Tax Rascal

Mitt Romney’s Tax Plan is Flat but Not in the Way You’d Think

Categories: Economy, Featured, Politics, Tax Policy
Mitt Romney’s Tax Plan is Flat but Not in the Way You’d Think

Mitt Romney is betting on a boring tax plan to keep him ahead of the pack in 2012

There was a time when tax policy actually had the starring role in the 2012 Republican Presidential race.

That was before Sharon Bialek dolled up for the hungry cameras, while her attention-grubbing attorney punned lamely about “stimulus packages”, and related the tale of citizen Cain slipping a hand up her skirt and pulling her head toward his crotch.

That was also before Rick Perry fumbled the presidential pigskin once again as he let the Department of Energy slip from his addled brain with an epically infantile “Oops”.

All anyone could talk about then were Cain’s 9-9-9 tax plan and Perry’s optional flat tax, two true-blue conservative proposals that advocated uprooting the existing tax code and replacing it with some version of a flat tax.

But what of their chief rival Mitt Romney? Why no brouhaha about his tax plan?

Part of the reason may be that, compared to Cain and Perry’s catchier tax refrains, Romney’s tax plan is, well, kind of boring. Like the candidate himself, some would unkindly add.

Romney is rightly known as a details guy and his proposals certainly don’t disappoint in that respect. His economic plan, whose very title is itself a mouthful, is called Believe in America: Mitt Romney’s Plan for Jobs and Economic Growth and it is literally a book length tome. Rick Perry has even mocked it as a Tolstoy novel.

The first stand out is that Mitt Romney has not hopped aboard the flat tax bandwagon, even as he’s jumped every rightward cart heading his way. This is hardly surprising, as Cain and Perry embraced a flat tax less for the effective solutions it presented for our economic woes than as an opportunity to get to the right of Romney on tax policy.

In fact, even before the current campaign started Mitt Romney was already on record  criticizing the idea of a flat tax. Here he was hard at it as recently as 2007:

There was one aspect I thought would be troublesome, and that was the very, very wealthy, the people who sit back and clip coupons, who have very substantial investments, would pay no taxes at all. People like Bill Gates and Steve Forbes for that matter, under his plan, would pay no taxes and I don’t think that is acceptable to the American people.

War and Peace

So what is Romney’s tax plan? He is much too great a pragmatist to suggest something as extreme as completely scrapping the current tax code. Rather, he advocates maintaining the tax policies of the Bush administration, with a few minor alterations.

With respect to individual tax rates, Romney proposes making permanent the current, low marginal rates. Established by the Bush tax cuts of 2001, they are set to expire next year.

Depending on your political persuasion, this is either equivalent to maintaining the status quo or proposing a tax cut. But the fact of the matter is that Americans have lived with these rates for a decade, however temporary their real nature. If rates returned to 1990s levels, it would certainly have an effect on taxpayers comparable to an increase. In short, it would feel like a tax increase.

More controversially, Romney also wants to make permanent the low capital gains rate of 15%.

This is the rate that makes it possible for the billionaire Warren Buffett to fall under a lower tax rate than his middle-income secretary. The “tax the rich” fervor sweeping the country advocates increasing this rate the same as the marginal income tax rate. As is, the current 15% rate is seen as a major culprit in the widening economic inequality. If Romney wins the nomination, look for this to be a major point of difference with President Obama.

Helping Romney’s position somewhat is the fact that he also proposes eliminating capital gains tax on those making less than $200,000.

Romney argues that low capital gains taxes are essential to encourage “Americans to save and to invest for the long-term, which would in turn free up capital for investment flowing back into the economy and helping to facilitate economic growth.”

Romney also advocates permanently dissolving the estate tax, also known as the “death tax.”

When it comes to the corporate tax system, Romney’s proposals are a little more dramatic. He wants the top rate immediately lowered from 35% to 25%.

In his view, the current top rate is so high that it impedes America’s competitiveness on the global playing field. Indeed, the trend among OECD nations has been to lower corporate taxes. As he puts it “excluding the United States, combined statutory rates among OECD nations fell from an average of about 48 percent in the early 1980s to 25.5 percent on 2010.”

As for what some would characterize as the unfairness of lowering taxes on corporations, the Romney camp has this to say:

Worries that a lower corporate tax rate is unfair or unaffordable are fundamentally misplaced. The truth is, as Mitt Romney likes to say, “corporations are people.” They represent human beings acting cooperatively to be economically productive. Each dollar earned by a corporation is a dollar that ultimately flows in one form or another, to employees and shareholders. And those shareholders include the millions of Americans who own shares in mutual funds or who have pensions that invest in the American economy.

The question, though, is who exactly these dollars flow to. I can already see Occupy Wall Street foaming at the mouth with something like this.

Rounding up, Romney says we must “broaden the base and simplify the rules.” But whether that includes closing corporate tax loopholes is  unclear.

Romney does, however, support the transition to a territorial tax system, which would solve the problem of many companies tending to keep their profits offshore which, incidentally, is the primary means by which corporations like GE and Google have been able to avoid taxes.

The U.S. now operates under a worldwide tax system, in which corporations pay taxes in the host country. When they move that money back to the States, they have to pay to the IRS the difference between the host country’s taxes and what they would have owed here. As such, the current system amounts to a huge disincentive for companies to repatriate profits.

Under a territorial system profits are only taxed in the country in which they are earned. 26 of 34 OECD countries operate under this system. Romney hopes that removing the incentive to keep profits offshore will encourage American companies to bring as much as $1 trillion back to the U.S. and reinvest it in the national economy.

The Teflon Candidate?

This is not a tax policy proposal that’s going to get many conservatives excited. Among the current Republican field, Romney is one of the only serious candidates not advocating some sort of radical overhaul of the tax system, as this Tax Policy Center matrix makes clear.

In the recent CNBC Republican debate, moderator John Harwood tried to pin Romney down on what many see as his weak conservative tax credentials.

“You don’t have a flat tax,” Harwood said. “You’re proposing to preserve the Bush-era tax rates. What is wrong with the idea that we should go to one rate? Why do you believe in a progressive tax system?”

Romney replied, “Well, I would like to see our taxes flatter. I’d like to see our code simpler. I’d like to see the special breaks that we have in the code taken out. That’s one of the reasons why I’d take the corporate rate from 35 down to 25, is to take out some of the special deals that are there.”

This response, in a nutshell, encapsulates Romney’s approach in the primary battle, which could be summed up as one eye at the base and the other cast further off at the general electorate. He throws a few vague bones to the right and then immediately pivots to an issue more popular with independents. Later in his answer he attacks President Obama and woos the middle class but  without ever really weighing into a flat tax debate that could potentially inflame conservatives against him.

Romney is clearly banking on winning the Republican primary without ever once making a fuss, not least over his tax plan – which is why you probably haven’t heard about it. And as soon as he’s clinched the nomination, without making any major concessions to the right, he’s going to start selling his middle of the road tax plan to moderate and independent voters in the 2012 election.

By way of a startling contrast, take a look at the other Republican contenders: Herman Cain has the drastic 9-9-9 plan, Newt Gingrich touts a Perry-esque optional flat tax, and Ron Paul wants to abolish the IRS entirely. Surely if one of them did manage to surge past Romney and win the nomination, key independents would balk at their radical, conservative, hot button reform proposals.

There is every indication that tax policy will feature just as prominently in the general election, and Romney is betting his candidacy on the hope that Republicans at large will recognize his moderate strain of conservatism as the most electable.

President Obama has already voiced his opinion that the rich ought to be taxed more. Doubtless this will be the Democratic rallying cry in 2012.

The challenge for Romney is that he’s going to have to deflect criticism that he’s a candidate for the wealthy, and the GOP is effectively the party of the rich. His tax plan arguably favors wealthy individuals and corporations. Still, Romney has done a good job linking a thriving, profit-driven private sector with increased job opportunities for average Americans.

It is also, quite literally, a continuation of the Bush administration policies which, after four years of the Obama administration, is a much less damning charge than it once was.

The Promise of Stability

Perhaps the greatest strength of Romney’s tax policy proposals, and incidentally his whole candidacy, is stability. Romney aims to “keep the tax structure stable so that investors and entrepreneurs are not confronted with a constantly shifting set of rules that make it impossible for them to plan ahead.”

His conventional and comparatively boring tax proposals may end up working in his favor. I think he’s made the correct calculation that Americans are tired of economic upheaval and are going to think twice before upending the tax code.

This time around, Obama can’t just run on hope-filled rhetoric; he’s going to have to run on his record. And what most people remember, at least on taxes, are the President’s battles with Congress and the last-minute tax deal that resulted last December – a tax deal that’s only going to last for two years.

Combine this with the crisis over the debt ceiling, the stimulus package before it, and then the bailouts before that and there is an argument to be made for stability, a return to economic normalcy, if you will.

Romney might just be boring enough to pull this message off.

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