Bobbing and Weaving

By James Kwak

Mitt Romney’s latest attempt to make his tax plan seem plausible (that is to say, not a pack of blatant lies) is the idea of capping deductions at some level, like $17,000 or $25,000. Of course, as we all know, it doesn’t add up; Dylan Matthews provides a quick summary. If you cap deductions and you cut rates by 20 percent, everyone’s taxes go down, and the very rich (but not the super-super-rich) benefit the most.

This shouldn’t be news to anyone, because this problem has already been solved in its general form: there’s no way his numbers add up, because you could eliminate all the tax breaks for the rich and still not pay for a 20 percent rate cut. I confess I have some attachment to this issue because I think I was one of the first people to point out the mathematical impossibility of the Romney tax plan (the day after he announced the 20 percent rate cut).

Unfortunately, of course, this is all about politics, and arithmetic coherence is not the bar Romney needs to clear. He just needs to get enough undecided voters (stop and think for a second about what it means to be undecided right now) to think that his tax plan isn’t a complete fraud and to think that all of us self-appointed defenders-of-math are just Obama hacks. And this latest cap on deductions is probably enough to clear that much lower bar.

39 thoughts on “Bobbing and Weaving

  1. Romney’s plan is impossible. Duly noted. But the next step in the analysis is to figure out what he would actually do if elected. He has been adamant about not increasing the deficit and pretty clear about not increasing the “middle class” share of the tax burden. So my best guess is that his rate cuts might not be as drastic as he’s been saying. Say 10% instead of 20%. That doesn’t seem like it would be so bad?

  2. The Bush tax cuts ushered in job losses. Why would we continue this folly? Wealthy corporations like GE pay no taxes.
    We have to end the Bush tax cuts for the 1% and close tax loop holes for corporations. Then we can decide if we need to further raise taxes on the wealthy. Wealth inequality causes capitalist economies to flounder. I assume you’d prefer to keep capitalism?

  3. What frustrates me is that a very strong argument can be made in favor of essentially eliminating all deductions and lowering tax rates.

    However, you can’t lower rates by 20% (nor should you), to achieve actual simplification you need to eliminate the deductions entirely not cap their value, and to be equitable you need to both increase the size of the standard deduction for everyone and lower the rates for the middle of the distribution much more than you lower them for those at the top of the distribution.

    Romney took what was essentially a sound idea and bastardized it into a giveaway to the wealthy.

  4. He just needs to get enough undecided voters (stop and think for a second about what it means to be undecided right now)

    I have done that, and concluded that we are entering an extended period of the dumbing down of America. The good news is that we are still far ahead of, most of the rest of the world.
    But utopia is just around the corner, go figure.

  5. @rkean – when the Bush cabal was packing up, Paulson handed a 3 page stick up note to the USA taxpayer. You have got to be kidding me if you think the segment of USA population with a 3 digit IQ believes that this is something other than another run on the collective wealth of USA via the D.C. tunnel being made by Wild West CRIMINALS.

    As for the segment of the population that can be talked into following a Jim Jones to Jonestown, it’s about time to file a lawsuit against ALL media organizations for “false advertising” aimed at eliminating “idealists” through mass murder/suicide. I’m serious. File the lawsuit and stop the “sell”.

  6. I want to coin a new term pertaining to what’s going on in the US: “VILs”.
    Vested Interest Looters. They’re the ones whose interests FOX “news” and the Republican party revolve around, like planets orbiting a dense money sun. “VILs” – catchy, isn’t it?

  7. James Kwak seems to be opposed by Barack Obama, according to the TPC’s Donald Marron;

    Click to access 1001492-Marron-Cutting-Tax-Preferences.pdf

    An aggressive effort to trim tax preferences could increase federal revenues by several hundred billion dollars each year. Policymakers should use that money to lower tax rates and reduce future deficits.

    Lowering tax rates would further reduce the economic distortions the tax system creates and would encourage economic growth. Reducing future deficits would help tame our federal debt, which threatens to rise to unsustainable levels in coming years.

    President Obama’s National Commission on Fiscal Responsibility and Reform (2010) and the Bipartisan Policy Center’s Debt Reduction Task Force (2010) (on which I served) both endorsed this strategy in their recent deficit reduction proposals. The fiscal commission’s “Illustrative Tax Plan” would scale back and redesign many of the largest tax preferences (e.g., mortgage interest, employer health insurance, and retirement saving), eliminate many others (e.g., state and local interest), and use the resulting revenue to

     Cut individual tax rates, bringing today’s six brackets (10, 15, 25, 28, 33, and 35 percent) down to three (12, 22, and 28 percent);

     Repeal the alternative minimum tax (AMT), the personal exemption phaseout (PEP), and the phase-out of itemized deductions (Pease);

     Cut the corporate income tax rate from 35 to 28 percent; and

     Reduce the deficit by $80 billion in 2015 and more in later years.

    Is Marron’s math impossible too?

  8. Romney’s so-called numbers don’t add up; his tax preach fails the sniff test; if something is too good to be true, it isn’t, chances are.

  9. Is Marron’s math impossible too?

    No, but believing that we collect those rates is impossible to believe.
    We currently have the second highest corporate tax rate in the world, but we have least amount actually collected from current corporate tax policy. Juggle away and reduce your burdens, new math is here to stay.

  10. That’s already been well documented. The IRS only collects taxes via liens from people who they know can’t afford a lawyer. I’m sure the army of clipboard men kicking in the doors of the houses of single women with normal mortgages during the orgy of fraudclosure gate can have a new job right away in “collections” – but 12 million “new jobs”? C’mon – that can’t all be those nice Mormon missionaries all grown up and ready to go do “collections”?! My how time flies…

    Romney was a missionary in France during a very exciting time in regards to an energy policy being set in motion in France. They got off coal and went to nuclear. Too bad Romney did not divine how big that was of an opportunity for “venture” capitalists from USA, huh? Talk about “creative destruction” of the old to replace with the new…much more high tech than a toy factory in Texas being dismantled to pay for his bishop’s soul-finding “fee”….

  11. This is even more crass and cynical on Romney’s part than you suggest. Which Americans are most likely to have deductions that exceed the cap (and thus have their taxes rise)?

    Those with large mortgage payments, and those with large state tax bills. And where do those people live? Hmm, let me guess: California, New York, New Jersey, Maryland, Massachusetts, Connecticut, Washington. Do those states have anything in common?

    Now that you mention it, none of them are going to vote for Romney anyway.

  12. Charts of Bush’s and Obama’s years
    12/10/04 by Investor’s Business Daily. See the graphs. In part:

    The Bush tax cuts began in mid 2003.
    US jobs in millions:
    mid 2003 – 130 . . 2008 – 138 (+8)

    Deficits as % of GDP
    2004 3.5% . . 2007 1.2% (-2.3 %point)

    Obama’s Record: median income
    2009 – $55,000 . . 2012 $51,000 ($-4,000)

  13. Sunday, September 23, 2012
    The Amount Of Crap About Tax Rates Is Staggering!! The Republicans Continue Babbling About Cutting The Income Tax Rates, But That Is Meaningless!! If You Don’t Actually Pay Income Taxes, It Doesn’t Matter What The Rate Is Because 0% Of Any Number Is Still Zero!!

    General Electric and Wells Fargo Bank, just to mention two big ones, pay NO income taxes and haven’t for years. Here is the rest of the story.

    When the taxman cometh, most corporations wave him on by, according to a government study released on Tuesday.

    About two-thirds of U.S. companies and foreign firms doing business in this country paid no federal income taxes from 1998 to 2005, according to a study by the Government Accountability Office. Sen. Byron Dorgan, D-N.D., called the report “a shocking indictment of the current tax system.”

    To be sure, many of the nonpayers were small or new companies that probably made no money. But the report said that about a quarter of large corporations – ones that had more than $250 million in assets or $50 million in gross receipts – paid no taxes. In 2005, for instance, 3,565 large U.S. companies and 998 large foreign-owned companies operating here did not pay any income taxes.

    The report neither identified any companies nor specified how they avoided tax liability.
    There are numerous legal ways a corporation can duck taxes. The most obvious one: If you don’t make money, you don’t have to pay taxes. Companies also can write off previous years’ losses, get tax exemptions for a plethora of expenses, use R&D credits, even wipe out tax liability when their employees exercise stock options.

    But corporations can do a lot of creative accounting to “lose” money – and sometimes that can cross the line.
    One such practice identified by the report is “transfer pricing abuse.” Essentially, that means shuffling money among corporate subsidiaries by charging pumped-up fees for goods and services instead of market-rate “arms-length” prices.

    Adam Hughes, director of federal fiscal policy at OMB Watch, a nonpartisan government accountability watchdog, explained how transfer pricing works.

    “A company will incorporate offshore where there are no taxes,” he said. “That (parent) company charges the U.S. company lots of money for things like the trademark for the company logo. The U.S. company says, ‘I made $50 million, but my stupid parent company charged me $50 million for the logo.’ The U.S. company gets to deduct the royalty fees as an expense and move profits to the parent company offshore in a tax-free haven.”

    In the years covered by the GAO report, a greater percentage of foreign-controlled domestic corporations than U.S. ones paid no taxes. Although the report did not draw conclusions about the prevalence of transfer pricing abuse, it discussed the issue at length.

    The Tax Foundation, a Washington, D.C., nonprofit that believes the tax system should be simplified and rates reduced, said nothing in the report showed that corporations are scofflaws.

    “Even in a good year, a lot of firms are failing,” said spokesman William Ahern. “General Motors lost $10 billion in 2005, so how much corporate profit tax would you expect them to pay? American Airlines lost almost a billion dollars. What would you want them to pay when they’re already cutting people? They pay when they’re profitable.”

    But don’t corporations employ armies of accountants and lawyers to figure out every possible loophole?
    There’s nothing wrong with that, Ahern said.

    “In that respect, they are just like individuals,” he said. “Don’t we all fill out our tax returns as aggressively as we know how and take every deduction and credit we’re entitled to, even if they’re unprincipled, even if they’re in the tax code only because Congress thinks we will appreciate them for subsidizing us?”
    Chris Edwards, director of tax policy at the libertarian Cato Institute in Washington, D.C., agreed that the report didn’t prove that corporations are abusive or deceptive in their tax practices.

    “It’s common sense: Corporations don’t earn profits in many years,” he said.
    But, Edwards added: “All that said, I think there probably is large tax avoidance by U.S. multinational corporations, but in my view that’s driven by the very high U.S. corporate tax rate. A corporate tax rate cut is long overdue.”

    On paper, the United States has the second-highest corporate tax rate in the world. It comes to about 40 percent (the federal rate is 35 percent; the average of state and local taxes adds on another 5 percentage points), putting it a notch behind Japan. But the effective tax rate – what artful-dodger companies really pay – is much lower than the nominal rate, critics charge.

    “We have a pretty high nominal corporate tax rate, but effectively it’s not high at all,” said Lenny Goldberg, executive director of the California Tax Reform Association in Sacramento. “There are many tax-avoidance strategies. We’d be far better off with a simpler (structure) that made sure taxes were actually paid by corporations.”

    In fact, despite its high nominal rate, U.S. corporate taxes as a percentage of gross domestic product are lower than in most other industrialized nations. From 2000 to 2005, revenue from federal and state corporate income tax averaged 2.2 percent of the U.S. GDP, compared to an average of 3.4 percent in 30 of its trading-partner countries, according to the Treasury Department.

    Peter R. Merrill, a principal at PricewaterhouseCoopers, wrote an article in the publication Tax Analysts, underscoring this paradox.

    Data on corporate tax as a percentage of GDP “present a conundrum,” he wrote. “The United States has the second highest combined statutory corporate tax rate among (the Organization for Economic Cooperation and Development) countries, yet is tied with Hungary in raising the fourth lowest amount of combined corporate income tax revenue relative to GDP in 2004.”

    Read more:

  14. The US is broke and in debt in the Trillions. Government does not make money, the workers who pay taxes is what the government runs on. We are in serious trouble and I beg all of you to vote for the party that knows that we cannot borrow any more or we will give our country to whomever has an interest in taking us over and turning everyone into a willing worker. Please, Please vote sensibly.

  15. “If you cap deductions and you cut rates by 20 percent, everyone’s taxes go down,”
    Alas, James, there you go again. You omitted an important qualifier. The proper statement is that: you cap deductions, ergo, taxable incomes increase so that the resulting larger taxable income base offsets the revenue loss from the lower marginal tax rates. It is tiring to have to keep correcting your economic reasoning. However, I am sure you are a very good lawyer and might still be elected President when you grow up.

  16. You’re just Obama hacks. Sorry, but the moonbat messiah is polling waaaaaaaaaaaaaaaaaaaaaaaaaaaaaay behind, so this conversation is purely academic. I liked the old Baseline, when you guys wanted to kill Wall St. as much as i do. The people here KNOW that the POTUS doesn’t run the economy, the Fed and Wall St, run, rape, and loot the economy. That said, Obama is a hate filled anti-white bigot, and the sooner he is gone, the better.

  17. I don’t see how people could vote for this man yet it is a very close race.

    Romney simply wants to be President and he doesn’t care how he gets there.

    He says he will find the loop holes “after” he gets elected. He has had 10 years to work on this and so far he has not come up with a single loop hole. Not one.

    Yet people listen to his pitch and think they will vote for him. There is something wrong in the thought process that is leading to support for Romney.

  18. And Obama’s math works? Puh-lease. I’m not convinced either side has a clue, and it’ll take them coming together to make something happen. Odds of that happening before we’re all on our knees. Let’s hope we get lucky and something between slim and none actually materializes. Even at that, let’s hope we’re not confronting Minsky’s Singularity, where none of the models work.

  19. I liked the old Baseline, when you guys wanted to kill Wall St. as much as i do. The people here KNOW that the POTUS doesn’t run the economy, the Fed and Wall St, run, rape, and loot the economy. That said, Obama is a hate filled anti-white bigot, and the sooner he is gone, the better.

    Its not that we don’t want to as bad as you, but there are some laws to follow if you want to keep your moral sense. As for the Fed and their like minded rapin fellows, it could be worse. They might purposefully mess up a good job and then play the quality control card just cause they can. That said, I just found out that Romney and the Fed have very close ties, in that they are both being hung by their wives.

  20. exnikhilo:”So my best guess is that his rate cuts might not be as drastic as he’s been saying. Say 10% instead of 20%. That doesn’t seem like it would be so bad?”
    Depends whether (or how much) the deficit goes up as a result.

    On your point, that what matters is what Romney will actually rather than the rhetoric: When a candidate is somewhat vague about the tax cuts but completely vague about the revenue increases, it is a good bet there will net deficit growth. We have heard this song before, twice.

  21. Ah Del, there seems to be two problems here. One is a failure of comprehension and the other is a failure of mathematics.

    1) Comprehension: Social Security has absolutely nothing to do with Federal Income Tax Rates. Social Security is a free standing account that is paid into by working people who later withdraw money when they retire. In no way does Income tax rates have ANYTHING to do with Social Security.

    2) Mathematics: Two-thirds of ALL U.S. companies paid NO, NONE, NADA Federal Income taxes last year. In addition, 103,000 households with incomes in excess of a quarter of a million dollars ($250,000) last year also paid NO, NONE, NADA Federal income taxes last year.

    (These are all U.S. Government numbers, not mine. And in spite of the opinion of my former hero, Jack Welch, I do not believe the U.S government fakes the numbers.)

    So no matter what income tax rate you apply to all these companies and folks, you still get ZERO INCOME for the government because (again)
    Any % X $0 = $0. You may want to ask one of your kids to check this math.

    It should be clear to you by now that the problem is not “rates”, it is

    And finally, while everyone is entitled to their own opinions, nobody is entitled to their own facts.

    Since you have raised the question, I am not a lawyer, I have spent most of my adult life in research and dealing with facts (which is why I have so much respect for them), I have been a life long Republican who voted for Dwight Eisenhower( until W decided that it was O.K. for us to torture people), and now am a registered Independent.

  22. I am not sure I get the point of checking Mitt’s math. Whether his plan will work on not is pretty irrelevant. I don’t think he has any intention of trying to implement it.

    I am baffled as to why anyone listens to politicians at all.

  23. James, I didn’t realize that someone might think I was talking about Social Security Taxes or the the viability of the “Trust Fund”. I don’t recall a mention of the “Trust Funds” in your initial post. But since you now raise the topic, unfortunately, the current administration has failed to dare to directly address the issues,e.g., through delaying the retirement age, more rigourous means testing, etc. There’s a big empty black hole out there.

    Similarly, the corporate tax code has to be pulled into the twenty-first century, to recognize such issues as transfer-pricing, markets for tax losses (a la recent bankruptcy of the taxpayer subsidised Solyndra), etc.

    If you can convince the State and Municipal lobbiests in D.C. to drop the current tax-exempt status of their interest payment to individuals, many of those interest income recipients would have to start paying federal income taxes (and we might ALL start paying higher state and local taxes so those states and localities could pay for their more expensive borrowing).

    None of this tax stuff is set in stone. The legislative and executive branches propose and dispose, so long as the courts let them. If the voters want to search for the culprit, they need just look in the mirror.

    Let me share a personal anecdote. Within the last month MS/NBC had an article about some of the places suffering most from this recession. My home town won the dubious honor, recording the biggest drops in homes prices, as well as exceptionally high unemployment rates and home mortgage foreclosures. Around that same date Bloomberg posted an article that of the ten richest counties in the U.S., 7 were around Washington, D.C. It seems almost obscene that the blood-sucking lobbiests (companies, unions, “civil society”, whatever) are paid so much to hover around the D.C. area trying to get their grubby little mitts on the taxpayers’ money while the folks in my hometown are hurting so much. I cringe at the prospect of their having to go through four more years of this nonsense.

  24. As some posters above have pointed out, Romney is simply giving lip service about his tax plan. If he’s elected, he will flip-flop toward whatever benefits the wealthy, and if there is a Republican Senate, much economy-devastating legislation will pass. I fully expect Romney to try to eliminate all programs of government assistance, simply because his belief system is against helping those that “… should take personal responsibility and care for their lives.” (his 47% statement)

  25. Yes, its true, this whole election is about telling us what we want to hear.

    But dropping out of the voting process is wrong.

    The Republican’s plan has no chance of working because of the Grover Northquist pledges.

    It would seem to me that in spite of the Trillion dollar deficits under Barack, we have a better chance with him because he willing to tax the top 1%.

  26. James: I would like to know where your information comes from about the percent of corporations and people who pay no tax. Could you provide links for this please.


  27. The election and politics is about deception (lies figure prominently). Romney is expert. Obama will lose this election in a landslide (think Reagan/Carter). It’s not just the economy, it’s everything Obama did to alienate independents that voted for him in 2008. It’s all the disaffected youth that will stay home this time. Does the Obama administration have any legitimate standing to question the integrity of Romney’s campaign considering what the transparent hope and change Dream Team actually delivered? Get used to saying President Romney now.

  28. I wouldn’t get used to anything changing under a Romney administration. You see, presidents have been promising deliverance and every type of hopium in the known universe for decades now. But once they become president, they are briefed by the military as to why most of those promises can’t be kept. In the name of national security mostly today, but just about anything qualifies when dealing with the military. So don’t expect the Romney dream team to handle anything but your money.

    As for paying no tax Mike, I would be surprised if there were such a link for the initial acts of the tax evasion were quite a while ago and even then was only picked up by a few conscious souls, but here is the low down.
    Most company’s operating in the US do pay some form of taxes, but those operating overseas don’t pay tax here until the profits of that money are returned home to be used in whatever fashion. Think of oil refinery’s who make gas here for say $2.50/gal and then sell it for say $5/gal in Europe. Hefty profits then sit in an offshore bank waiting for the tax rate to drop so they can be repatriated. [a new financial word meant to work on the emotions of politicians who have dedicated so much work in its name lately, Romney would be a perfect candidate for these feelings]. So instead of paying taxes to bring the money home, the offshore banks, in Bermuda say, make a request to the treasury to send dollars there as they have clients whom want to withdrawal large amounts of cash dollars deposited to these offshore bank accounts. The money is secretly sent, and then just as secretly loaded, onto fast boats and floated to the shores of the US tax free, where it can now do what it wants. This was the prime reason for the flat tax movement and elimination of many professions and depts of inefficiency within gvt. The big jobs election campaign drowned out the movement, but not the flow of untaxed income.

  29. Word, Anon. Romnesia man and his boy blunder eddie munster will be defeated by the electoral college. They will have the popular vote, but be gored by the electoral vote. Payback is a byatch.

  30. Romney is oh-so-interested and has a “plan” to help small businesses (no details, though, huh?).

    It’s all beyond ridiculous at this point. With 480 people in USA collectively worth 2.08 TRILLION USA $$$$, and unemployment benefits getting taxed, it’s not even possible to buy enough cabbage for the gourmet “golempki” to feed the peeps over the holidays, much less have the “small” capital needed to launch one of those “started in my kitchen” SMALL BUSINESSES. Heck, even 20-30 years of successful SMALL ethnic restaurants are looking at not enough of a currency flow to replace their “hardware” – you use pots and pans 24/7 they need replacement. On top of not having the currency flow for LIFE MAITENANCE, even the PRODUCT QUALITY is no longer available!

    Economic GENOCIDE of USA middle class through the tax policies….no ifs, ands, or buts about it. Just the “math”, Ma’am.

    Fnk “fiat money” issued as “debt” – yeah, that’s “science”, right?

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