Why Romney’s Tax Plan Doesn’t “Add Up”

Start with the point I made in my previous blog. If in fact Romney offsets the 20% across the board tax cut by eliminating deductions, then there would in fact – as he said – be no tax cut. The decrease in tax rates would be compensated by deductions that no longer exist. So if the tax cut constituted the most powerful ammunition in Romney’s plan to grow the economy, the fact that it would actually put no money in the pockets of consumers defuses that tactic. Nevertheless, Mr. Romney continues to say the tax cut will benefit small businesses. How can that happen if there is in fact no tax cut?

He has also claimed that the tax cut will not impact the deficit. That would be true but only if the point made above were actually the case. If the amount of revenue flowing into the treasury remains the same before and after the so-called tax cut, the deficit would not be affected. Let us ask, however, just how likely is it that the tax cut will be offset by the elimination of deductions?

 The oath most Republicans have made to Grover Norquist bears heavily on this question. Mr. Norquist has quite logically concluded that the elimination of a tax deduction is in fact a tax increase. He will thus score any legislator who votes to eliminate a deduction (such as, for example the oil depletion allowance) as an oath-breaker. Given that those Republicans who have signed up to honor Mr. Norquist have in the past marched lockstep with their oath, it is highly unlikely that they will break their pledge and vote for the elimination of deductions.

 This may seem on the surface like a good thing; the taxpayers will get to keep their deductions, and if the 20% tax cut is passed into law everyone would get a big tax cut. That would certainly help the economy but would just as certainly send the deficit through the roof (or into the clouds: it’s already on the roof).

 It’s difficult to say how Mr. Romney would react to this. He has said that he will cut the tax rates by 20%, but that he would not do it if it impacted the deficit. My guess is that, if elected, he would introduce a bill to cut taxes. It will pass the House (if it remains in Republican hands) but be defeated (or filibustered) in the Senate. He would have kept his promise, but the economy would continue on its present heading: gradually upward.

[An aside: I’m sure President Obama, if he is defeated, will feel rather badly about the fact that he was saddled with Bush’s recession and that his successor will be the beneficiary of the recovery he has set in motion. Life’s a bitch.]

Taking a further look at the 20% tax cut, I wonder about folks like me. I don’t itemize deductions. Our house is paid for and we have no kids to claim. This last tax year we paid exactly zero state taxes, and we are sufficiently insured that our out-of-pocket medical expenses never rise above the threshold at which they might be claimed. But if Romney – by some miracle – does in fact pass his 20% tax cut into law, I will receive about $8000 of new income. Some of this may be offset if Romney also deletes the standard deduction portion of the tax code. My standard deduction was $13,900 and I paid taxes in the 28% bracket. So if that deduction is eliminated my gift from the government will be reduced by $3,892 (13900 X .28) leaving me a shade over $4,000 of new money to spend.

But looked at another way, the government will lose that $4,000. Very wealthy tax payers who live in circumstances similar to mine (no deductions to speak of) and whose income consists of capital gains, if they also lose the $13,900 standard deduction, they will gain $5,915 (13900 X .15). That is under identical circumstances, the wealthy taxpayer will receive $1,900 more than me.

Odds are, though, that wealthy people who take the standard deduction are, at present, few in number. They itemize. Romney, for example deducted several millions for charitable deductions and probably a similar amount for interest paid on the mortgages of his several homes. If Romney’s tax plan does in fact eliminate all deductions (in order to make the tax cut revenue neutral), then he would wind up paying very, very much more than he is currently paying. That is, the rich would be paying more while folks like me would be paying less.
OK, but doesn’t that sound like Obama’s plan: increase taxes on the wealthy while cutting taxes on the middle class? Of course it does, and that makes me think Romney has a few aces hidden up his sleeve. I know this must be so because he said in the recent debate that the “top 5% of the taxpayers will [under his plan] continue to pay 60% of all taxes” [presumably, as they do now]. We get a clue – but no details – from a rumor he circulated, that something like a $17,000 or $25,000 cap will be placed on deductions. (This would not be a standard deduction but only a limit on the amounts that could be claimed.) But his clue leaves me still wondering how the wealthy are going to pay only 60% of the total when the numbers seem to imply that they will pay much, much more. Something tells me he has more than aces up his sleeve.

OK. That’s a mystery, but there are other aspects of the Romney plan that are in plain sight. If he does actually cut all marginal rates by 20% then the top rate (currently 35% on earned income) would be reduced by 7% while the 28% rate would be reduced by only 5.6%. That is, the wealthiest among us would get a larger percentage decrease than the less wealthy. (Bush pulled a similar trick (twice) and got away with it – if adding trillions to the national debt can be so considered.) If Romney had said instead that he was going to reduce taxes by trimming 5 points off each rate, the difference would have been less of a card sharp’s trick. In actual dollars, however, even at that more equitable adjustment, the wealthy would receive much more than the rest of us.

I get it. Romney is sharp practicing the numbers. By promising a 20% reduction across the board, he has loaded it up so the wealthy get a greater percentage deduction. But his claim that the wealthy are still going to pay 60% of all taxes can betrue only by further unexpected consequences. If the government’s total income from taxes is significantly reduced by the tax cut (and if all the mysteries surrounding deductions are removed) the rich, while still paying 60% of all taxes, would actually be paying less in actual money.

This brings us back to Mr. Norquist and his co-conspirators in the Congress. His aim and theirs is, as he said, to reduce the size of government to such an extent that “it could bathe in a bathtub.” Methinks Mr. Romney is well aware of what that means and what it aims to achieve. Norquist and the confederacy of dunces that have signed up to assist him in his aims, want to eliminate Social Security and any other high-cost program that benefits the people. He wants to go back to the government of the 1920’s, before the New Deal, before fair labor practices were enacted, before in fact all the social safety nets were put in place. They seem to believe that if government were smaller, if the people were left to fend for themselves in what Hobbes referred to as a struggle of all against all, the world would be a better place. That argument has been made and lost many times over. The fact is that when ordinary people (not your fictitious John Galt’s) feel there’s a net below them that will catch them if their ambitions fail, they are more prone to take the risks associated with entrepreneurship. In other words, the New Deal created a society within which growth was made more possible. The six decades following WW II demonstrate the effectiveness of that idea. Norquist is running against the facts of history and seems proud of it. He’s dead wrong

And so is Romney’s tax plan for it can end no place but where Grover wants it to end: in a nation constantly teetering on the edge of destruction. I’m voting against that.

The following is an excerpt from my forthcoming book, The Several Roads to Serfdom. It’s not exactly on topic but it illustrates another of the many attempts of the rich to get richer at the expense of the rest of us.

They [Norquist and his Republican cronies] seek to eliminate taxes on all forms of profit from capital investment—no more taxes on interest, dividends, and corporate profits. In the long run this strategy will lead (certainly) to the amassing of huge sums of capital, which in turn will lead (supposedly) to a greatly expanded industrial base . . . . By long run these planners mean something on the order of a decade or so. We know, however, that long term economic plans become less likely to succeed as the length of the term increases. Some horrible event like an unwanted war may reverse the trends, or the holders of all that capital may choose to invest it in cheap labor markets overseas. [These paragraphs were written in 2005] . . . Common Sense suggests that the great capital accumulations will be invested where the cheapest labor and most unsatisfied demand can be found. Thus, the working classes in the already industrialized nations will probably receive little of the benefits of the capital accumulation, with labor in third-world countries being the primary benefactors. It is indeed likely that workers in industrialized nations will take home lower real wages than they do now. The plan, thus, may never directly benefit the nation that made the changes to its tax structure.

But two things are certain. If the Congress actually implements the plan, those among us who derive their income from investments will live free of all income taxes, while (if the size of government remains relatively the same) taxes on income earned by labor will increase.

And here’s another certainty. Even if the great masses of capital do not produce the intended result, even if the plan completely fails, those whose taxes were reduced to zero will have become fabulously wealthy. At the same time, those who earn their living by the sweat of their brow will benefit only if the plan does work. That is, labor takes all the risk, capital none.
Altman [who was quoted earlier] did not mention that this scheme was given a trial run in Chile during the reign of Augusto Pinochet. At the dictator’s request, Milton Friedman—the economist who wrote the introduction to the 50^th anniversary edition of The Road to Serfdom—dispatched a swarm of his trainees to Chile. They convinced Chile’s dictator that so-called supply-side economics would produce great wealth. The plan was implemented in the mid-70s. Fifteen years later Chile was in deep recession, with wages down almost 20% and the numbers of people living in poverty having doubled from pre-Friedman levels. The plan did, however, work exactly as planned—the wealthy people of Chile got wealthier. Pinochet finally sent Friedman’s pack packing . . . and reverted to the economic tactics of Salvador Allende, the legally elected president Pinochet had assassinated in a 1973 coup.
Illustrative of how the world now works, the Friedmanites and their cronies in [Reagan’s] State Department branded that colossal failure of supply side economics, “The Miracle of Chile.”
But Neoconomy may not be an evil scheme. It may be that it just looks like one. It could turn out that our current planners really have their hearts in the right place, and the fact that they are all wealthy men has nothing to do with the nature of the plan they’ve concocted. But how can we know this? Any means by which the facts could be communicated to us flow through channels controlled by the suspects. If these devils are really Devils, the poor working stiffs may be eight months pregnant before they begin to show.