With the election coming up next Tuesday, I wanted to research some of Mitt Romney’s tax plan. But first let take a quick look at Barack Obama’s plan
It appears that Obama’s plan is to let the Bush tax cuts expire to fund revenue increases. Letting the Bush tax cuts expire means tax increases of (i) an increase in the maximum ordinary income rate from 35% to 39.6%; (ii) an increase in the maximum long-term capital gain rate from 15% to 20%; and (iii) an increase in the maximum rate applicable to qualified dividends from 15% to 39.6%.
Now let’s take a look at Mitt Romney’s plan. According to www.MittRomney.com, he would push to:
• Make permanent, across-the-board 20 percent cut in marginal rates
• Maintain current tax rates on interest, dividends, and capital gains
• Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
• Eliminate the Death Tax
• Repeal the Alternative Minimum Tax (AMT)
Let’s take a look at one piece of the plan. In this part, we’ll look at:
“Make permanent, across-the-board 20 percent cut in marginal rates.”
To understand this, we must define the term marginal rate. The marginal rate is the tax rate paid on the last dollar of one’s income. For example, let take a taxpayer filing single who has taxable wage income of $40,000 in 2012. They would pay 10% on $8,700, 15% on $26,650 ($35,350 – $8,700), and 25% on $4,650 ($40,000 – $35,350). This would be a total $6,031 of income tax ($870 + $3,998 + $1,163).
A 20% cut in marginal rates across the board as indicated by MittRomney.com would mean that this taxpayer pays 0% on $8,700, 0% on $26,650 ($35,350 – $8,700), and 5% on $4,650 ($40,000 – $35,350). This would be a total of $233 in total tax!
Keep in mind that a person that makes $40,000 in taxable income generally has at least $49,750 in actual income. This is due to the standard deduction of $5,950 and personal exemption of $3,800 which reduce taxable income.
In my opinion paying $228 in total federal income tax doesn’t seem reasonable for a person making nearly 50k a year. This means that it must be a 20% cut to the rate. This means that the 10% would become 8% and 15% would become 12%. It also mean that the top rate after expiration of the Bush tax cut, the top rate of 39.6% would be reduced to roughly 31.6% for an 8% total break compared to 2% and 3% for the lower tax brackets.
Here’s a catch I found. Upon digging into the PDF for Mitt Romney’s Plan for Jobs and Economic Growth, I came across different facts. The plan is to “maintain marginal rates at current levels.” This directly contradicts his website which states, “Make permanent, across-the-board 20 percent cut in marginal rates.” This is an interesting contradiction on Mitt Romney’s information. I assume that maintaining marginal rates at current levels is Mitt Romney’s tax plan.