CA Republican

My political musings...

Tax Reform, Tax Cut, Tax Hike

Team Obama has been playing the “Romney will give the rich a tax cut” game for a while. Romney/Ryan explain the tax reform plan but its so much easier to throw out tax cut or tax hike rhetoric. So here is a simple example.

Lets assume Ms. 1% earns $100 and has deductions worth $20.

Lets assume she has a tax rate of 30%.

So today Ms. 1% pays ($100 - $20)* 30% = $24 in taxes

What Obama says Romney will do

Romney proposes a 20% across the board marginal tax cut as part of tax reform - so the 30% rate drops to 24%. But Obama only highlights the cut part not the tax reform part.

So based on this Obama says Ms. 1% will pay ($100 - $20)* 24% = $19.20 in taxes - LESS than the currently owed $24.

What Obama himself will do

He says he will raise the rate on Ms. 1% (who, by the way could be a small business owner running an S-Corp/LLC and therefore paying individual taxes).

Lets assume Obama raises the rate from 30% to 35% and so Ms. 1% pays ($100 - $20)* 35% = $28 in taxes - MORE than the currently owed $24.

What Romney will actually do

Romney will reduce the rate by 20% but eliminate deductions (i.e. close loopholes for the 1%). Ms. 1%’s rate drops from 30% to 24% BUT she also loses the $20 deduction.

Under tax reform Ms. 1% pays ($100 - $0)* 24% = $24 in taxes - EXACTLY THE SAME as the currently owed $24. In other words though her tax rate got cut the tax revenue collected by Government did not change.

Reducing marginal tax rates can spur economic growth (more investment) while also closing loopholes that complicate the tax code and allow for gaming of the system by powerful interest groups.

  1. amitnanda posted this
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