Mitt Romney's Pig in a Poke Tax Plan, Or Why Surrender Our Tax Deductions without a Fight?

Mitt Romney's tax plan is the centerpiece of his promise to create 12 million new jobs. He expects 7 million of those jobs to come from the benefits of the tax plan alone. So what's in that tax plan? It's a bit of a pig in the poke. He's got a sack, he says there is a delicious pig in it, but we can really only see the outline of the pig against the sack. It could just as easily be a cat.

On the individual tax side, here are the highlights to Mitt Romney's tax plan:

Make permanent, across-the-board 20 percent cut in marginal rates - The top tax rate would come down from 35% to 28%, but there's a catch - some taxpayers will have to give up tax deductions they currently get.

Maintain current tax rates on interest, dividends, and capital gains - This maintains the current 15% top rate, but due to the next provision that only applies to people who earn more than $200,000.

Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains - That means, for example, that someone with $10,000,000 could park it in U.S. Treasury debt, collect a $200,000 annual check from the federal government at current 2% interest rates, and pay $0 in federal income tax. Talk about expanding the 47%!

Eliminate the Death Tax - At Mitt Romney's $250,000,000 estimated net worth, this could save the five Romney sons up to $83,958,000 at current exemptions and rates or $137,154,200 at pre-Bush tax cut exemptions and rates scheduled to go back into effect in 2013. No wonder they are out campaigning for mom and dad.

Repeal the Alternative Minimum Tax (AMT) - You probably don't know about AMT tax if you don't have to pay it, but it's a 28% flat tax on a broader definition of ordinary income above certain thresholds. As we will see, Mitt Romney is not so much eliminating the much-hated AMT but folding it into the regular income tax. Won't that be fun for everyone.

Actually, that's not merely the highlights, that's the whole plan - the part in bold, I'm the one who filled in the few details and commentary. There is also a separate outline of a 4 point plan to reduce corporate taxes.

Now, this may not be a bad plan, my taxes would go down, at first appearance. Who can argue with lower taxes? Who can begrudge the Romney boys their full inheritance? But let's look a little more closely at something Mitt Romney has said about his tax plan in the first debate:

"We ought to bring the tax rates down, and I do, both for corporations and for individuals. But in order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions so that we keep taking in the same money when you also account for growth."

I have listened to enough politicians to wonder, is this a stealth tax increase? Not lose revenue and keep taking in the same money sound to me like we end up paying in more taxes than we did before. That's how Mitt Romney summed it up himself:

"Get the rates down, lower deductions and exemptions to create more jobs, because there's nothing better for getting us to a balanced budget than having more people working, earning more money, paying more taxes. That's by far the most effective and efficient way to get this budget balanced."

Romney is even on record as saying that there would be no tax cut at all:

"And finally, with regards to that tax cut, look, I'm not looking to cut massive taxes and to reduce the revenues going to the government. My number one principle is there'll be no tax cut that adds to the deficit. I want to underline that — no tax cut that adds to the deficit."

Of course, President Obama has been going around until recently telling everyone Mitt Romney's plan is a $5 trillion tax cut. But of course you can't cut $5 trillion out of the tax revenue stream and remain revenue neutral. Barack Obama may be unwittingly helping to sell a stealth tax increase.

So what sort of deductions are we talking about losing? The two that have been most talked about are the charitable deduction and home mortgage interest deduction. However, Mitt Romney has never spelled out exactly what he has in mind to take away.

In fact, what he did list in the first debate was "deductions and credits and exemptions." That could include all of the following types of items:

(1) Charitable contributions
(2) Mortgage interest
(3) Personal exemptions
(4) Standard deduction
(5) State or local income taxes
(6) State or local property taxes
(7) Foreign taxes
(8) Interest on state or municipal bonds that is currently tax-exempt
(9) Miscellaneous itemized deductions over 2% of AGI
(10) Medical expenses not covered by insurance over 7% of AGU
(11) Health insurance contributions by you or your employer
(12) IRA, 401(k), and pension contributions by you or your employer
(13) Social security benefits
(14) Educator expenses
(15) Student loan interest deduction
(16) Tuition and fees
(17) Moving expenses
(18) Business travel expenses
(19) Depreciation on business assets
(20) Section 179 expense election for purchase of business assets
(21) Percentage depletion and intangible drilling costs
(22) Domestic product activities deduction
(23) Spread on incentive stock options
(24) Child dependent care expense credits
(25) Child tax credits
(26) Residential home energy credits
(27) Education credits
(28) First-time home buyer credits
(29) General business tax credits
(30) Ethanol and other biofuel tax credits

You see, once you start talking about adding deductions, credits and exemptions to taxable income, that could bring in a lot of items that are not subject to income tax now. You can pay a 20% lower tax rate on a 25% higher taxable income and end up writing the same check at the end of year to the IRS. If your taxable income is raised by more than 25%, you've just been hit with a tax increase.

I don't know exactly which items Mitt Romney means to add to the income tax base, he may not even know himself, intending to negotiate that with Congress when the time comes, but he absolutely means to add enough to offset the 20% tax rate cut. He said it, as clear as day.

Under the Romney tax plan, your taxable income goes up, but not your actual income, that's the insidious nature of taking away deductions, credits, and exemptions - $5 trillion worth according to Barack Obama. Mitt Romney hasn't given a number but it has to be a big one.

Is there a Republican constituency for the Romney tax plan, even if it is a stealth tax increase? Of course there is. "Elect our guy President and we'll cover the deficits," is a pretty simple political transaction. And then hope to make this tax change back on economic growth. Yes, this is another brand of hope and change.

Also, this change moves in the direction of a flat tax, long a goal in Republican Presidential politics from Steve Forbes to Herman Cain's 9-9-9 plan. A big problem is how the country would transition from the current progressive tax rates to the flat tax. Mitt Romney's plan, with its deceptively simple complexity, is essentially a transition plan.

We have long had a flat tax here in liberal Massachusetts. It's 5.3% against some exemptions and very few deductions (12% on certain capital gains). I will tell you that not having the usual deductions, credits, and exemptions is brutal. However, the Massachusetts state constitution does have some protections:

"Article XLIV. Full power and authority are hereby given and granted to the general court to impose and levy a tax on income in the manner hereinafter provided. Such tax may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property. The general court may tax income not derived from property at a lower rate than income derived from property, and may grant reasonable exemptions and abatements."

Income from labor can be taxed at a lesser rate than income from property under the Massachusetts state constitution. Curiously, the opposite is true under Mitt Romney's tax plan. It's hard to see how taxing work more than investments creates jobs.

Another protection is the ballot question process. In 2000 a ballot question passed 59% to 41% to reduce the tax rate from 5.95% to 5.6% in 2001, 5.3% in 2002, and 5% in 2003 and thereafter. When the legislature refused to let the tax rate go below 5.3%, a question was put on the 2002 ballot to repeal the tax outright, which was defeated by only 55% to 45%. A 2008 ballot question to repeal the tax was defeated by 70% to 30%.

The Massachusetts flat tax allows direct negotiation at the ballot box between the taxpaying-public and the legislature, and the public has shown that it will exercise its rights to rein in the legislature responsibly.

That brings us back to the Romney tax plan. The flat taxers will be glad to give up their deductions, credits, and exemptions, but should the rest of us surrender without a fight?

Mitt Romney tries to make it easy for voters to say yes. Here's how he explained it in the second debate:

"Now, how about deductions? Because I'm going to bring rates down across the board for everybody, but I'm going to limit deductions and exemptions and credits, particularly for people at the high end, because I am not going to have people at the high end pay less than they're paying now. The top 5 percent of taxpayers will continue to pay 60 percent of the income tax the nation collects. So that'll stay the same. Middle-income people are going to get a tax break.

And so in terms of bringing down deductions, one way of doing that would be to say everybody gets — I'll pick a number — $25,000 of deductions and credits. And you can decide which ones to use, your home mortgage interest deduction, charity, child tax credit and so forth. You can use those as part of filling that bucket, if you will, of deductions. But your rate comes down."

Your tax rate comes down, but not necessarily your tax amount. Here's the kicker:

"The burden also comes down on you for one more reason. And that is every middle-income taxpayer no longer will pay any tax on interest, dividends or capital gains, no tax on your savings.

That makes life a lot easier. If you're getting interest from a bank, if you're getting a statement from a mutual fund or any other kind of investments you have, you don't have to worry about filing taxes on that, because there will be no taxes for anybody making $200,000 a year and less on your interest, dividends and capital gains."

That just sounds like an all-around good deal for a large segment of the middle class myself included. You can work your whole life and build up a nest egg, and you don't have to pay any more taxes on the income that your nest egg generates. But, again, you have to remember that this bit of tax generosity is coming out of your hide during your working life.

Let's go back to that $25,000 number Mitt Romney picked as "one way of doing that." That sounds like a lot. Most people don't have that many deductions. But of course you have to remember to include your credits and exemptions too. More importantly, it's the precedent.

Yes, the cap on deductions, credits, and exemptions may start at $25,000 and the list of deductions, credits, and exemptions to be capped may be short, to begin with. But once it is there, the cap can be lowered to $20,000 to $10,000 to $0. Likewise, the list of items to be capped can get longer and longer.

I'm letting the cat of the bag. This is it. Once we give up our deductions, credits, and exemptions, they are gone for good. This is a transition to a flat tax, and the first step in the transition is not the final one.

What protection do we get? Deductions, credits, and exemptions have provided some measure of protection against high income tax rates for as long as the U.S. has had an income tax. If we give up that protection, what's left? We know that Congress is not a good brake on reckless borrowing, spending, or tax increases. We have 16 trillion reasons not to trust Congress, with another trillion reasons being added every year.

I believe that a Constitutional amendment requiring submission of major borrowing, spending and tax decisions to popular vote by the people is the only way to protect ourselves adequately.

How would that work? If the target is to limit federal spending to 20% of GDP, Congress should have to submit any proposal to spend more to a popular vote. Likewise, increases to the U.S. debt ceiling beyond a similar ratio should also go to a popular vote. Finally, we need the initiative petition, so that overreaching tax laws can be revised by the people at the ballot box. If it's going to be a flat tax, we first need a Flat Tax Amendment.

If we can't get that Flat Tax Amendment first, we should keep our tax deductions and not surrender to the flat tax increase.