It does not balance the federal budget but it does provide a middle class tax cut without cutting taxes for high income earners
Joe Wallace, Coachella Valley iHub
One of the biggest points of contention in both the Vice Presidential debates and the Presidential debates that degenerated into a ?your math doesn?t work? vs. ?oh yes it does? spitting contest had to do with an assertion made by Republican Mitt Romney regarding an across the board income tax cut.
Mr. Romney asserted that it was possible to cut the tax rates across the board by 20% and at the same time place a cap on deductions without giving a big tax break to people considered by the Obama campaign to be in the top 1% at the expense of the middle class. Romney did not share a specific cap that he would propose to place on deductions but has publically mentioned the numbers $17,000, $25,000, and $50,000 as possibilities.
In an attempt to settle the argument, satisfy my own curiosity, and to boil the question down to a simple IRS Form 1040 that most of us are familiar with, a new tax table was constructed for a Romney proposal. Currently the top tax rate of 35% kicks in for married filing jointly filers at an adjusted gross income of $379,000 where highly paid couples are required to contribute (that is the word used in the tax code) $102,574 plus 35% of the amount over $379,000.
With a Romney proposed cut in rates of 20% this couple?s ?contribution? would be $81,060 plus 28% of the amount of AGI over $379,000. On the surface that looks like a big tax cut for a couple making a combined salary of over 7 times the average household income which is now just over $50,000 per year or 10% below its high.
Limiting the amount of itemized deductions allowable will in most cases change that. In order to investigate what would have to happen for Mr. Romney?s claim to be possible a simple Excel spreadsheet was created with variable deduction limitations. A further assumption was made that the average high earning couple currently has a total of 25% of gross earned income in deductions.
A number of iterations were conducted and the magic number for the deduction limitation came out to be $49,357. That limitation guarantees that a couple with gross earnings of $500,000 or above with deductions of 25% of earnings with not ever pay less taxes that they would have paid under the current tax rules and rates. Furthermore those who earn above $500,000 per year pay more in income taxes that they would under the present system.
Couples with high earnings an deductions below the deduction limitation would get a tax break which seems in line with the intention of only limiting deductions that are actually used.
A couple earning $5 Million per year would see their taxes increase by 6.14% to $1,361,120 per year. In a rare and extreme instance where a couple earned $1 Billion they would see a tax increase of 6.8% to $279,961,120.
This analysis of course made no assumptions with regard to capital gains and only dealt with taxes levied on earned income which all Americans are subject to pay.
The conclusion with respect to the debate based pissing contest is that Romney is right. He can drop income tax rates 20% without redistributing money from the middle class to high wage earners.
A couple with an AGI of $50,000 under the Romney plan will see and income tax reduction of $1,500 based on the tax rate dropping from 15% to 12%.
Of course this does not balance the federal budget but it does simplify the tax code and go a long way toward leveling the playing field with respect to itemized deductions.
Source: http://city-countyobserver.com/2012/10/19/romneys-20-income-tax-cut-math-does-work-by-joe-wallace/
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