Barack Obama and Mitt Romney laid out competing frameworks for tax reform on Wednesday, competing to lay down political markers on a policy issue both parties where both parties want reform but where there is little chance to achieve Congressional compromise anytime soon.
Piggybacking on the 59-point plan he released in September, Romney unveiled a proposal he said would bring “more jobs, less debt, smaller government.” Romney proposes an across-the-board 20% cut in marginal tax rates for individuals, which would lower the top tax rate from 35% to 28%, a return to the level signed by President Reagan in 1986. The plan would maintain the current 15% rate on dividends and capital gains for incomes above $200,000 per year, just as Romney proposed in September, while exempting families making less from paying taxes on such gains. The former Massachusetts governor also called for the repeal of the alternative minimum tax and the estate tax.
On the corporate side, Romney reiterated his proposals to slash the corporate tax rate from 35% to 25% while transitioning to a “territorial tax system,” which his campaign said would spur companies to reinvest foreign profits at home. At the same time, he wants to broaden the tax base by patching a code shot through with deductions and exemptions. “I’m going to limit the deductions and exemptions particularly for high-income folks,” Romney said Wednesday during an event in Chandler, Arizona, during which he pledged to “make sure the top 1% keeps paying the current share they’re paying or more.” Romney did not specify which exemptions he wants to eliminate, and his advisers have not released further details.
Romney’s advisers say the overhaul would be revenue neutral, primarily paid for by reductions in federal spending — which Romney says he will pare by $500 billion, bringing it down to 20% of GDP by 2016 — broadening the tax base, and trimming entitlements. (Romney wants to block-grant Medicaid to the states, gradually raise the retirement age on Social Security for younger generations while chaining it to inflation rather than wages, and transition to a Paul Ryan-style premium-support system for Medicare.) That would have to be done in concert with a factionalized Congress, in the face of intense pressure from powerful business lobbies who moan about the U.S.’s crippling tax burden while devising ways to pay very little in taxes.
Like Romney, Obama’s economic team wants to overhaul the tax code to put the U.S. on more competitive footing by lowering rates and ending deductions. The President’s proposal, sketched out Wednesday by Treasury Secretary Tim Geithner, would trim the corporate tax rate from 35% to 28% while eliminating loopholes and subsidies Obama has criticized before –notably, for the oil and gas industries, hedge funds and companies who generate profits overseas — to offset the lost revenue. It would also provide special incentives to manufacturers and force companies who generate overseas profits to pay an unspecified minimum tax on foreign earnings.
Both of these proposals are just blueprints, with too many blanks and too much left to Congressional wrangling for a complete assessment. But that is by design. For Obama, who has faced accusations that his policies are hostile to business interests, the proposal answers critics by suggesting a lower corporate rate. It also preserves his pledge to provide a “fair” economic playing field and assigns the thorny task of handling the specific pay-fors — and the blame that accompanies it — to a brutally unpopular foil at the other end of Pennsylvania Avenue.
For Romney, who has been criticized by conservative wonks for proffering a timid tax-reform plan (his GOP rivals suggest slashing corporate rates more deeply), the proposal is a way to mollify critics and refocus the political debate in the hours before a pivotal Republican debate, one week before a pair of must-win contests in Michigan and Arizona. It offers a compelling juxtaposition for a candidate who has made economic expertise the cornerstone of his presidential bid: While Rick Santorum tries to parry questions about prenatal testing and Satan, Romney is setting out a plan to shrink government and get the nation back to work. Never mind the fact that much of his plan is reheated from the fall, and that large parts remain opaque. Stepping on Obama’s own symbolic marker is an added bonus.