Focusing and sharpening his economic policy yesterday, Mitt Romney released his comprehensive tax reform plan which substantially cuts marginal tax rates without falling prey to the deficits-don’t-matter syndrome which has come to typify many Republicans these days. Both supply-siders and budget hawks will applaud this new initiative. He manages a walk down the supply side spurring economic growth while honoring his inner deficit hawk.
“The right way forward is a flatter, fairer, simpler tax system that generates the revenue we need to fund a smaller government that is restrained to its historical size,” said Romney.
At the heart of Governor Romney’s tax plan are permanent, across-the-board 20 percent cuts in marginal tax rates while limiting deductions, exemptions and credits for higher income Americans to insure revenue-neutrality.
As reported by John Harwood for CNBC.com, Glenn Hubbard, Romney’s top economic advisor, said the plan would cut all six current tax brackets –10, 15, 25, 28, 33, and 35 percent (depending on the taxpayer’s income) — by the same proportion of 20 percent. This yields new brackets of 8, 12, 20, 22.4, 26.4, and 28 percent. “It’s a marginal rate cut for every American,” claims Hubbard. Hubbard, a former adviser to President George W. Bush, is now dean of Columbia University’s business school.
The Romney plan will also maintain the current 15 percent rate on income from qualified dividends and capital gains but will cut taxes further for lower- and middle-income citizens with annual incomes below $200,000. In addition, it abolishes the Death Tax, i.e., inheritance tax, and repeals the Alternative Minimum Tax (AMT) for both individuals as well as corporations.
The proposal also calls for reducing the current 35 percent corporate tax rate, one of the highest in the industrial world, to a very competitive 25 percent. It makes permanent the R&D tax credit as a spur to innovation for both manufacturing and non-manufacturing businesses.
Following the lead of Japan and the United Kingdom, Romney would also switch to a territorial tax system, just like most of Europe, restoring American competitiveness in the global market place and encouraging domestic investment of foreign profits. Again, Glenn Hubbard contrasts Romney’s plan, favorably, with President Obama’s “full-throttle attack on multinationals.”
Hubbard also took the opportunity to critique Senator Santorum’s tax plan, reports Harwood, for dramatically expanding the budget deficit and, given its differential or zero tax rate for manufacturing, results in “significant capital misallocation.”
“Net-net, it’s a job destroyer, not a job creator,” said Hubbard. This is a serious policy issue which should be developed further in the course of the campaign.
This supply-side tax proposal should also be viewed in tandem with Governor Romney’s plan to reduce federal spending to 20 percent of GDP by 2016, which he estimates will require $500 billion of non-defense cuts. This, according to Hubbard, is one of three different revenue streams that would keep this tax proposal revenue-neutral along with “dynamic” economic growth from its supply-side effects and additional income resulting from “base broadening” stemming from limiting deductions while lowering the marginal tax rates.
Full disclosure: This writer is a Romney supporter and, as a former fan of the late Congressman Jack Kemp, applauds this new tax proposal as both good politics and even better policy. The Governor is a very convincing budget hawk, but he was losing the initiative on growth and supply-side tax reform while Senator Santorum and Speaker Gingrich proposed pain-free tax cuts that were largely indifferent to their deficit consequences.
Mitt Romney’s supply-side tax cuts are reality-based in that they can be reconciled with fiscal responsibility, which is one thing the Tea Party has taught the Republican Party to take seriously once again.
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