Romney, Obama and Simpson-Bowles: How Do the Tax Reform Plans Stack Up?

September 12, 2012

In the midst of slow economic recovery, presidential candidates are forced to distinguish themselves in many areas. One way they are doing this is by offering different proposals for tax reforms. For example, in contrast to Obama's tax policy, which has a 39.6 percent tax on the top marginal income rate, Mitt Romney has offered a solution for real tax reform that goes back to the Simpson-Bowles plan released nearly two years ago, says William McBride, chief economist at the Tax Foundation.

The National Commission on Fiscal Responsibility and Reform was established by President Obama in 2010 to come up with a bipartisan solution to rein in the nation's debt. Alan Simpson and Erskine Bowles were the co-chairs. They issued a final report detailing their findings and potential solutions:

  • Over the next decade, the Congressional Budget Office (CBO) predicts that publicly held debt will account for 90 percent of the nation's gross domestic product (GDP).
  • The Simpson-Bowles plan would lower the top marginal tax rate and pay for it by eliminating credits, deductions and other expenditures.
  • However, their solution would bring tax rates on capital gains and dividends up to 23 to 28 percent, instead of the 15 percent it currently stands at.
  • This would reduce GDP by at least 2.1 percent and crush investment.

Romney's proposed plan is modeled on the Simpson-Bowles plan with a few changes.

  • The top rate on personal income would be 28 percent, like with the Simpson-Bowles plan.
  • The bottom rate would be 8 percent, making it more progressive than the Simpson-Bowles plan.
  • Furthermore, it eliminates all taxes on investment income, which would stimulate more investments.
  • Additionally, Romney's plan would eliminate the estate tax. According to the Bureau of Economic Analysis, the federal estate tax has never raised more than $29 billion, which is less than the cost to enforce the tax.

Unlike the other two proposals, Obama's tax policy does nothing to rein in spending or balance the budget, and only seeks to impose more taxes on high earners.

  • Under his plan, the top marginal rate on personal income is 39.6 percent.
  • Economic growth would only increase by 1 percent a year, in contrast to the 4 percent per year growth under Romney's plan.

Real tax reform is needed to address many concerns over spending, debt and the deficit. The Simpson-Bowles plan is a starting point but has flaws that Romney's plan intends to correct. Obama's plan simply continues down a path that has created economic problems and will continue to do so if not corrected.

Source: William McBride, "Romney, Obama, & Simpson-Bowles: How Do the Tax Reform Plans Stack Up?" Tax Foundation, September 6, 2012.

 

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