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If elected president, Mitt Romney will have to make some adjustments to his tax plan. For now he is saying that he wants to lower rates across the board by 20 percent and entirely offset the cost by scaling back tax expenditures unrelated to investment income. He wants his plan to be distributionally neutral. But is the Romney tax reform plan fair? It's a question that is getting a lot of attention in the press. It can be answered only by wading into obscure data that tell you how tax expenditures are distributed across income categories.
The now-famous August study from the Urban-Brookings Tax Policy Center (TPC) presents the data, and it shows that achieving all these goals simultaneously is, under reasonable assumptions, mathematically impossible. (Citations are at the end of this article.) That allowed the Democrats to score some points. We won't dwell on that here. Instead we are going to look beyond the election and explore what could be done in 2013 to help President Romney draft a decent tax plan that would be roughly consistent with his campaign promises.
Option 1: Rates Adjustment
Option 2: Deductions Become Credits
Option 3: Income Phaseouts
Alternative 4: Raise Taxes on Investment
Unfortunately for tax reformers, the Romney approach is not a fast track to lower rates and a broader base. That is because of the simple fact that the tax benefits that Romney might have to cut disproportionately benefit the middle class. If elected, Romney could address these issues by making the rate structure more progressive, by converting deductions to credits, or by phasing out tax breaks as income rises. The first two approaches are alternatives Romney should consider. But income phaseouts are bad economics and have no place in a tax reform plan that is supposed to improve the code.
View TaxAnalysts'® Martin Sullivan's opinion in its entirety on TAX.com.
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