The detailed tax plans from Republican presidential candidates would provide tax cuts for the highest earners with those from Rick Perry and Jon Huntsman offering the biggest benefits. Mitt Romney’s proposal, which suggests fewer changes, would benefit middle-and lower-income families more than his rivals’ would.
On the surface, the 9-9-9 tax plan of Herman Cain would lead to the biggest tax cuts at the top of the income scale and the largest tax increases at the bottom. Analyzing the Cain plan is difficult because he also eliminates the payroll tax and imposes a 9 percent business tax and a 9 percent national sales tax, both of which tax consumption rather than income.
For families between the extremes, the differences separating the candidates’ tax positions are less dramatic and depend more on the circumstances of individual households. For example, Perry’s flat 20 percent tax could mean higher taxes for upper-income families who would pay a marginal rate of 14 percent under Huntsman, though the Texas governor would continue the mortgage interest deduction.
“These plans won’t just affect the rich,” said Kathy Pickering, executive director of the Tax Institute, the research and analysis arm of H&R Block Inc.. “They’re going to have a direct effect on the bottom lines of every American.”
The findings stem from an analysis of the candidates’ plans conducted by The Tax Institute, based on scenarios affecting four families at multiple income levels suggested by Bloomberg News. It examined the tax plans of President Barack Obama and four Republican candidates with the most detailed tax proposals: Cain, Perry, Romney and Huntsman.
Unlike the proposals of his potential Republican rivals, Obama’s plan would raise taxes for the wealthy family in the study and would prevent tax increases for the other three households.
The study’s results are shaped by the lack of specificity in the candidates’ proposals and by assumptions about the families. The households were all designed as families of four, with a married couple filing jointly who have a child in college and a child in grade school.
Also, because the analysis examines only federal income tax payments and refunds, it doesn’t consider how corporate and payroll taxes affect families, and it doesn’t account for benefits that the families would receive from the government. It also doesn’t address state and local taxes or any macroeconomic benefits from changes in the tax code.
Correct but Incomplete
“It is correct but incomplete,” said Douglas Holtz-Eakin, who was the economic adviser to Republican Senator John McCain’s 2008 presidential campaign.
The wealthy family in the study earns $1 million a year, and, like many in the top tax bracket, it receives a sizable share of that money -- $237,500 -- in capital gains and dividends subject to lower tax rates. It has no mortgage interest because the family’s home is paid off, and takes $155,000 in itemized deductions for state and local taxes and charitable contributions.
If the current tax system were extended beyond the scheduled expiration of income tax cuts in 2012, the family would pay $248,025 in federal income taxes. That includes taxes on the investment income of high earners included in the 2010 health-care law that are scheduled to take effect in 2013.
Top Tax Rate
The extent of the Republican candidates’ tax cuts for the wealthy family depends on how they may adjust the top income tax rate and especially on how they tax investment income.
“Whatever you do to dividends and capital gains, they benefit or get hurt in spades,” said Roberton Williams, senior fellow at the Tax Policy Center, a nonpartisan research group in Washington. “The ones that exempt investment income all benefit the rich enormously.”
Among the Republican presidential candidates, former Massachusetts Governor Romney’s plan provides the smallest tax cut of $16,400 to this family, because he would repeal taxes from the health-care law while keeping the top rate at 35 percent and the capital gains rate at 15 percent for high earners.
Texas Governor Perry’s 20 percent flat tax would exempt capital gains and dividends. The wealthy family would lose its deductions, though it would receive a 39.8 percent tax cut and pay $149,300. Businessman Cain’s 9 percent income tax would offer a deeper cut, dropping the family’s income tax to $63,810.
Under former Utah Governor Huntsman’s plan, the decline in the top rate to 23 percent would more than outweigh the loss of all deductions and credits, and the family would pay $144,525.
In an interview with Al Hunt on Bloomberg Television yesterday, Huntsman defended his plan and the way it would cut taxes for top earners and raise some taxes for low-income workers.
“Rates come down and it is based on the premise that this country needs to grow,” he said. “You got to start with a proposal that will stand the test of scrutiny in Congress. And I believe mine can.”
The tax plan of former House Speaker Newt Gingrich, which features a 15 percent top rate, would provide a benefit for this family similar to the one proposed by Perry.
The upper-income family in the study has a small business, which means that the company’s profits are reported on the family’s tax return. In this case, the total adjusted gross income is $200,000 a year, and the family earns $30,000 in capital gains and dividends subject to preferential rates.
In this income range, tax breaks such as the mortgage interest deduction tend to matter more, meaning that the results can vary widely across family structures, Williams said.
“The empty nesters who don’t have a mortgage any more, they’re in a very different situation than the 30-somethings with three kids, who are trying to save for retirement, trying to pay off a mortgage, trying to save for their kids’ education,” he said.
The sample upper-income family paid $12,000 in mortgage interest, had $10,000 in charitable contributions and paid $29,000 in state and local taxes.
If Congress extends the expiring tax cuts, this family would pay $25,443 in federal income taxes. That tax burden plummets under the Cain and Huntsman plans that offer lower marginal rates and exempt investment income. In Huntsman’s proposal, this family would receive a 40.8 percent tax cut and pay $15,064 in federal taxes, even without itemized deductions.
Romney’s plan to exempt investment income from capital gains taxes for families with adjusted gross income of less than $200,000 would lead to a tax cut for this family of $8,920, or 35 percent.
If the value of the business grows over the next few decades, the owners would benefit from most of the candidates’ plans to repeal the estate tax. Ron Paul, for example, proposes ending the estate tax and eliminating taxes on savings.
Unlike the upper-income and wealthy families, the sample middle-income family can’t take full advantage of the tax code’s incentives for retirement savings because it spends a greater percentage of its income each year.
This family earns $100,000, puts $2,000 aside in an individual retirement account and receives $2,000 in capital gains. Like most U.S. households, it takes the standard deduction, because its mortgage interest, charitable contributions and state and local taxes total $10,000, below the current standard deduction of $11,600 for married couples.
The tax code’s benefits to this family are credits for child care and education, and the candidates’ plans that limit or end these benefits tend to increase this household’s tax liability.
Eyes Off Ball
“One of these things that these proposals are doing is playing off the prominence of the top rate and sort of taking people’s eyes off the ball, which is how much tax you pay,” said Lawrence Zelenak, a tax law professor at Duke University in Durham, North Carolina.
If current tax policy were extended, the middle-income family would pay $6,535 in federal income taxes.
Under the Cain and Perry plans, the family would face tax increases, with Cain charging $8,910 and Perry imposing an $8,200 tax.
Cain’s 9-9-9 plan would shift the U.S. from an income tax system and toward a consumption tax system. The analysis for all families considers only the income tax changes under Cain’s plan. The business tax, the sales tax and the elimination of the payroll tax would have disparate effects on the families and on wages and prices.
Under Romney’s and Huntsman’s plans, this family would receive a tax cut. Romney’s plan to exempt investment income for most households would result in a $300 tax cut, and Huntsman’s lower rates produce an $851 tax cut. The effects of Romney’s plan could change depending on how he addresses tax credits for education that were expanded in the 2009 stimulus law and are slated to expire at the end of 2012.
Like almost half of U.S. households, the low-income family in the study pays no federal income taxes. Instead, it receives a refund of $2,383 under the current code because of the earned income tax credit, education credits and the child tax credit.
This family earns $30,000 a year in wages plus another $10,000 in disability pay from Social Security, most of which isn’t taxed.
The family’s future tax bills will turn on how the candidates would treat these refundable credits. Proposals that eliminate those features of the code could cause these families to lose their refunds, and instead pay no tax or some tax.
“To the extent those are lessened or taken away, it’s debatable whether you call it a tax increase,” Zelenak said. “It’s nevertheless harming them in the bottom line and they need to look out for that.”
For example, the $12,500 per-person exemption in Perry’s flat-tax plan would prevent a low-income family from paying income taxes. Because Perry eliminates refundable credits, this family would take advantage of the option his plan provides to file under the current system. Even if the Bush-era tax cuts expire, the family would receive an $862 refund.
“It looks initially that that should simplify things,” Pickering said. “In the onset, it will double the work before it actually simplifies anything.”
Cain has proposed eliminating the income tax for a family of four below the poverty line, which is now $22,350. Because this family exceeds the poverty line, its income tax bill would be $2,655. If Cain exempted all income below the poverty line, that bill would change to $644.
What is difficult to determine with as much precision is how Cain’s national sales tax and proposed business tax, which doesn’t allow a deduction for wages, would affect this family.
“It’s a campaign platform without really being a true tax policy plan,” Pickering said. “There’s so many things that we don’t really know how to make the assumptions about.”
In contrast with the Republican plans, Obama would focus much of his tax policy on raising taxes for the highest earners. He proposes to increase the top marginal rate to 39.6 percent, keep taxes from the health-care law, cap deductions at 28 percent and allow the top capital gains rate to rise to 20 percent.
For the wealthy family, those proposals combine for a 22 percent tax increase and a total tax bill of $302,947, or more than twice what Cain, Perry or Huntsman is proposing.
For the other three families in the study, Obama would continue current tax policy and leave their tax bills unchanged.