, but it would have raised about $2 trillion more in tax revenues over 10 years, mostly from high-income taxpayers, and cut spending to reduce the federal debt.
This discrepancy raises a more fundamental question.  Because Bowles-Simpson raises new revenue and Romney's plan doesn't, it should be easier, not harder, for Romney to make his cut-rates-and-reduce-loopholes plan more progressive than Bowles-Simpson. According to the Brookings/Urban Institute Tax Policy Center, the opposite is true. Why?

Romney, of course, has not specified what tax loophole reductions he would enact to offset a 20% marginal rate cut, though he has set broad ground rules.  Filling that void, the Tax Policy Center demonstrated this week that "a revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed -- including reducing marginal tax rates substantially, eliminating the individual alternative minimum tax (AMT) and maintaining all tax breaks for savings and investment -- would provide large tax cuts to high-income households, and increase the tax burden on middle- and/or lower-income taxpayers" (p. 1). Yet Bowles-Simpson, with comparable marginal tax rate cuts off set by tax loophole reductions, raises taxes far more on the top 1% than on everyone else, and more on the rest of the top income quintile than on any of the other income quintiles. Pray, how did they manage to do it?

The answer lies in one component of Romney's plan as summarized by TPC above  -- "maintaining all tax breaks for savings and investment." Bowles-Simpson doesn't do that. It takes major bites out of top earners by a) taxing all capital gains and dividends at ordinary rates -- that is, at 28% for top earners, as opposed to the current 15% rate; b) making state and municipal bonds taxable; and c) vastly reducing the allowable deductions for retirement account contributions.  I don't have figures for how much each of those steps would raise (though see below for an approximation).  But collectively they must account for the main difference between Romney's plan, which according to TPC would increase the after-tax income of taxpayers earning more than $1 million by 8.3%, and Bowles-Simpson, which would reduce the after-tax income of the top 1% of earners by 7.8% (and that of the top 0.1% by 11.8%).

According to the Joint Committee of Taxation, from 2010-2014 the reduced rates on dividends and capital gains enacted in 2003 (JGTRRA) cost the Treasury $403 billion; tax-free contributions to retirement plans cost $212.2 billion; and the tax-free status of state and municipal bonds cost $116.3 billion (Bernardi Securities, p. 12).  Eliminating those deductions, then, would raise about $730 billion over 5 years -- and, I assume, proportionately more over the ten year estimates of Bowles-Simpson, allowing for economic growth.  Those three deductions should account for a large chunk of the progressivity gap between Bowles-Simpson and the half-empty Romney "plan."

Update: Dean Baker also made the point (on Aug. 3) that Bowles-Simpson's capital gains tax hike is the fundamental difference between that plan and Romney's.

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