Selling the Middle Class down the River

The debates last night were disappointing, to say the least. Obama did not present himself in the manner to which we have become accustomed. He was disengaged and remote, something that he cannot afford. People like him personally and he did not use that to his advantage. Nor did he call Romney out on proposals that Romney implied during the debate. Obama missed a golden opportunity.

It is apparent that far too many voters are not really paying attention to details that can impact their lives in very specific ways. Romney said a number of things that show quite clearly what  his policies will be once in the White House. The chance that this will happen has increased quite significantly since the debate.

Romney had the following to say, “I will cut tax rates 20% across the board”. With that in mind, he goes on to say that he will eliminate deductions to keep this cut revenue neutral. He did not say he would eliminate deductions on the wealthy. He only mentioned deductions. That implies deductions for all taxpayers. He continued later that he would not raise taxes on the middle class, which is something that Obama pointed out.

Looking at this from my somewhat limited perspective, this is how it plays out:  Romney will try to flatten the tax structure, that is, have one or two tax brackets. In order for taxes to remain revenue neutral, he would probably have to eliminate the ten and fifteen percent tax bracket. He has said that he wants to eliminate the top bracket, which currently stands at 35%. He wants to get the top tax rates under 30%.

In order for this to happen, those taxpayers in the two lower tax brackets would have to see a rise in their tax rates. Since he has said that he is not going to raise taxes, and by that he probably means tax rates, he may not raise these rates. This is what he may do instead.

He said plainly that he wants to eliminate deductions. Most people do not itemize deductions on their tax returns. Instead they take the standard deduction, which is $11,900 per household. In addition, taxpayers get a $3,800 deduction per spouse and dependent in the household. For a family of four, that would amount to $27,100 in standard deductions.

If Romney eliminates this deduction, since most people don’t itemize, the lowest income earners would see a tax increase. Lets say that a household has an income of $30,000. After deductions for Social Security and Medicare ($2730), the taxpayer would pay $90 in income tax. Without the standard deduction, taxes would be $3330. With the Standard Deduction, the taxpayer pays a total of 9% tax (Social Security, Medicare contributions and tax due). Without the Standard Deduction, he would pay an effective tax rate of almost 20%.

If the taxpayer is in a higher tax bracket, the tax becomes incrementally higher. If a taxpayer earned $70000, with the Standard Deduction he pays $4090 (15%) in tax, more than Romney’s effective tax rate. Without the Standard Deduction he pays $9300 (22%) in tax, a difference of $5210.

These calculations are back of a matchbox calculations, and are only approximations. There may be other adjustments made and some of the deductions may be different depending on the tax year. Social Security contributions are only deductible up to $2000. If that deduction were eliminated, the effective tax rate would change.

There are other deductions that are also excluded from gross income before itemized deductions, including educator expenses, HSA (Health Savings), moving expenses, health insurance for the self employed, Student loan interest, IRA deductions, tuition fees and so on. If these were eliminated, it would further change the tax currently due. My calculations above do not include these deductions.

Romney talked about a $17,000 bucket of deductions. What he means is that he would eliminate deductions and then allow people to put deductions into a bucket. The question is whether this is from gross income, or the itemized deductions. To make use of itemized deductions, your total deductions must exceed the Standard Deduction, or it does not pay you to itemize. Most people do not have enough deductions to itemize. By putting deductions into a bucket, those without deductions would have a tax increase. This would be mostly the poor and some of the middle class.

What Romney wants to do is create a flat tax structure, which would decimate the Middle Class, increase their tax bill, reduce their spending and widen the gap between the wealthy and the rest.

The Middle Class would effectively vanish, to be replaced by a society in which there are only the very rich, and the very poor. In essence, a society like the old apartheid South Africa, Brazil not too long ago, and like most of the despotic dictatorships around the globe.

The voters are not paying attention. They are committing collective economic suicide by voting for Romney. It will be a generation or more before this nation recovers from the economic malaise brought on by this vote.

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