Romney Needs Tea Party Support for Tax Plan
Business + Economy

Romney Needs Tea Party Support for Tax Plan

REUTERS/Shannon Stapleton

If Mitt Romney is elected president on November 6, he likely would look to fellow Republicans in Congress to fill in the blanks of a framework to slash rates and pare deductions as part of an overhaul of the U.S. tax code.

Accused by Democrats and some academics of not spelling out how he would fund his proposed 20 percent across-the-board tax cut, Romney last week offered a hint of a solution: Impose a $17,000 to $50,000 deduction cap on tax breaks for Americans.

Among other approaches being discussed, according to Romney aides, are a revamp of the code with all tax breaks on the cutting table and a cap on itemized deductions as a percentage of income. Tax issues took center stage in last Wednesday's debate between President Barack Obama and Romney but not much detail was revealed beyond their campaigns' known talking points.

During the debate, Romney rejected Obama's characterization, based on a think tank analysis, that the Republican challenger's tax proposals would cost $5 trillion over a decade and add to the already-huge federal deficit. Some key lawmakers in Congress, mostly Republicans, have been drafting detailed plans to overhaul the U.S. tax code, a feat not accomplished since 1986.

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Aides to Romney say campaign officials have been consulting with most of them. If Republicans retain control of the House of Representatives as expected after the election, a Romney victory could give momentum to tax overhaul efforts. Republican Representative Dave Camp, chairman of the tax-writing House Ways and Means Committee, is working on plans that Republican congressional aides say could take off.

"We're not going to go to Congress and say, 'It's our way or the highway,'" Representative Paul Ryan, Romney's running mate and chairman of the House Budget Committee, said last month. "The best way to do this is to show the framework, show the outlines of these plans, and then to work with Congress to do this," Ryan added.

Getting any of this through Congress may be a challenge, especially if, as expected, it remains divided politically and prone to the sort of gridlock that has beset Obama since he took office in January 2009. Obama's fellow Democrats are aiming to maintain control of the Senate after the election.

In the 1986 overhaul, Republican President Ronald Reagan struck a deal for a major revamp with a Democratic-controlled House and a Republican-led Senate. Reagan administration officials drew up a proposal and Congress worked with them to hammer out the complex details. Since then, a generation of compromisers has passed from the scene, and deals of any kind have proven difficult in a Congress now accustomed to partisan stalemates. Even so, there is a consensus in political and corporate circles that the tax code is convoluted and outdated.

Romney's tax plan came under fire after the Tax Policy Center, a nonpartisan group, analyzed it and said that to fund the type of tax cuts for the richest Americans that would come under Romney's proposals, tens of billions of dollars would need to be raised from lower-income taxpayers. Conservatives, who have fought for decades for lower taxes, have argued that the math can work and that more breaks are on the table for possible elimination than analysts have assumed.

Making the numbers add up is tough. There are at least $1.1 trillion in annual tax breaks to trim to help pay for lower rates. These include some that are very popular among Americans, such as a mortgage interest write-off, charity donations and the workplace healthcare exemption.

The payoff could be huge. In 2010, the mortgage interest tax deduction cost $91 billion; the charitable giving deduction, $37 billion; the tax break for the value of employer-provided health insurance, $106 billion.

Republican Senator Pat Toomey, who is nearly done crafting legislation that would slash all individual rates by 20 percent, would cap tax breaks by a hard dollar figure in a similar vein to the option Romney floated this week. In Romney's proposal to limit taxpayers to perhaps $17,000 to $50,000 in any type of tax deduction, he suggested taxpayers could pick and choose which ones to keep and which to give up.

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Toomey's proposal also would raise revenue, via the deduction limits, which is controversial among Republicans who oppose nearly all attempts, including tax increases, to raise revenue for the government. Still, Toomey's ideas could gain backing among Republicans, aides to top Republicans say.

Senator John Thune, a Republican on the tax-writing Senate Finance Committee, backs scrapping all deductions and then adding some back after debate.
Americans can take either a standard deduction or itemize deductions like gifts to charity, taxes paid to local governments and certain expenses for childcare and education.

"Start from scratch. Let's write the thing all over. I think that is the only way that this thing is going to work," Thune, who has campaigned for Romney, said in an interview. That approach is similar to the one offered in 2010 by the bipartisan presidential deficit-reduction commission known as Simpson-Bowles. That panel proposed a combination of spending cuts and tax increases to reduce the deficit, but the plan went nowhere. Among other things, the plan recommended eliminating all tax breaks and then restoring a few, with strict caps. Ryan was a member of the panel and actually voted against its deficit-reduction plan, but he and Romney have both held up the commission's work as a starting point.

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Camp has a corporate tax plan mirroring Romney's in key respects. It includes a proposal to cut the existing 35 percent corporate tax rate to a 25 percent rate. "Tax reform will be on the table next year as long as Dave Camp is the chairman of the Ways and Means Committee," said Evan Liddiard, a tax lawyer who for decades worked for Republican Senator Orrin Hatch, now the top Republican on the Senate Finance Committee.

Senator Rob Portman, a Romney adviser, is close to completing legislation that would cut corporate taxes. His proposals, some very specific, include limits on tax write-offs for investment and interest. "That includes a lot of controversial stuff," Portman told the Reuters Washington Summit in June.

Another way to limit deductions has been offered by Harvard economist Martin Feldstein, an economic adviser to Reagan in the 1980s who has defended Romney's tax plan.

The Feldstein idea would cap the tax reduction that each taxpayer could get at 2 percent of one's adjusted gross income.

Obama has proposed limiting deductions for wealthier taxpayers to 28 percent of their income. The idea has yet to win broad backing in Congress as a stand-alone proposal but could see new life as part of a major tax overhaul.

(Additional reporting by Richard Cowan and Patrick Temple-West)