The Impact of Romney's Proposed $17,000 Deduction Cap
October 23, 2012
Mitt Romney's tax plan would add substantially to the gross domestic product (GDP) over time, raise after-tax incomes across the board, and cost the U.S. Treasury far less than what traditional "static" estimates have reported, says Stephen J. Entin, a senior fellow at the Tax Foundation.
However, the biggest issue in discussing Romney's tax plan is how the static revenue costs are going to be paid for.
- Altogether, the tax plan would increase private sector GDP by 7.8 percent.
- The overall cost, excluding economic improvements and revenue inflow, would be $338 billion (measured at a 2008 baseline level of GDP and income).
- Including the growth of incomes and tax revenue, the tax plan would cost around $137 billion in 2008 dollars.
- About 60 percent of the costs would be covered by the added income growth.
- In addition, the proposed reduction in the corporate income tax rate and lower taxes on capital gains, dividends and estates would contribute to job growth and federal revenues.
- The rest of the revenue shortfall can be eliminated by closing tax loopholes on high-income taxpayers or making cuts in corporate welfare and ineffective federal programs.
Recently, however, Romney has announced that he plans to impose a $17,000 cap on itemized deductions to fund his tax plan.
- Under this plan, private sector gains would decrease by 0.4 percent.
- The cap on deductions would reduce the costs of the tax plan from $338 billion to $206 billion.
- However, this would take back over half the tax cut for people between the $150,000 to $500,000 income ranges.
- Furthermore, it would take back 60 percent to 80 percent of tax cuts for those making over $500,000.
- In contrast, just 5 to 14 percent of the tax cut will be taken back for those with incomes between $20,000 and $50,000.
As a result, the after-tax income of tax filers will be disproportionately reduced. For example, the income for people making over $500,000 will be reduced by a third after taxes. However, those earning below $50,000 would only have their after-tax income lowered by 8 percent.
While Romney's deduction cap does succeed in paying for his tax plan without raising taxes on the middle class, it does so by reducing overall growth and lowering the tax cut for upper income payers. It is still unclear what deductions will be capped and whether Congress will agree to the major reductions in some of the deductions.
Source: Stephen Entin, "The Impact of Romney's Proposed $17,000 Deduction Cap," Tax Foundation, October 11, 2012.
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