Since taxes are as important as any issue in this year’s presidential race, Mitt Romney’s new tax plan is a welcome move to get the campaign back on the real issues.
The rate cut follows the Reagan formula of applying to anyone who pays income taxes. The current 35% tax rate (set to rise to 41% in 2013 including deduction and exemption phase-outs) would fall to 28%, the 33% rate to 26.4%, the 28% rate to 22.4%, the 25% rate to 20%, the 15% rate to 12%, and the 10% rate to 8%.
As an economic matter, this is the most effective kind of tax cut because it applies at the margin, meaning the next dollar of income earned. A mountain of economic research shows that a marginal-rate cut does far more than tax holidays or targeted tax credits to change the incentives to invest and hire workers, and thus provides the most economic lift.
This is especially true because the vast majority of businesses in America today aren't corporations. They're sole proprietorships, partnerships or Subchapter S firms whose profits are "passed through," as the jargon goes, to the owners and are taxed at the individual rate. These noncorporate firms account for over half of all business income, according to IRS data. By lowering their taxes and making the rates permanent, Mr. Romney's plan would do much to make the U.S. more job and investment friendly.
The editorial notes that President Obama’s plan for corporate tax reform, also released yesterday, wouldn’t apply to these “pass-through” firms and so would favor the big corporations.
While giving the plan high marks, the editorial notes that Romney often uses language that seems almost calculated to offend conservatives. Unfortunately, he did it again with this tax plan. Romney referred to middle-class families and the “top 1 percent,” appearing to borrow the terms of Occupy Wall Street. But Romney does stress growth over envy and that certainly sets him apart from the president.
Speaking of the Obama economy, Daniel Henninger has a must-read piece today on “Obama’s Virtual Economy.” Here’s the nut graff:
With his recently announced campaign platform—An Economy Built to Last—President Obama has essentially constructed a virtual economy. Instead of the economy we all live in, he's making one up and inviting us to pretend we are living in it. Welcome to the Sim City Economy.
Sim City, one of the most popular products ever in the imaginary world of video games, lets players bring to life towns of their own devising in great detail. It's endless fun, fiddling with the dials on the real world.
It is less fun to live in the real world President Obama is trying to ignore.