Romney's new cap on tax deductions would transfer wealth to the wealthy -- and hit the young where it hurts most
On Tuesday, Mitt Romney hinted at a key detail about his mysterious tax reform proposal. While he had previously suggested that he might eliminate some tax deductions or credits to pay for his proposal to reduce rates by one-fifth, yesterday he suggested that he would instead cap each taxpayer’s total deductions at $17,000. Some questions remain, such as whether he would include the exclusion for health insurance in the cap, whether it applies to single filers or married couples, or whether it would raise enough money to pay for his proposed cuts. (Probably not.) But assume that it’s a cap on the value of the biggest deductions, such as the mortgage interest deduction and the deduction for state and local taxes.
Because Romney would keep the preference for capital gains and dividend income and lower the top rate, any proposal to eliminate major deductions would in effect be, exactly as the Obama campaign has argued, a tax increase for the middle class to pay for a tax cut for the rich. A cap would work differently. Since it would impact only those whose deductions total more than $17,000, it would affect only the fairly well-off – those whose mortgage interest, state and local taxes, out-of-pocket health expenses, and other deductions exceed $17,000. As Suzy Khimm points out at Wonkblog, that will mostly be wealthy people in high-tax jurisdictions – but even the purchaser of a $450,000 house in Washington, DC would pay $18,000 in mortgage interest at the beginning.
Yet the Romney proposal as a whole, with capital gains still protected, would nonetheless redistribute income from the merely well-off to the very, very rich. To see what I mean, let’s look at Mitt Romney’s own tax return for 2011: Romney’s deductions total $4,519,140 – a lot of money. At his average tax rate of 14 percent, deductions saved him $632,679. A cap would take away all but about $2,000 of that $632,679.
But look at what the capital gains preference does for him: Romney took home $12,573,249 in capital gains in 2011. (I’ve left out dividends, just to keep it simple.) At 15 percent, that’s about $1,885,950 of his taxes. But if he paid the same rate as on ordinary income, 35 percent, he would pay about $4.4 million. So the capital gains preference saved him $2.5 million, while deductions saved him only about $632,000.
I’m just using Romney as an example here, partly because he’s a very rich person whose tax return I happen to have. But a well-off family, earning maybe $200,000 a year in ordinary income with a $600,000 house, is already paying a much higher rate than the Romneys of the world and would face a significant increase.
There’s one more thing about this proposal that hasn’t really been mentioned: It would be a giant intergenerational transfer from young to old. Just as Paul Ryan’s Medicare proposal creates a generational divide between those currently under 55 (who have spent much of their working lives in a stagnant economy) and those who are older and whose benefits would be protected, capping deductions has a similar generational effect. Why? Because younger people benefit disproportionately from the mortgage interest tax deduction and older people benefit from preferential rates on capital gains and dividends.
The mortgage interest deduction is worth much more in the early life of a mortgage, when most of each monthly payment is interest, than later, when it becomes mostly principal. And the deduction has no value for people who have paid off their homes or paid mostly in cash from the sale of an old home. Finally, older homeowners are more likely to have purchased before the real estate bubble of the 2000s. In a 2008 paper, the economists James Poterba and Todd Sinai examined the distribution of tax deductions by age and other categories. They found that homeowners between the ages of 25 and 35 got an average value from the mortgage interest deduction of $1,155, and homeowners between 35 and 50 got $1,598. But homeowners over 65 got only $149 on average from the deduction.
Who benefits from the preference for capital gains and dividends? Here’s a chart from Paul Caron’s TaxProf Blog:
As the chart indicates, taxpayers over 65 are twice as likely to have capital gains or dividend income than those 45-55, and those preferred sources of income make up much more of their income than for younger groups – six times as much in the case of dividends. The Romney tax plan would protect this advantage.
While many older Americans live under great economic stress and poverty, there is a significant portion of them who benefited greatly from the economic prosperity of the post-War era, who had significant economic gains from their early investments in housing and in the stock market in the 1970s and 1980s, and who also benefit from programs such as Medicare and Social Security that provide them significant economic security. The younger generation (by which I mean those under 55) has not had the same advantages, and both Ryan’s budget and Romney’s tax plan would make it worse for them while protecting the wealthiest of the older generation.
Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute. More Mark Schmitt.
More Related Stories
- Is the Environmental Defense Fund ruining environmentalism?
- Developers evict historic women's shelter to build luxury hotel
- 3 possible solutions to international tax avoidance
- David Vitter's hypocritical, punitive, horrible new amendment
- No women allowed: Summer music festivals are dudefests, again
- Democrats may be even worse than Republicans at regulating Wall Street
- There's no substitute for government disaster relief
- Billionaire hedge funder: Babies, breast-feeding "kill" focus, keep women from succeeding
- "Bookless library" set to open in Texas
- Greek yogurt, toxic waste hazard?
- Incoming BBC news director on journalism gender gap: "We can do better"
- Illegal construction, shoddy materials at fault in Bangladesh factory disaster
- Destroying the planet for record profits
- Lawsuit alleges anti-gay hiring practices at ExxonMobil
- The Maker kids are alright
- Portland's senseless war on fluoride
- Is Pittsburgh the next Portland?
- "Original Coca-Cola had a very small amount of cocaine"
- Justin Bieber will destroy you if you live-tweet his parties
- Corporations accused of wrongdoing win battle to keep identities secret
- Wall Street firm's "Golden Pitchbook" is totally sexist, full of lies
Featured Slide Shows
The week in 10 picsclose X
- 1 of 11
Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
Credit: AP/LM Otero
Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
Credit: AP/Matt Rourke
A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
Credit: AP/Jenny Aicher
Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
Credit: AP/Molly Riley
Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
Credit: AP/J. Scott Applewhite
Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
Credit: AP/Carolyn Kaster
O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
Credit: AP/Las Vegas Review-Journal/Jeff Scheid
Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
Credit: AP/NASA/Chris Hadfield
When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
Credit: AP/Jacquelyn Martin
A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
Credit: AP/The Duluth News-Tribune/Clint Austin
Recent Slide Shows
- 1 of 11