How The Model Tax Plan Romney Cited Could Raise One Middle-Class Woman’s Taxes By $6,000

Our guest blogger is Seth Hanlon, Director of Fiscal Reform at the Center for American Progress Action Fund.

Throughout the campaign, Mitt Romney has refused to give details when asked how he plans to pay for his nearly $4.8 trillion in tax cuts. In Tuesday night’s debate, audience member Mary Follano asked Romney how his plan could affect her personal taxes. She specifically asked how his plan would affect tax benefits like education credits, which she said are “important to me because I have children in college.”

Romney didn’t answer her question, offering only a vague proposal on limiting certain deductions that wouldn’t come close to paying for his total tax plan. But on Thursday, to bolster its claims that a “Romney-style tax plan” could be made to add up, the Romney campaign pointed to a tax plan presented in a 2006 report from Congress’s Joint Committee on Taxation (JCT). As ThinkProgress reported earlier, the tax plan Romney is holding up as a model would eliminate nearly all middle-class tax breaks:

Under the proposal, all personal exemptions, itemized deductions, personal credits except for the earned income credit, and all above-the-line adjustments to income except for retirement savings deductions and the deduction for self employment taxes would be repealed. The largest categories of deductions repealed are present-law deductions for home mortgage interest expenses, State and local taxes, and charitable contributions. In addition, the exclusions for certain employee fringe benefits, such as employer contributions for health and life insurance, would be repealed. The standard deduction would remain.

As the study found, such a plan would cause a “redistribution of individual income tax liability from high wage earners to low wage earners.” In other words, according to former congressional tax counsel John Buckley, it “would reduce taxes on high income individuals and finance that tax reduction by increasing taxes on everyone else.”

Let’s look at how such a plan could affect middle-class taxpayers in finer detail. Consider Ms. Follano — the woman who asked Romney for specific answers on his tax plan. We don’t know enough about Follano to calculate her taxes with precision, but we can use what we do know about her to gauge the potential impact of the “Romney-style tax plan” on someone in her shoes.

We assume her income is $70,000 — the average wage for her occupation on Long Island.* Right now, she is benefitting from various tax exclusions, deductions, and credits. For example, if she gets health insurance through her job, that could be worth more than $5,000,** but it is not taxed.

Follano said she has kids in college. So assuming she has two college kids, she would probably be allowed to claim personal exemptions for them — and under President Obama’s American Opportunity Tax Credit, she’d be able to claim up to $2,500 in tuition tax credits per student. Middle-class taxpayers may also claim “itemized deductions” like the mortgage interest deduction and the charitable deduction — but for present purposes we’ll just assume that she takes the standard deduction. Given these assumptions, a person similar to Follano would pay about $4,000 in federal income taxes this year. (The tax computations are below.)

Under the “Romney-style” plan, however, she’d pay much more. The loss of all of these tax benefits would overwhelm any savings from lower rates. For starters, her $5,220 in health benefits would be included in her income. She would lose all three of her personal exemptions (totaling $11,400). She’d still be allowed the standard deduction, but she’d lose the tax credits that she can now claim for her kids’ tuition, costing her $2,500 per student. She would be paying 23 percent lower rates on her taxable income, but that doesn’t come close to making up for the tax benefits that she’s lost.

The bottom line: She’d pay more than $10,000 under Romney’s model plan — about $6,000 more than she does now and about $6,000 more than she would pay under President Obama’s plan.

This is just one example of how such a plan would raise middle-class taxes, and every taxpayer would be different. As the JCT study finds, however, the middle-class as a whole would be big losers in a “Romney-style tax plan.” To be sure, Romney has not said this is his plan. But given that he hasn’t said what his plan is, it’s the best that voters have to go on.

Calculations

* Ms. Follano is a respiratory therapist. The median income for respiratory therapists on Long Island was $69,450 in 2011 according to the Bureau of Labor statistics.

** The average premium for a single plan in New York was $5,220 in 2010.

Tax computation under current rules (single filer, 2012 tax year):
Adjusted Gross Income: $69,450
less Exemptions (3): $11,400
less standard deduction: $5,950
equals Taxable Income: $52,100
Tax before credits under current rates: $9,055
less max. tuition tax credits for two students: $5,000
Tax liability: $4,055

Tax computation under “Romney-style tax plan” (2006 JCT plan) (single filer, 2012 tax year):
Adjusted Gross Income: $74,670
less personal exemptions: none
less standard deduction: $5,950
equals Taxable Income: $68,720
Tax before credits under 23% lower rates: $10,109
less tuition tax credits: none
Tax liability: $10,109

Tax increase from Romney-style plan: $6,054