[UPDATE: Here is a link to a great resource which identifies all 172 tax loopholes/deductions http://www.washingtonpost.com/wp-srv/special/politics/tax-code-break-by-break/
As they say in Vegas, now that the cards are on the table, it’s time to place your bets. As a business owner, I am acutely interested in the tax-cut high-wire act taking place during this election cycle. Personally, I am very disappointed that I still do not understand how one of the candidates tax plans will work but I refuse to take anyone’s word on spec.
Adjusted gross income is defined as your gross income less any deductions you are able to take. If you have gross income of $300,000 and you have deductions of $50,000, your adjusted income (aka taxable income) would be $250,000. You will therefore pay taxes on $250,000 not $300,000.
The President’s plan is resonantly clear for many Americans to understand. The first $250,000 of adjusted income will be taxed at the exact same rate as it has been taxed since 2000. That is very easy to digest. Adjusted Income over $250,000 will be taxed 4 points higher than it is today. This means if a person earned $400,000 in adjusted gross income yet had $100,000 in deductions, their adjusted income would be $300,000. They would then be subject to a tax increase of 4% on $50,000 or an additional $2,000 tax increase under the Obama tax plan.
The tax plan is paid for by:
A). Allowing the current tax rate of 35% to rise to 39% of adjusted income.
B). Savings from the wars in Afghanistan and Iraq.
I barely used all of my fingers figuring the math out.
I know of very-very few people that voluntarily want to see their federal income taxes rise. Therefore if you earn less than $250,000 in adjusted income you will have a positive view of the President’s plan. However if you earn more than $250,000 in adjusted income, you are not pleased that an employee of the government wants to tax you and take more of your money in order to turn around and spend it. It is totally understandable that higher-earners would do many things to avoid the implementation of the President’s tax plan.
Therefore you can understand why they are supporting Governor Romney and his tax plan.
Governor Romney’s plan is a bit more challenging so I am going to break out my Texas Instrument calculator which I use for Calculus and Trigonometry. Here we go.
There are 172 tax deductions in the current tax code. The value of all 172 deductions in 2011 was nearly $1.100 billion. 140 of these deductions were placed into the tax code prior to 1980. 32 have been added since 1980. 56 of the deductions are specifically for Corporations. The remaining 116 are individual tax deductions for individual tax filers.
Many corporations are run by individuals that can choose to file at individual tax rates which are still the same as the 35% corporate tax rate. In some cases, individuall business owners can earn 100% of their income as Dividends or Capital gain which will be taxed at a much lower rate of 15%.
Governor Romney’s plan is to leave the tax rates at the same level they have been since 2000 and then lower them an additional 20% for every person that pays federal income tax. This should have no impact on the 47% of Americans that do not pay Federal Income taxes as they will not receive any benefits as a result of the tax plan.
In addition, estate taxes shall be eliminated, Corporation taxes will be lowered to 20% and Capital Gains taxes will be eliminated for adjusted incomes under $250,000.
The tax plan is paid for by:
Eliminating enough deductions to achieve a 100% offset the tax cuts. The plan is designed to also be deficit neutral, will not add to the debt and be fully paid for. The plan also promises that no one earning more than $250,000 will see any net deduction in the taxes they currently pay. This plan has no net tax cuts. The top 5% of tax-payers will pay at least 60% of all income taxes.
The plan also assumes GDP growth of 4% which would produce new economic growth with growing wages that will in-turn generate new tax revenues.
The total value of all 172 individual and corporate tax deductions is approximately $1.1 trillion per year. Which deduction must be cut in order to achieve the goals of the Romney plan without retarding growth, cutting jobs, or driving up the national debt?
You do the math.
The top 25 tax deductions enjoyed by individual non-business specific taxpayers by random order of value are:
1. Mortgage Deduction – $ 88.7 billion
2. Earned Income tax credit – $ 62.5 billion
3. Employer Plans. – $ 42.2 billion
4. IRA Plans – $ 15.0 billion
5. Charitable Contributions – $ 39.6 billion
( non-health )
6. Charitable Deductions – $ 4.5 billion
( health only)
7. Medical Savings Accounts – $ 1.9 billion
8. Capital Gains Exclusion – $ 27.6 billion
on home sales
9. Credit for homebuyer expense – $ 10.4 billion
10. Step-up basis of Capital Gain $ 50.9 billion
11. Additional Deduction for elderly – $ 2.5 billion
12. Capital Gains (except agriculture- $ 37.6 billion
timber, iron ore and coal
13. Exclusion of interest on Life – $ 21.2 billion
14. Property Tax Deduction. – $ 19.3 billion
15. Parental personal exemption – $ 3.0 billion
for students age 19 & older
16. Charitable contributions – $ 4.5 billion
( education only )
17. Exclusion of scholarship and – $ 3.0 billion
18. Credit for child & dependent – $ 1.9 billion
19. Making work pay tax credit – $ 44.0 billion
20. American Opportunity tax credit – $ 14.4 billion
21. Lifetime learning tax credit – $ 3.9 billion
22. Child Credit – $ 42.5 billion
23. Exclusion of taxes/benefits for – $ 13.3 billion
Armed Forces personnel
24. Deductibility of non-business – $ 37.7 billion
state & local taxes
25. Discharge of mortgage debt – $ 1.4 billion
The value of the top 25 deductions for corporations, investors and business interests is approximately $593 billion or nearly 55% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).
The top 25 tax deductions enjoyed specifically by corporations or specifically high-earning businesses and investors by random order of value are:
1. Employer contributions for health – $173.0 billion
2. Employer Plans – $ 42.2 billion
3. KEOGH IRA Plans – $ 15.0 billion
4. Credit for small business. – $ 2.6 billion
health expenses (additional)
5. Interest exclusion on – $ 3.6 billion
hospitable construction bonds
6. Self Employed Medical. – $ 6.2 billion
7. Additional Deductibility of – $10.0 billion
Medical Expenses (large)
8. Energy Production Credit. – $ 1.6 billion
9. Alcohol Fuels Credit. – $ 3.1 billion
10. Special Credit -Oil & Gas. – $ 4.2 billion
11. Credit for low-income. – $. 6.0 billion
12. Accelerated Depreciation for – $17.5 billion
machinery & equipment
13. Exclusion of net inputed – $47.0 billion
14. Graduated corporation – $ 3.3 billion
income tax rate
15. Deduction for US production. – $13.8 billion
16. Exemption from passive loss – $10.9 billion
rules for rental loss
17. Carryover basis of Capital – $ 4.8 billion
gains on gifts
18. Expensing of certain small – $ 6.7 billion
19. Graduated Corporation – $ 3.3 billion
Income tax rate
20. Treatment of qualified. – $23.6 billion
21. Accelerated depreciation on – $13.0 billion
buildings other than housing
22. Exclusion of interest on bonds – $ 2.4 billion
for educational facilities
23. Employer provided child care – $ 1.4 billion
24. Credit for increasing research – $ 3.9 billion
25. Deferral of income for foreign – $41.4 billion
The value of the top 25 deductions for individuals is approximately $460 billion or nearly 42% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).
Ok my friends, you now have the exact same data the politicians have. You can now decide exactly what to keep and what to cut. You may have heard the Governor has already stated he will not cut Mortgage deductions, employer healthcare deductions or charitable contributions. You may have also heard about a limited deduction bucket of $17k, $20k, and even $50k. This idea is not in writing anywhere in the Governor’s tax plan so it is nothing to be taken seriously at this point. Only when he settles on a real number in the bucket can anyone evaluate whether the bucket is big enough to work.
Governor Romney has a plan to cut taxes by 20% ($4.8-$5 trillion); increase budgeted Pentagon spending by $2 trillion, and continue the lower Bush/Obama tax cuts for everyone ($trillion). He says he will balance the budget in 4 years and eliminate the deficit by the end of his term. His plan starts with a cost of $7-8 billion over a 10 year period. If every tax deduction is eliminated – every single tax deduction – the value of those deductions would be around $10-$11 trillion over a10 year period.
There is no reason an experienced businessman and former Governor with the current House Budget Chairman as his Vice Presidential running mate CAN’T show how they developed their math. There is only reason they refuse to give you their straight story; they know exactly how they want to do it but they know 50.01% of voters will not like nor will it ever get done.
The Federal Government’s budgeting process is very well understood. The Congressional Budget Office has been scoring budgets for decades. There are a number of ways to get credit for savings:
A). Slowing previously budgeted growth in spending and eliminating spending all-together
B). Cutting or eliminating tax deductions, credits or loopholes.
C). Reducing growth related to interest or inflation.
There are also a number of ways to generate revenue in order to pay for the functions of Government and the administration of our country:
D). Collection of taxes and fees
E). Tariffs and Trade related income
F). Revenue from performing assets and reimbursement of US expenses
In order for Governor Romney’s tax plan to work, he will need to specifically identify 4 things:
1). The true value of his reductions in revenue
2). The true value of any increases in spending
3). The specific tax deductions he is eliminating and a one-for-one Assoiciation to the cuts in revenue
4). Some specific plan for how he can receive support from 60 Senators and a majority in the House
5). How he can violate supply-side economics and still achieve economic growth.
6. How his plan can guarantee 12 million net new jobs and produce 4% GDP growth.
I mention item 5 & 6 because this is where I get totally lost when studying the Gov’s tax plan.
The Governor has stated on a number of very public occasions the following:
“The wealthy will not receive any tax-cuts”. “They will pay the same taxes they pay today”. They pay 60% of taxes today and will pay the same percentage under my tax plan”.
If these statements are truly what Romney believes and what his plan actually calls for, his plan can not work. Why? It violates the concept of supply-side economics and the theory of trickle-down growth policy.
For decades, it has been considered a near-religious fact that if you cut taxes for high-earners, they will take their excess income and drive it back into the economy through increased investments, business expansion, and jump-starting commerce specifically in the United States. President Reagan embraced this concept as did President Bush. Governor Romney has always supported the concept of getting tax-cuts into the hands of the job-creators, the wealthy entrepreneur, and investors. Those that believe in the concept of lower taxes to create economic growth have a long history of advocacy.
Cleaning up the tax code in a way that is still revenue-neutral is a waste of time since it does not create any new wealth or any new revenue. As a matter of fact, it not only does nothing for new revenue, the tax payer does not save a dime either.
WHAT’S THE POINT OF A REVENUE-NEUTRAL TAX PLAN!
A CUT IN RATE THAT DOES NOT RESULT IN A CUT IN TAXES IS SILLY AND MAKES NO SENSE!!
If Governor Romney is telling the truth and he will not give the wealthiest among us a single dime …. a single dollar of net tax-cuts, how does he get the growth necessary to keep his budget in balance. In other words, if the economy needs the job-creators to have more net revenue that would come from a tax-cut and the Governor’s tax plan is specifically designed to produce no cut in the taxes paid, how does this create more economic growth?
My theory: High-earners will receive a tax-cut under the Romney plan because it is the only logical way for a true supply-side tax plan to actually function according to supporters of the concept. The true-believers will never agree to a plan that does not result in a real and tangible tax-cut.
See if you can find another plausible answer.
We need a tax plan that does not resemble a circus high-wire budget balancing act.