October 30, 2020

DealBook: The Winners and Losers Under Romney’s Tax Plan

The Republican presidential candidate Mitt Romney has indicated that his plan is revenue neutral.Eric Gay/Associated PressThe Republican presidential candidate Mitt Romney has indicated that his plan is revenue neutral.

Tax reform always has its winners and losers. Mitt Romney’s proposed plan to lower tax rates and limit deductions is no different, but it takes some digging to sort it out.

Mr. Romney has indicated that the plan is revenue-neutral, raising as much revenue as current law. He has also said it is “distributionally neutral” — meaning that the rich, middle class and poor would all continue to bear the same aggregate tax burden as they do now.

The idea seems to be that lowering tax rates would spur economic growth, and the reduction in revenue from lowering rates would be at least partly offset by increased revenue through limitations on deductions, credits and exclusions.

In recent weeks, the focus has been on whether the math “works” in the sense of whether cutting deductions for the wealthy would actually generate enough revenue to finance the proposed rate cuts. The implication, based on a study by the Tax Policy Center, is that in order to remain revenue-neutral, the middle class would have to share the pain of limited deductions. That would effectively shift the tax burden from the rich to the middle class and violate the stated goal of distribution neutrality.

What has been missing from the conversation is a discussion of who wins and loses if, as Mr. Romney insists, the plan sticks to its goal of distribution neutrality.

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Distribution neutrality is a funny concept. Even if the plan is distributionally neutral, there still must be winners and losers. After all, if everyone paid exactly the same amount in taxes as before, then tax reform would not be reform: it would be the same as no change at all in the tax code.

Some people will pay a lot more and some will pay a lot less, even if the rich, middle class and poor each continue to pay the same amount in the aggregate. The fairness of the plan will depend on how finely calibrated each group is defined. Economists often group taxpayers by income quintiles, but a definition this broad places both middle-class homeowners and billionaires in the same group, even though ability to pay varies greatly.

Who are the likely winners and losers under the Romney plan? Most of the action will occur within this top quintile of taxpayers. These households make at least $100,000, and they make about $250,000 on average, before tax. In the aggregate, they pay most of the federal income tax burden.

Assume, as Mr. Romney suggested in one debate, that deductions, in total, would be limited to $25,000. The winners would be those who would enjoy the lower rates but do not take a lot of deductions. Their tax burden would shift onto heavy users of deductions.

And who is that? Let’s focus on three important tax breaks: the mortgage interest deduction, the charitable deduction and the deduction for state and local taxes. The pain would be concentrated in areas with a high cost of living like New York, New Jersey, Connecticut and California, where home prices and state and local taxes are high.

The mortgage interest deduction, under current law, is capped at a million dollars of mortgage debt. Under the Romney plan, even homeowners with a mortgage of $500,000 would quickly fill their “bucket” of deductions. Limiting the mortgage interest deduction is good tax policy, but it will also depress home prices at the high end and lead to substantial opposition from the real estate industry.

Now consider the charitable deduction. Under current law, the deduction is limited to 50 percent of one’s adjusted gross income — a limitation few people run up against. If total deductions are limited to $25,000, however, many people will use up that amount through the mortgage interest deduction, removing the tax incentive to donate.

Finally, consider the state and local tax deduction. The state and local tax deduction is an indirect subsidy to high-tax states like New York, New Jersey and California.

Allowing state and local taxes to be deducted from the federal return reduces the political pressure to keep state and local taxes low. Similarly, the exclusion of municipal bond interest, another tax break that is on the table, mainly benefits state and local governments, while investors pay an implicit tax in the form of accepting a lower interest rate.

The point is not to defend these tax breaks. Rather, it’s to emphasize that tax reform is easy to talk about and hard to do. For every unsympathetic group like insurance companies or oil and gas multinationals, there’s a charity like the Red Cross or the Salvation Army. And one voter’s loophole is another’s livelihood.

Even in advance of the election results, lobbyists are getting ready for action. The Chronicle of Philanthropy reports that some large nonprofits sent letters to President Obama and Mr. Romney last week urging them to maintain the charitable tax deduction as is. This grouping of nonprofits also announced “a gathering on Dec. 4 and 5 to bring hundreds of its members to Washington to tell members of Congress that any tax changes that led to decline in private giving would devastate nonprofits and the people they serve.”

From an academic perspective, there is much to like in the Romney plan, with its broader base and lower rates. But it is not a win for everyone. And history shows that those who would be made worse off have great success in persuading Congress to maintain the status quo.


Victor Fleischer is a professor at the University of Colorado Law School, where he teaches partnership tax, tax policy and deals. Twitter: @vicfleischer

Article source: http://dealbook.nytimes.com/2012/10/31/the-winners-and-losers-under-romneys-tax-plan/?partner=rss&emc=rss

Bucks: The Fine Print on a Wedding Insurance Policy

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Wedding bells rang Friday for Prince William and his bride, Kate Middleton. Fireman’s Fund Insurance Company took the opportunity promote its wedding insurance policies by writing a “tongue in cheek” letter to the happy couple.

“Here in the U.S., we even offer a ‘change of heart’ provision,” the letter says. “If the bride or groom gets cold feet, we’ll cover the cost of the wedding (but we’re confident that wouldn’t happen with either of you).”

Even if yours isn’t a six-figure event involving royalty, weddings are often big-ticket affairs in which a lot can go wrong. So some sort of insurance protection is not all that unreasonable. In fact, according to www.wedsure.com, a site maintained by a Fireman’s affiliate, wedding claims paid out have included $15,897 for a bride who backed out, $8,350 due to a minister who failed to show and $3,412 for a bridal gown lost by the seamstress.

The policies are marketed as a way to cover unforeseen damage to wedding gowns, gifts, jewelry etc. But the insurance company’s letter didn’t mention some of the caveats that go along with the “change of heart” provision, or numerous other asterisks that may prevent policy holders from collecting.

Here’s a list of some of our favorite exclusions and other details from wedsure.com, which helpfully includes a sample policy:

1. Change of heart coverage. Only pays out if the person paying for the wedding isn’t the bride or groom, and if the change of heart occurs at least 180 days before the event. Also, the person who wrote the check must have “had no prior knowledge of a pending change of heart” by the party with the icy feet.

2. No coverage for expenses incurred if the event is canceled or postponed due to bodily injury to any person caused by or resulting from, among other things, taking part in any hazardous sport or activity, including (but not limited to) hunting, skiing or sledding, racing of vehicles of any kind; skin diving or sky diving.

3. Forget about collecting for the loss of or damage to photographs or video recordings caused by “nuclear action or war.”

4. No coverage for bodily injury, property damage or personal injury resulting from any aquatic activities or event.

5. Ditto for injuries or sustained while doing any of the following: bicycling, bungee jumping, climbing, equestrian activity, hiking, ice skating, paint ball, roller skating, skate boarding and trampoline.

6. No coverage for loss or damage to jewelry caused by theft from an unattended vehicle (unless, that is, the jewelry was “locked and secured”; the car had an audible alarm that was armed; and there are visible signs of forced entry, requiring repair to the vehicle).

7. No coverage for loss or damage by breakage, marring, or scratching of gifts that are statuary, marble, glass, china, porcelains, furniture or other fragile items (unless the damage is the “direct result” of situations like “fire, explosion or smoke; lightning, windstorm, hail, earthquake or flood; aircraft, spacecraft, self-propelled missiles, or objects that fall from any of these; strikes, riots, civil commotion or vandalism; sprinkler leakage, or collapse of buildings).

Did you purchase wedding insurance for your big day? What was your experience with any claim you filed?

Article source: http://feeds.nytimes.com/click.phdo?i=658fcd6e3ed5fbb0035bf058f20c5f4f