Romney, Obama, & Simpson-Bowles: Comparing the Tax Plans

September 06, 2012

Reform Target Should be Simple Code that Treats All Taxpayers Equally

Washington, DC, September 6, 2012—Among the tax reform plans of the major presidential candidates, Mitt Romney’s proposal to lower rates and eliminate credits and deductions comes far closer than that of President Obama to the widely-praised and bipartisan framework of the Simpson-Bowles tax reform commission, according to a new analysis from the Tax Foundation.

The National Commission on Fiscal Responsibility and Reform, co-chaired by Alan Simpson and Erskine Bowles, was established by President Obama in 2010 as a bipartisan effort to rein in the national debt. The Commission’s final report included recommendations for dramatic reform, including eliminating tax expenditures across the board and cutting the top marginal tax rate to as low as 23%, down from President Obama’s favored top rate of almost 40%.

“Politics is the art of the possible and Simpson-Bowles shows us what was almost possible in 2010,” said Tax Foundation Chief Economist William McBride. “On the plus side, Simpson-Bowles shows us how significant revenue can be raised by lowering tax rates and eliminating tax expenditures. However, its major failing is that it raises taxes on investment, which would raise no additional revenue and only exacerbate the current anti-saving, anti-investing bias in the tax code.”

Mitt Romney’s plan aims for a Simpson-Bowles style reform, with lower rates and fewer tax expenditures, but without additional penalties on saving and investing. The top rate on personal income would be 28% and the bottom rate would be 8%, making the rate structure more progressive than under Simpson-Bowles. In terms of tax expenditures and simplification, Romney has said he would target credits and deductions for “people at the high end” while preserving some preferences targeted at the middle-class such as deductions for mortgage interest and charitable giving.

President Obama’s tax plan, however, is largely at odds with any commonly held notion of tax reform, including Simpson-Bowles. It would result in dramatically higher tax rates, on the order of 50% to 90% higher than the Simpson-Bowles rates on personal income and investment income. While the president has voiced support for eliminating tax expenditures, his specific proposals tend to add more than are taken away, although he has proposed limiting them for high-income earners. Not only does this fail to simplify the tax code, it fails to spur the economy, ultimately resulting in insufficient tax revenue and perpetual deficits.

Real tax reform would produce a tax code that is simple and treats all taxpayers equally. It would also treat all consumption equally, whether that consumption occurs now or, as a result of saving, later. This would best be accomplished by lowering tax rates on saving and investment to match the current zero tax rate on consumption.

Tax Foundation Fiscal Fact No. 327, “Romney, Obama, & Simpson-Bowles: How Do the Tax Reform Plans Stack Up?” by William McBride, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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