Comparison of Obama and Romney Tax Plans

Posted by Jeff Carter
on October 7th, 2012

There is a lot of disinformation out there on the two tax plans. It’s very tough to make a soundbite statement and delineate exactly what you mean no matter which candidate makes it. However, there are some certainties to tax codes.

Taxes are disincentives. If you don’t want something, tax it. It’s the reason we have sin taxes. Progressive income tax codes are not there to create opportunity, or create the desire for someone to make more money. The enforce normative “fairness” economic concepts which are unproductive when it comes to society. As a person goes up the income scale, each marginal dollar of income costs more to produce under progressive systems.

You may not realize it, but the actual rate of taxes you pay isn’t the headline rate. The 39.5% Obama wants the top rate to go to isn’t the rate on all dollars earned. It’s only the dollars after a certain level. That’s how the cost to each new dollar earned goes up. It also means that if I make $199,000, I might quit working so I don’t go over the $200k threshold. It just depends on the effort and risk I have to exert to make that extra dollar. The rich pay the same amount in tax on the first dollars they earn as the person that only earns that level of income.

For example, if my net income after deductions is $388,500 under the new Obama plan, I won’t pay $153,457 in taxes. I’ll pay closer to $1000+3,998+12,575+26040+7,045+67,806+.396*every dollar made over $388,500. The total is $118,464 or a blended rate of 30%. That excludes things like Medicare taxes and self employment taxes which add to the burden. It doesn’t include income from dividends or short/long term capital gains. It’s just ordinary income. I will be the first to admit it’s a crude assumption but I hope you get the point.

What also is interesting is how Obama segments it. The 33% tax bracket is pretty tight, with only a $21,500 spread. The two tax brackets around it have a spread of $93,000 and $188,350 respectively. Why do you suppose? Because if you look at income breakdowns around the country, most people make under 85k per year. He is segmenting voters and creating class warfare with the tax code. He is also severely penalizing people that make $188,351 or more.

Because the rich are engaged in jobs that can have irregular income streams, they can avoid taxes or plan ahead for taxes. Lawyers, traders, consultants, hedge fund managers and other independent contractors have that ability. They can use loopholes in the tax code to recognize revenue differently, match up expenses differently to pay less tax depending on how the code applies to them. Romney wants to lower tax rates, but end those loopholes so they actually wind up paying more per dollar earned. However, because the rate is lower, the incentive to earn more is stronger. Obama isn’t closing loopholes. He is just increasing rates. His cronies, like Warren Buffett, will still be able to pay a low marginal rate while their secretaries pay more.

Thousands of small businesses file income taxes on the same personal rate schedule that individuals do, and they are going to get trapped by the Obama plan. That’s the essence of why the Obama plan is job killing, economic growth killing and destroys incentives for businesses to employ new employees. The risk/reward/effort trade off for them to grow just isn’t worth the cost of trying to earn the extra money. If they are close to the line, they may scale back operations to stay under it.

The Romney plan is different. Under his plan, less tax is paid. However, loopholes are closed and avoiding income is a lot more difficult. So headline marginal rates will be closer to the rates you actually pay. But, and this is very important, because the marginal rates are lower, the incentive to produce and make more income is greater under the Romney plan than the Obama plan. The Romney plan will incentivize economic growth. More growth equals more jobs. More jobs equals less government transfer payments to people, and more revenue into the government system. Combine that with a massive cut in spending and it’s how a budget crisis is solved.

Neither plan is economically perfect. But, the Romney view on taxes is more productive for the country than the Obama view. The best way to tax is to have a 0% tax on capital gains, and corporations. Plus, have a flat tax rate on individuals of 15-20%, with no deductions. Shrink the size and scope of government tremendously so it performs bare bones services. By the way, taxes on capital reduce production and efficiency, and no corporation actually pays taxes. They simply pass it on to their customers. It’s a cost of doing business, but that is an argument for another day.

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