What Will Mitt Romney Do To My Taxes?

Mitt Romney's biggest promise is his simplification and reduction of taxes.  So, what impact will his taxes really have?  To assess this I used the excellent summary posted at bankrate.com to create the comparison below:

OK, but what in the world does this really mean? 

Well, the first thing you need to note is that according to the Tax foundation's summary of the Romney plan estimates that he will increase taxes as a percent of GDP relative to an extension of the current law (i.e. indefinite extension of the Bush tax cuts).  In fact, in 2015, the increase (using the CBO's estimate of the 2015 GDP), works out to ~$53BN more than under Bush.  Huh?  Did you get that?  While Romney is cutting marginal tax rates, Romney isn't cutting effective taxes, he's raising them.  

The way he's raising them is ostensibly through simplification of taxes.  What he proposes to do is to get rid of tax expenditures and tax deductions.  Great!  But, who will pay more?

Well, the effective federal tax rate for the top 1% of the country is actually higher than the 28% peak rate under Romney's plans.  That means that no matter what deductions he cuts for $1MM+ income earners, their effective tax rate is going to go down. This is not a matter of belief.  The effective tax rate cannot exceed the maximum marginal tax rate.  

So, clearly some or all of the rest have to pay more.  But, how much more?  Well, consider the following:

• His proposed tax cuts will cost between $4T-$5T over 10 years, i.e. roughly $400BN a year, but he plans to increase taxes by $53BN.  To make that math work, he has to cut $453BN in tax expenditures and deductions.  
• Tax expenditures Romney will likely cut are: deduction of state and local taxes, exclusion of capital gains on death, earned income tax credit and child tax credit and a host of teeny ones, the aggregate savings from these would be less than $200BN in 2015, i.e. he still would have a $250BN+ hole to bridge.  To fill this, he has to limit or eliminate tax deductions for Medical, Education, Child tax and Mortgage Interest deduction.
• Romney says he will reduce taxes on under $200K income.  I have not personally done the analysis of whether this is even feasible (there are some studies Romney himself references that suggest no). However, let's assume he's right, well the effective taxes for under $200K goes down, the effective taxes for over $1MM goes down, but the net effect is tax neutral, so the effective taxes for the middle income group - $200K-$1MM income has to go up.
• Finally, one of Romney's goals is to "increase the tax base" by the repeal of earned income tax credit.  That means anyone who pays low or no taxes is likely to see a tax hike.

To make matters worse, consider that:

• Romney promises to increase defense spending by ~$2T over 10 years, i.e. $200BN a year
• Romney's repeal Obamacare will, according to the CBO, actually increase the deficit.
• In addition, the country currently has an annual deficit of roughly $900BN a year.

Romney is proposing a balanced budget.  So, he has to make up roughly $1.1T a year.  So, he could not close the gap even if he cut all non defense discretionary spending.  That means he has to cut Medicare, Medicaid and Social Security spending in some way.  

So, to summarize:

• $1MM+ income will pay less
• $200K-$1MM income will likely pay more
• People who don't pay taxes will likely pay more
• Rest will likely be neutral 
• Corporate taxes will likely go down for companies that pay more than 25% in effective taxes, and go up for everyone who pays less

Now, if you are like me, you are probably wondering how is Romney going to keep all his promises?  After all, isn't all this likely to be very unpopular?

Well, the short answer is he probably won't keep his promises.  Why do I say this?  Well, that's what history tells us.  Here is the deficit increase by Presidential term.

As you can see from the chart above, Democratic Presidents have been incredibly responsible about the debt.  The GOP Presidents, not so much.  What's going on is that the GOP Presidents in the last 30 odd years have consistently cut taxes, promised to cut spending, then not delivered on the latter, resulting in massive deficits and borrowing.  There is no reason to believe that Romney will be any different.

So, the vast majority of us will either likely see a tax increase or will see a tax cut on a credit card.  Choose your poison.

(Oh, and in case you are wondering about Obama.  

• Under $200K income - neutral.    
• Between $200K-$1MM income - depends on the composition of your income.  AMT repeal may offset the sting of higher marginal rates.  
• Over $1MM income - higher taxes.
• Among companies - multinationals and oil companies lose, most others gain.)

PS:  For a very fun game to try and make Romney's plan add up, try this link.