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Election Season Economics: Comparing the Presidential Candidates' Tax Plans

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How will Romney or Obama's proposed tax plans affect you?

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Mitt Romney’s Tax Plan

The president submitted his tax plan to Congress in his 2013 budget proposal, and when compared to the information Mr. Romney has presented, the two plans appear to have some significant differences.

On federal income taxes, Mr. Romney has said he would like to cut taxes for all six tax brackets by 20%.

From bottom to top, the tax brackets would fall to 8%, 12%, 20%, 24.4%, 26.4%, and 28%.

So if you fall within the top two brackets, President Obama would tax you at 36% and 39.6%, while Mr. Romney would tax you at 26.6% and 28%.

Let’s examine how this could impact a single person (we’ll call him Mike), who is in the second highest tax bracket.

The median gross income for a single person in this bracket is \$283,500. Let’s chop \$50,000 off for deductions (mortgage interest, personal deduction, children, education, etc.) making Mike’s adjustable gross income \$233,500.

That would still put Mike in the second-highest tax bracket. So in 2011, assuming Mike had zero tax credits, he would have been taxed at 33% and would have paid around \$79,000 in taxes, based on his adjusted gross income of \$233,500.

If President Obama’s plan had been in effect, then Mike’s tax rate would have been 36%, raising his tax bill by \$6,200 to around \$84,000.
But if Mr. Romney’s plan had been in effect, Mike’s tax rate would have been just 26.4%, lowering his tax bill by \$15,700.

This means that under Romney’s plan, Mike would have kept around \$21,800 when compared to President Obama’s plan.

Romney’s plan also includes a very investor-friendly tax environment. He said he would totally eliminate the federal income tax on capital gains and dividends for people making less than \$200,000 and would impose a flat 15% tax on those making more than \$200,000.

Mr. Romney would also eliminate the current 3.8% surcharge that the government currently tacks on to investment income earned after making \$200,000 per year.

Here’s another very simple example:

Say that Mike’s adjusted gross investment income was \$500,000.

Under President Obama’s plan, Mike would be taxed at the elevated full income tax rate of 39.4% and would have \$300,000 of his investment income taxed at 3.8%, for a total tax bill of as much as \$210,000.

Under Romney’s plan, Mike would have been taxed at a flat 15% for a total tax bill of \$75,000, a \$135,000 difference.

Romney has also said he plans on totally eliminating the AMT, as well as the estate tax.
No positions in stocks mentioned.
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