Former Massachusetts Gov. Mitt Romney, seeking to kick-start his presidential campaign among recalcitrant conservatives, proposed Wednesday cutting the top income tax for individuals to 28 percent.
Romney’s earlier economic plan called only for preserving the current top tax rate of 35 percent, while holding out the promise of lower rates later in an overhaul of the tax code.
But facing a major challenge from upstart Republican rival Rick Santorum, he has chosen to outline such an overhaul in Arizona ahead of critical Feb. 28 primaries there and in Michigan — and before a televised debate Wednesday night in Mesa.
Romney’s top economic adviser, Glenn Hubbard, said the plan would cut all six current tax brackets — 10, 15, 25, 28, 33, and 35 percent, depending on a taxpayer’s income — by the same proportion of 20 percent. That would produce this new set of tax brackets: 8, 12, 20, 22.4, 26.4, and 28 percent.
"We want middle-income Americans to be the place we focus our help, because it's middle-income Americans that have been hurt by this Obama economy," Romney said in annoucning the plan.
Hubbard said Romney is committed to making his plan both “revenue neutral” – meaning it won’t add to the budget deficit — and “distributionally neutral” – meaning that it won’t shift the tax burden from upper-income Americans to middle and working class Americans. Since the largest benefits from rate reduction would go to upper income taxpayers, so will the burdens of “base broadening” reductions in existing deductions needed to keep the government from hemorrhaging revenue, he explained.
Reducing large tax deductions, such as the ones for home mortgage interest and state and local taxes, is politically treacherous because of their popularity with voters and elected officials alike. For now, at least, Romney will dodge any potential backlash by avoiding any specifics.
Romney will pledge to work with Congress on “limiting them,” Hubbard said, but “it is not his intention to take on any specific deduction or exclusion and eliminate it.”
Romney has praised the work of President Barack Obama’s Simpson-Bowles deficit reduction commission, and criticized the Democratic incumbent for ignoring its work. But Romney is also rejecting the commission's recommendation that tax overhaul produce increased government revenue to cut the deficit, while embracing its recommendation to cut the top tax rate to 29 percent or lower.
Hubbard contrasted Romney’s “pro-growth” plan with Obama’s proposal to raise taxes on individuals earning more than $200,000 and households earning more than $250,000. He argued that would hurt economic growth by crimping small businesses, many of which file under the individual tax code.
Hubbard, who advised former President George W. Bush and now is dean of the business school at Columbia University, also cast the Romney plan as superior to Santorum's.
The former Pennsylvania senator would also cut the top individual rate to 28 percent, the level it reached after Congress and the White House agreed on a tax overhaul plan during Ronald Reagan’s presidency, which preserving only one more tax bracket of 10 percent. In the name of “national security,” Santorum has also proposed a zero tax rate for manufacturing businesses as a means of preserving and expanding that economic sector.
The Santorum plan would dramatically expand the budget deficit, Hubbard said, and the zero rate for manufacturing would result in “significant capital misallocation.”
“Net-net, it’s a job destroyer, not a job creator,” Hubbard said.
Santorum and former House Speaker Newt Gingrich, who has proposed an optional “flat tax” system of 15 percent, have accused Romney of timidity. With his new proposal, Romney seeks to counter that charge in advance of the Arizona debate.
Romney’s plan aims to balance two competing priorities of different Republican factions. By proposing to cut the top rate, he bids for support among supply-side conservatives who contend that lower marginal rates are the key ingredient for producing economic growth.
But by vowing to offset the loss of revenue by eliminating some deductions, he responds to concerns among deficit hawks about expanding the tide of red ink that has the federal government spending an estimated $1.3-trillion more than it takes in this year.
And by insisting that those unspecified reductions will fall most heavily on the affluent, he seeks to limit his own exposure as a wealthy former financial industry executive who himself has paid taxes at only around the 15 percent rate because most of his income comes from capital gains. Romney would maintain the current 15 percent rate on dividends and capital gains.
Obama has proposed to tax the “carried interest” received by many hedge fundand private equity executives at higher ordinary income rates rather than as capital gains, arguing that current law gives them an undue advantage. Hubbard said a President Romney would ask his treasury secretary to study the “devilishly hard question” of whether current law should change and tax some of that income at ordinary income rates.
Romney had previously proposed eliminating capital gains taxes on taxpayers earning less than $200,000. That drew fire from some conservatives, and campaign rivals such as Gingrich, on grounds that gave unwarranted preference to a specific group and would have a small economic impact since those taxpayers receive relatively little in capital gains anyway.
Romney also proposes to eliminate the estate tax and the Alternative Minimum Tax, while cutting the top corporate tax rate from 35 to 25 percent.
Hubbard said three different revenue streams would keep the plan from increasing the budget deficit: the “dynamic” effects of economic growth, the additional income that would be subject to taxation through “base broadening," and spending cuts Romney plans that would reach $500 billion per year by 2016. The campaign promised more specifics on those spending cuts within the next week.
In advance of Romney’s tax plan, Obama’s Treasury Department proposed its own corporate tax overhaul plan cutting the top corporate rate to 28 percent by eliminating some existing corporate deductions. Part of the Obama plan includes a minimum tax on the overseas income of U.S.-based corporations.
Hubbard, accusing the administration of a “full-throttle attack on multinationals," said Romney will propose shifting to a territorial system that would not tax corporate income earned overseas.