The Romney and Obama Fantasy Tax Plans

Barack Obama and Mitt Romney

Before Congress left town for a five-week recess, each chamber passed a tax plan the other has pledged to reject. Nobody expects a compromise before the end of the year.

On the campaign trail, meanwhile, President Obama and his Republican challenger, Mitt Romney, are trashing and caricaturing each other's tax plans, yet offering little clarity on an issue that could hit the wallets of many Americans as early as the start of next year.

To deconstruct what each candidate is proposing and what's at stake, I've highlighted how the two candidates differ on the major tax issues, with a bit of bottom-line analysis at the end:

The "temporary" tax cuts from 2001 and 2003. These expire at the end of 2012, which is a major economic issue because if that happens, virtually all Americans will face an abrupt tax hike that few have prepared for. The shock could easily induce a recession.

Romney wants to make all of these tax cuts permanent, which means income tax rates would stay where they are. Obama wants to extend the current tax rates for one year for individuals making $200,000 or less and for couples earning $250,000 or less. For people earning more, tax rates would revert to the higher Clinton-era levels, with the top rate going from 36 percent to 39.6 percent . Obama's one-year timeline suggests he anticipates a big budget deal in 2013 that might permanently alter the tax code and supercede current rates.

The payroll tax cut. This temporary change enacted during the recession lowered the Social Security withholding rate from 6.2 percent to 4.2 percent, a monthly savings of about $80 for the typical taxpayer. It's scheduled to expire at the end of 2012, and neither candidate has proposed extending it. This is one tax that's likely to "rise," or, in other words, return to its prior level.

[See what will happen to your taxes in 2013.]

Further tax cuts. Romney wants to cut all income tax rates by an additional 20 percent, from the levels they're at now. Obama has no such proposal.

The estate tax. Romney would eliminate it. Obama would raise the estate tax from its current level of 35 percent, with an exemption for the first $5 million, to 45 percent with a lower exemption of $3.5 million.

Investment income. Romney would eliminate taxes on dividends, capital gains and interest for most middle-class taxpayers, while keeping them at current levels for couples earning more than $200,000 and single filers earning more than $100,000. Obama would raise taxes on such income. He'd hike the rate on capital gains from 15 percent to 20 percent. He'd treat dividends and interest income—now taxed at 15 percent—as ordinary income, subject to whatever bracket the taxpayer is in.

The alternative minimum tax. Romney would repeal this unpopular "shadow tax" meant to snare middle and high earners who use various loopholes to dramatically lower their tax burden, under the ordinary rules. Obama would retain the AMT and modestly reform it, by indexing it to inflation, to make clear what future thresholds will be. That would eliminate the need for Congress to pass an annual "AMT patch," which is now needed to assure that too many taxpayers don't get caught short by this tax.

[See what might be hiding in Mitt Romney's tax returns.]

Corporate income taxes. Romney would cut them from a top rate of 35 percent to 25 percent. Obama's plan is similar: He'd cut the top rate to 28 percent.

Healthcare reform taxes. Romney would repeal the tax increases of 0.9 percent on wages and 3.8 percent on investment income that Obama imposed on higher earners as part of his health reform law. Those changes go into effect in 2013. Obama still supports them.

Personal deductions. Romney has said that he'd close loopholes and kill or reduce deductions to help raise extra revenue to finance his across-the-board tax cuts. But he hasn't identified any specifics. Obama would limit deductions such as those for mortgage interest and health insurance to a maximum of 28 percent, which would amount to a tax increase for people above the usual income thresholds of $200,000 for individuals and $250,000 for couples.

Plausibility: Both candidates' tax plans have one big thing in common: They leave out lots of ugly details about future tax increases that most economists think are inevitable in order to keep Washington solvent. The Tax Policy Center found that if all of the detailed changes Romney has proposed were enacted, they would amount to sizable tax cuts for millionaires, more modest cuts for middle-income earners, and a small tax hike for people earning less than $30,000. It would also add $365 billion to the federal deficit in its first year. All told, such a plan seems to have no chance of passing in the current political climate, although Romney argues that faster economic growth would make his plan more appealing than the TPC's numbers suggest.

Obama has fleshed out his ideas more, since he's had to submit several detailed budgets to Congress. But his numbers don't add up, either. They include none of the middle-class tax hikes--such as a 50-cent per gallon increase in the gas tax—or the deep cuts in entitlement programs like Medicare and Medicaid that his own budget commission said would be needed to fix the government's finances for good.

For all the rhetoric sure to be spent on taxes this fall, tax reform—if it ever happens—will almost certainly split the difference between Democratic and Republican priorities. That's the only way to accomplish something so momentous. But it's also the reason it may be a long time coming.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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