Romney Ryan 2012: Pro-Growth Tax Reform and the "Romney Hood" Lie

Editor’s note: This is the third of a five part series that compares and contrasts the Romney-Ryan plan with the Obama-Biden plan on entitlements, spending/debt, taxes, jobs, and health care.

The biggest obstacle holding both business expansion and consumer spending back is lack of certainty on tax rates.

Our tax code is a mess. It is so complicated that individuals, families, and employers end up spending over six billion hours and $160 billion per year trying to comply with the law and pay the actual taxes owed. Since 2001, there have been nearly 4,500 changes made to the tax code, averaging more than one each day over the past decade.

Compliance with the current tax code is a financial hardship for employers that falls disproportionately on small businesses, which spend an average of $74 per hour on tax-related compliance, making it the most expensive paperwork burden they encounter.

Corporate tax, income tax and capital gains tax

We now have the highest corporate tax rate in the world at 39.2% (including state and local taxes), leaving us with a huge disadvantage competitively in the age of outsourcing and globalization. At the same time, our corporate tax code is riddled with loopholes and special interest subsidies that larger businesses and corporations which have the resources to lobby for can get, making the revenue we collect on our corporate taxes far less than where the rate is set. In other words, we’re not incentivizing global businesses to keep jobs and money here, while those that do don’t pay everything.

Also, starting January 1, 2013, Americans will face a $494 billion tax increase, the highest ever in one year. Congressional aides are calling it “Taxmageddon” — a chilling reference fit for an economic nightmare. Federal Reserve Chairman Ben Bernanke has warned that it will be a “massive fiscal cliff” for the economy.

Taxmageddon falls primarily on middle- and low-income Americans. That’s because, contrary to the president’s rhetoric about “the wealthiest Americans,” 60% of the Bush tax cuts went to middle- and low-income taxpayers. Almost 34% of the tax increases from Taxmageddon come from the expiration of the 2001 and 2003 Bush tax cuts. Another 25% comes from the expiration of the payroll tax cut. Most of the remaining increases come from Obamacare, notably from the start of the hospital insurance 3.8% surtax on all forms of income over $250,000.

On top of that, 75% of the other taxes to be collected on Obamacare from the individual mandate will come from those making under $120,000 a year, according to the non-partisan CBO. Quite a different story from what the president told us when he said health care should never be purchased with tax increases on middle class families or even when he claimed Obamacare wasn’t a tax at all.

The Obama administration is also seeking to hike the capital gains tax rate to its highest level since 1978. During a Democratic primary debate hosted by ABC News four years ago, Charlie Gibson asked then-Senator Obama why he would support raising the capital gains tax when, as he correctly pointed out, capital gains revenues only went up every time the tax rate was cut, and went down every time the tax rate went up. Obama replied, “I would look at raising the capital gains tax for purposes of fairness.”

Obama-Biden Plan

Passing “the Buffett rule” would bump the tax rate on investment income at the shareholder level to 30%, up from 15% today. The new 30% capital gains rate would be the third highest in the world, behind only Denmark and Chile, which will push hundreds of billions of investment dollars overseas to global competitors. Lower capital investment in the U.S. means less wage growth, and so the people hurt most by this tax hike would not be employers, but wage earners.

On income taxes, Obama has called on Congress to pass another one-year extension of the Bush-era tax cuts for people earning less than $250,000 a year, while letting the rest expire at the end of 2012. Passing such an action won’t solve any problems. For starters, the highest tax bracket income earners, when compared with those people in lower tax brackets, are far more capable of changing their taxable income by hiring attorneys, accountants, etc. They can change the location, timing, composition, and volume of income to avoid taxation.

If you need proof, look across the Atlantic. In 2010, Britain decided to raise its top tax rates all the way to 50%. The first revenue returns came in for the government earlier this year, and the revenues have plunged. Not quite the desired effect.

Even back in the U.S., California is learning the hard way that soaking the rich isn’t working out so well, seeing a nearly 22% decline in revenues after raising income tax rates.

In Canada, however, the Conservative government has lowered their corporate tax rate from 22% in 2006 to 15% in 2012 and taxes their richest bracket at 29% vs. the U.S.’s 35%. Now the average Canadian household is richer than the average American household for the first time in history.

Extending the Bush era tax cuts for the 98% for only one year will also not produce anymore consumer confidence than it did the last time it was extended for two years. When President Bush signed the 2001 and 2003 tax cuts into law, he gave them a 10 year time frame to foster a long term, predictable, pro-business environment to plan ahead in. Mapping out tax rates for only 1 to 2 years at a time does not remove uncertainty and only leaves persistent hesitation to spend, invest, or hire.

Lastly, a study conducted by Ernst & Young concluded that letting tax rates for the wealthiest Americans lapse would sap $200 billion and some 700,000 jobs out of the economy, reduce wages by 1.8%, and lead to a decrease in investment.

Romney-Ryan Plan

What Mitt Romney has endorsed and what Paul Ryan has proposed in his budgets is pro-growth tax reform. Pro-growth tax reform, as illustrated in the bipartisan 1986 Tax Reform Act, closes loopholes that allow for overseas tax shelters as well as special interest subsidies in order to collect on revenue more efficiently while cutting tax rates across the board at the same time to incentivize businesses to keep money and jobs here instead of overseas, thus broadening the tax base.

Ryan explains:

Both parties are aware of this, which is why several members of both parties understand that pro-growth tax reform is the only way to solve the problems inherent in our tax code. Thirty-six Democrat, Republican, and Independent senators, 100 Republican and Democrat congressmen, the bipartisan “Gang of Six” plan, and the president’s own Simpson-Bowles debt commission have all come out in strong support of pro-growth tax reform. It has more support among both parties than any other tax reform proposal, including raising tax rates even higher.

In advocating pro-growth tax reform, Romney has proposed to lower the corporate tax rate from 35% to 25% across the board, cutting everyone’s income tax rates by 20%. Best of all, Romney pays for all of it by returning levels of federal spending to 20% of GDP (the historical average throughout the 20th century) by 2016. Below is a side-by-side chart comparison of Obama’s proposed 2013 tax rates and Romney’s. As you can see, Romney’s tax rates would be even lower for the 98% than Obama’s.

Obama has taken to calling pro-growth tax reform “Robin Hood in reverse” or “Romney Hood.” The charge is that even though Romney is proposing to cut tax rates for everybody across the board, Romney will finance this by imposing a tax increase on the middle class. His evidence is a single study by the Tax Policy Center, a liberal think tank that has long opposed cutting income tax rates.

The Tax Policy Center uses the headline-grabbing opinion that it is “mathematically impossible” to reduce tax rates and close loopholes in a way that raises the same amount of revenue. They then postulate that Romney would have to do something he hasn’t proposed: raise taxes on those earning less than $200,000. In the Obama campaign’s political alchemy, this becomes “Romney Hood” and a $2,000 tax increase.

The Tax Policy Center ignores the history of tax cutting. Every major marginal rate income tax cut of the last 50 years — 1964, 1981, 1986 and 2003 — was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code — i.e., the share of taxes paid by the richest 1% rose.

For example, from 1980 to 2007, three tax rate cuts brought the highest marginal tax rate to from 70% to 35%. Internal Revenue Service data shows that when the tax rate was 70%, the richest 1% paid 18% of all federal income taxes. With the rate down to 35% in 2008, the share of taxes paid by the rich doubled to 40%.

The Tax Policy Center’s claim that it’s impossible to make the numbers add up is also refuted by Obama’s own Simpson-Bowles debt commission report. The Romney plan of cutting the top tax rate to 28% and closing loopholes to pay for it is conceptually very close to what Simpson-Bowles recommended.

An editorial from The Wall Street Journal sums it up best, “Hats off to the scholars at TPC: Their study manages to claim that what happens in real life can’t happen in theory.”

The next installment of this series will explore both tickets’ plans on job creation.