Election could come down to taxesNow that Mitt Romney’s and President Barack Obama’s campaigns have made matching claims that, if elected, 12 million new jobs will be created over the next four years, knowing which man to believe comes down to the details. And the details are sketchy.
Neither candidate has articulated exactly how they got to their perfectly matched estimate. Romney presented it first; the Obama campaign responded by calling it a “low bar.” When pressed, both make vague references to enacting policies that will encourage economic growth. Mitt Romney points to his proposed 20 percent across-the-board cut to federal personal income taxes, along with proposed cuts to corporate taxes, as the tool most likely to generate economic growth that will result in job creation that is 50 percent higher than current projections.
At least one liberal analysis of his plan warns, however, that if the effect of Romney’s total tax cut plan does not “trickle down,” the sheer cost of it in lost revenues could simply end up adding $4.9 trillion to U.S. debt over 10 years, without significant job growth.
Romney, expectedly, rejects that argument, but his economic advisers won’t quantify how they arrive at the plan they call “revenue neutral.” As a result, neither Romney’s personal tax plan, nor the criticism of it, can be proven or disproven without greater detail, with which the campaign has been particularly stingy.
While the result of the competing tax plans is unpredictable, what Romney would have Americans pay is known. The top federal tax rate would drop from 35 percent to 28 percent; the rate for the lowest earners who pay federal tax would drop from 10 percent to 8 percent.
Romney would eliminate the much-maligned Alternative Minimum Tax, or AMT, a tax rate which permits none of the popular deductions (like mortgage interest), and which was initially designed to make sure high-earners paid at least some federal income tax, but which now ensnares increasing numbers of unsuspecting middle-income earners.
That’s because its thresholds were not indexed to inflation, which Obama would fix, rather than eliminate the tax (and it’s windfall revenue) altogether. Obama’s plan would stop the growth in the number of taxpayers subject to AMT. Neither candidate would touch the remarkably popular mortgage interest rate deduction, even though it costs the government plenty and has little beneficial effect on home ownership rates.
Overall, Romney’s personal tax cuts are bigger. So how does he plan to offset lower tax rates without costing the government much needed revenue? By eliminating some of the thousands of personal tax credits, write-offs and deductions in the U.S. Tax code.
Fewer deductions mean having to increase the number of people who pay tax, at both ends of the income scale, while lowering the average percentage of income paid. Still, the math doesn’t work unless more people are working, and those who are working are earning more. Critics worry that Romney’s theory is dangerously circular.
Both Obama and Romney would extend the so-called “Bush Tax Cuts,” set to expire at year’s end, for households earning $250,000 or less. In a move that matters more symbolically than fiscally, Romney would extend the cuts for all, including the few percent of high income earners.
Obama, on the other hand, in allowing the Bush tax Cuts to expire for the rich, would see the top marginal tax rates rise from 36 percent to 39.6 percent. That’s a rate which, as he likes to point out, is what high-income earners paid under the widely-lauded Clinton presidency.
Obama would also raise taxes on capital gains and dividends from 15 percent to 20 percent, a plan opposed by the investing class. Romney proposes eliminating taxes on various investment gains, which explains why his campaign is so beloved by the private equity and hedge fund universe.
Like most Republicans, Romney pledges to eliminate the Estate Tax (what Republicans call the “Death Tax”), which taxes the inherited transfer of one’s investments, dividends and interest to their descendants (but not their spouse).
In addition to being philosophically abhorrent to conservatives, some small businesses owners argue that it has forced them to liquidate inherited going concerns, such as farms, in order to satisfy large tax bills. Obama, on the other hand, would restore the Estate Tax to an earlier level, taxing fully 45 percent of that part of any inherited estate above $3.5 million.
The U.S. is often cited as having the highest corporate tax rates in the developed world. This characterization ignores the loopholes enjoyed by many U.S. firms that provide corporate America, as a whole, with a substantially lower “effective” tax rate.
Romney cites Canada as an example of economy that has benefited from lowering its corporate tax rate. He pledges to reduce the tax businesses pay from 35 percent to 25 percent, again, while eliminating some loopholes. This is Romney’s central argument for his campaign’s higher growth projections.
Obama would keep corporate rates taxes where they are, but would offer temporary tax relief to firms that engage in domestic R&D and manufacturing, and to companies which actively “in-source,” or return jobs once shipped overseas to the U.S. Obama would also eliminate certain industry subsidies, such as those currently offered to oil companies.
Taxes are the domestic economic issue on which the two candidates differ most sharply, and their differences illustrate the growing “class divide” amongst voters, with so-called “haves” favoring Romney, and “have nots” favoring Obama. Romney recently referred the 47 percent of Americans who, for various reasons (including joblessness, low income, military service or old age) are net recipients of federal government money, as opposed to net contributors, as “victims” who would not support him.
Romney’s right, if one accepts that all national ballots are cast in one’s self-interest. But the future of the U.S. economy may depend on more enlightened thinking. Both candidates have offered unsubstantiated outcomes, but what American voters need to see is the detailed long arithmetic showing how they get there. Whether they’ll get the data they need before Election Day is unclear.
* The author is a CNN anchor and chief business correspondent.
by Ali Velshi