Romney says he will lower tax rates and close loopholes. Can it work? Of course it can. It is actually quite easy, even from a revenue-neutral point of view. He can easily lower taxes paid by about 8% for everyone! Seriously, he can do this! Follow me through the orange wormhole-of-death and let me show you how it works.
Romney hasn't said exactly what he will do, all we really know is 'lower rates', 'close loopholes', and 'blame democrats' (also known as 'bipartisan support'). So lets see how we can make this work.
First, we need to look at deductions. There are alot of deductions out there, but Ryan did mention the mortgage deduction, so lets look at that one. This chart shows the value of the mortgage deduction binned against Adjusted-Gross-Income (AGI). This is from 2007 so it is slightly dated, but the IRS outsourced its tax-stats operations so now a private company is reviewing everyone's tax returns and their website is down, but I digress.
Anyway, here is the 2007 tax-value of mortgage deduction versus AGI:
If the mortgage deduction were eliminated, this is how much more in taxes everyone on-average would pay. As you can see, the averaged mortgage deduction is pretty flat for the lower income ranges, then takes off at higher incomes. That seems pretty regressive and downright unfair? So, why not give it up? Maybe etch-a-sketch romney's inner-progressive is channeling itself. Or maybe we should just follow the money....
The absolute value of the tax deduction doesn't tell the whole story. Next, we need to look at the relative value of the deduction - i.e. what is the value of the deduction as a percent of AGI. When we do that, we get this picture:
As you can see, the mortgage deduction is a much bigger percentage of AGI for the lower income bins than it is for the higher income bins. That $7000 deduction to someone making $32k means alot more to them than the $30k deduction to someone making $6M. All of a sudden, it is looking quite progressive.
Now these are averaged values, so some people benefit wildly while others get no benefit. Also, there is a limit since there is no benefit of deducting more than you owe, so yes, eliminating the deduction does not hit the lowest brackets as badly as it might appear, especially if you increase the standard deduction (another meme romney/ryan has thrown out). But, lets keep following the money....
Using 2007 numbers, the mortgage deduction was worth about 8% of total tax receipts. Get rid of the mortgage deduction and you can cut taxes across-the-board by 8%!! Hooray! So, lets plot the difference of income-tax reduction (money in your pocket) minus the mortgage deduction lost (money taken out of your pocket) and see who wins and who looses. If you are above the 'zero' line, you win. If you are below the 'zero' line, you lose:
Now do you get it?
Now, in fairness, romney hasn't released his tax plan. All we know is 'eliminate deductions', 'reduce rates', and 'blame democrats'. So, I simply put together a scenario that achieves all three objectives. I am also assuming he will hold social security and medicare hostage to achieve this. I should also point out that it is not like he is proposing to fund a universal single-payer healthcare system or universal free college education. All he is proposing is a tax shell game.
But hey, with etch-a-sketch man, you never know. Maybe he is going to eliminate the special tax treatment of capital gains and dividends?