Romney's tax plan: a comparison

I am the primary breadwinner of a middle class family. We live in a comfortable home in a nice neighborhood, and we paid for that home with a mortgage. We have two vehicles that each have over 100,000 miles on them. My wife works part time to supplement the household income.

Let's say I have a friend who is also the primary breadwinner of what on the surface most would assume is a middle class family. He lives in a nice house in a nice neighborhood, but he does not have a mortgage. The vehicles he and his wife drive are similar to ours. Neither he nor his wife has to work because they have amassed a fortune in the multiple millions of dollars and therefore have more than enough money to live on for several lifetimes.

Just for fun, let's examine how the Romney tax plan would affect each of us.

1. Across the board reduction in tax rates by 20%.

Impact on me: I would save at best a few thousand dollars a year, only because my income is above the median household income in the US. Those closer to the median would see little if any benefit.

Impact on my hypothetical friend: saving a lot more than a few thousand dollars a year.

2. Maintain current tax rates on interest, dividends, and capital gains.

Impact on me: none. I don't exactly make a lot in interest or capital gains.

Impact on my hypothetical friend: none, until you factor in item 3.

3. Eliminate taxes for taxpayers with Adjusted Gross Income below $200,000 a year on interest, dividends, and capital gains.

Impact on me: none, per comment on 2.

Impact on my hypothetical friend: depending on how he manages his portfolio, he could quite easily eliminate all tax liability. Since he has no income from wages and can live on less than $200,000 a year, he could buy and hold securities or sell losers to offset enough of his capital gains such that his AGI never gets above $200,000 a year. Since all his income comes from interest, dividends, and capital gains, despite his significant net worth, he may pay zero dollars in income tax.

4. Eliminate estate tax.

Assuming we were both to die under the Romney plan, Impact on me would be zero, since I'm not worth enough that it matters.

Impact on my hypothetical friend would potentially be significant, though I'm sure he has already reduced the potential for estate taxes through careful planning.

5. Repeal the Alternative Minimum Tax.

Impact on me: none.

Impact on my hypothetical friend: it would keep him from having to pay taxes even though he would have otherwise escaped liability through management of his interest, dividends, and capital gains. The AMT would prevent the situation from arising in #3 where someone of significant means has avoided tax liability. Repealing it would allow a lot of wealthy people to avoid more tax than they do already.

Closing comments: lest anyone think that putting more money in my hypothetical friend's pocket will lead to more jobs, let me disabuse you of that notion right away: it won't. He has made his money but isn't looking to start or grow a new business. He's content to just manage his portfolio. Anything less he pays in taxes will just result in a larger number on the statements that his brokerage firm sends each quarter.

Since there is no such thing as a free lunch, the revenue the government would lose by eliminating my hypothetical friend's tax liability would have to be made up for somewhere else, either by raising my taxes (perhaps eliminating the mortgage interest deduction, which would cost me more than a 20% marginal rate reduction saves me) or by cutting programs, perhaps the programs that helped me get through school and become a contributor to the economy in the first place.

Don't let Romney's naked assertions that he knows how the economy works and that you should trust him to solve the problems fool you. He's solving problems alright, he's solving the problem of having to pay taxes for people who are already wealthy. He does nothing to help the working middle class.