Romney and Schumer Talk Taxes

By Children’s Home Society of Florida Foundation

Members of both parties made speeches on this past October 9th that focused attention on taxes. While there undoubtedly will be discussion of tax provisions in the upcoming November congressional session, the focus of the two speeches this week by Presidential Nominee Mitt Romney and Sen. Chuck Schumer (D-NY) was potential major tax reform in 2013.

Mitt Romney’s Tax Plan

Mr. Romney explained his principal proposal on taxes to reduce the top rate from 35% to 28%. Because the goal is for the plan to be “tax neutral,” the total revenue to be raised should not change from the current amount. The Romney proposal intends to limit itemized deductions to produce a lower top rate and maintain the existing level of tax revenue.

The major itemized deductions are for state and local taxes, home mortgage interest, health insurance and charitable giving. Mr. Romney suggested that a cap of $17,000 on itemized deductions could be one acceptable option.

On a national media news program, Romney was asked whether he would consider reducing the charitable deduction and the home mortgage deduction. He stated, “I can tell you, with regards to the deductions you described – home mortgage interest deduction and charitable contributions – there will, of course, continue to be preferences for those types of expenses.”

In subsequent discussions with news media, aides to the Romney campaign indicated that the cap on deductions could be negotiated to a higher level such as $25,000 or $50,000. All of the final provisions of a tax bill would be subject to negotiation with both parties in Congress.

Romney campaign aides also mentioned other potential options. There could be a percentage cap on itemized deductions similar to the percentage limits for charitable deductions. Another option would be a conversion of some of the itemized deductions to credits.

During the Vice-Presidential debate on October 11, nominee Paul Ryan (R-WI) stated that the tax rate reduction from 35% to 28% could be accomplished without increasing middle-class taxes. He stated that the current levels of taxes paid by upper-income and middle-income Americans could be retained. Vice President Joseph Biden did not agree with this statement and suggested that the current progressivity of the tax system would suffer under the Romney proposal.

Senator Schumer’s Tax Plan

Senator Chuck Schumer (D-NY) spoke on October 9 and discussed in detail both personal and corporate tax reform.

Schumer stated that the tax reform would be quite different from the last comprehensive tax bill in 1986. That bill was negotiated by House Ways and Means Chair Dan Rostenkowski (D-IL), Speaker of the House Tip O’Neill (D-MA) and President Ronald Reagan. Schumer noted, “Our needs today are different compared to 1986, and we cannot take the same approach we did then.”

He observed that the 1986 bill was revenue neutral. However, because the current national debt is “approximately 73% of GDP” and approximately double the debt level of 1986, Schumer indicated that any tax reform must also lead to higher revenues.

Three Legs

The Schumer plan would start with corporate tax reform. This would be revenue neutral. The rate would be reduced from the current 35% by limiting depreciation and other corporate deductions. A lower overall corporate rate is essential in competing with other nations. All other industrialized nations now have lower corporate rates than the United States. Schumer believes that a lower corporate rate will assist in job creation.

Schumer then discussed three options for personal income tax reform.

1. First, he reviewed the proposals such as a reduction to a 25% top rate accompanied by very limited itemized deductions. He noted that the Joint Economic Committee, a nonpartisan group that assists Congress, estimates that this plan would lead to a tax increase for many taxpayers. Couples with incomes over $100,000 would pay $2,681 in higher taxes.

2. Second, the Simpson-Bowles plan from the Bipartisan Debt Commission appointed by President Obama suggested reducing the top rate to 28% through changing many of the deductions to credits. This plan would also involve a tax increase for couples with incomes over $100,000 in the amount of $1,000.

3. Schumer then explored his third approach. He suggested that it is important to protect some tax expenditures, such as those for college education, retirement savings, mortgage interest, charitable deductions, and state and local tax deductions.

In order to protect these tax expenditures, Schumer proposed increasing the top rate to 39.6%. He points to a Congressional Research Service report that states tax cuts “do not appear correlated with economic growth.” If that report is correct, Schumer claims that increasing the rates on upper-income persons will not harm the economy.

A major part of the solution in the view of Schumer is to increase the tax rate on capital gains. A substantial portion of the benefit of the 15% rate on long term capital gains accrues to upper-income persons. Schumer indicates that the capital gain rate should not increase to 39.6%, but should be substantially above the present 15%.

In summary, the Schumer solution involves three elements:

1. Reduce tax expenditures by limiting itemized deductions.
2. Increase the top rate to the 39.6% that existed under President Clinton.
3. Increase the long term capital gain tax rate.

Schumer suggests that a “grand bargain” is possible between the two parties. It would include the higher taxes suggested under his plan together with the entitlement reforms that have been proposed by the other party.

Editor’s Note: Your editor and this organization take no position on the Romney and Schumer tax proposals. It is now probable that there will be a major effort towards tax reform in 2013. While there will be discussion of taxes during the November session, the majority of tax changes are likely to be passed by Congress in 2013.

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Filed under: Taxation | Tagged: Chuck Schumer, Mitt Romney, tax reform 2013, taxes | 2 Comments »