Governor Romney today released "version 2.0" of his tax reform plan. When taken together with what he had before, the plan results in the following:
Cut individual and small business tax rates by 20% across the board. This means that the tax rate structure will change to the following:
|Current Rate||Romney Rate|
This will be a tax rate cut for every family that pays taxes, and for every small business (which pays taxes using the individual rates).
Like the Santorum plan, it cuts the top rate to the level President Reagan brought it to when he left office. It's important to note that every Presidential candidate has now called for an income tax rate no higher than 28 percent (Ron Paul is for eliminating the income tax over time).
Importantly, though, it falls short of the 25 percent rate goal of the Paul Ryan budget. This is also an important metric because small employers pay taxes at the individual rates, and Romney wants to cut the corporate rate to 25 percent (see below). Ideally, there wouldn't be a distinction between small business and corporate tax rates.
Eliminate the death tax and the AMT. Both of these features of the current system are anti-growth, anti-jobs, and should be eliminated in any tax reform plan. The death tax, in particular, is a well-documented jobs killer that destroys wealth more than almost any other tax. This is a clear "win" in the Romney plan.
Create a new 0% tax rate on investment income for taxpayers making less than $200,000. This is a bad idea. It's good that Romney wants to keep the capital gains and dividends rate at 15%, but to put a means-tested bracket into this structure won't have any positive impact on savings and investment at the margin. It's also an invitation for liberals to raise the tax rate later while holding most families harmless with the exemption.
A better way to achieve these policy objectives is to expand, consolidate, and simplify the various tax-advantaged savings accounts (IRAs, 529 plans, HSAs, etc.) available to most Americans. This allows most American families to save tax-free, while continuing to fight for a 0% capital gains and dividends rate more generally.
Lower the corporate income tax rate to 25%. This is good as far as it goes. It brings the rate down in line with the Ryan Budget target. The key is seeing how this is combined with business tax base broadening.
The fact is, a 25 percent federal rate just isn't good enough (and that's just as true for the Ryan plan as it is for the Romney plan). When combined with state rates, the internationally-comparable rate is closer to 30 percent. That's a full five percentage points higher than the OECD average, and still higher than major trade partners Canada and the United Kingdom. We would barely be competitive with Mexico and Germany. We'd only have a leg up on France and Japan.
In order to have a rate reduction which both achieves international competitiveness and makes the base broadening exercise worth it, the federal rate has to come down at least to 20 percent.
Move from worldwide to territorial taxation. This is a great move. The U.S. is one of the only countries left in the world which seeks to tax the international income of its own companies. This makes us highly-uncompetitive. Romney wants to shift over to what the rest of the world does and tax U.S.-source income only (territoriality). Even President Obama's own jobs commission recommended this.
Taken together, a big improvement over the first version of the plan. The personal rate reduction, in particular, is a welcome addition.