The Pros and Cons of Mitt Romney's Tax Plan

His plan to cut tax rates while killing deductions might be more plausible than critics contend.

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Republican presidential candidate Mitt Romney speaks during a campaign rally, Tuesday, Oct. 9, 2012, in Van Meter, Iowa.

There are a lot of details-to-be-named-later in Mitt Romney's tax plan, which has given it kind of a hypothetical quality—as if it might be just a tease meant to draw gullible voters who really believe that a nation deeply in debt can cut taxes rather than raising them.

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But some tax experts familiar with past efforts to revamp the tax code think there is an element of plausibility to Romney's plan, even if the devilish details won't come till after Election Day. In particular, the Republican presidential nominee has hinted at changes that might require some people to pay more in taxes, so that others can pay less. "The specifics necessary to create an economic model might be missing, but the principles and vision he has outlined give us substantial clues" about who the winners and losers might be, says Clint Stretch, former managing principal at Deloitte Tax.

The basic element of Romney's tax plan is a 20 percent reduction in each of the six federal tax brackets, so that those in the 15 percent bracket would instead be taxed at 12 percent, the 25-percent bracket would fall to 20 percent, and so on. He'd also lower the corporate income tax rate and eliminate or reduce other levies.

The catch is that Romney has insisted his tax plan will be "revenue neutral," meaning he would come up with other forms of revenue to offset money the government would lose if tax rates declined. This is where the guessing game begins, because Romney hasn't spelled out what those other forms of revenue would be.

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At one point, he suggested that personal tax deductions could be limited to a total of $17,000 per family, which could cut into the deductibility of things like mortgage interest and charitable contributions for some middle-class taxpayers, and many higher-income ones. But Romney recently recanted, saying he wouldn't do anything to threaten popular tax breaks that many middle-class families depend upon.

These now-you-see-it-now-you-don't tax proposals make it tempting to simply dismiss Romney's plan as an election-year confection. But Stretch, who closely followed the last big federal tax reform effort in 1986, says Romney has laid the groundwork for a tax reform plan that could be filled out later by Congress. And while Romney hasn't spelled out everything that might have to change, the elements of the tax code that he has highlighted—or refused to defend—provide hints at the specific changes he might have in mind. Here are some of the possible changes that could be part of Romney's tax plan, assuming he cuts all tax rates by 20 percent:

A near-total elimination of deductions for the rich. If the top income-tax rate fell by 20 percent, people with more than $1 million in income would still end up ahead, on average, even if all tax deductions in this bracket were eliminated. So Romney's plan would probably have to axe all deductions for this group, and still come up with further savings.

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A hike in the tax rate on capital gains or dividends. Romney has said he wouldn't raise these taxes, but he may have to in order to claim that he didn't cut the overall amount of taxes on the wealthy. If Democrats in Congress were to insist on raising such taxes as part of any reform deal, that might give Romney a bit of political cover, since he could say he had to compromise to get a deal done. Ronald Reagan did something similar to clinch the 1986 tax reforms.

Sharply reduced tax deductions for the middle class. By saying he would protect some deductions, such as those for mortgage interest and charitable donations, Romney has implicitly fingered others he might be more inclined to repeal. Two of the biggest are the child tax credit (worth up to $1,000 per child per family) and a variety of tax credits for education expenses that are generally worth as much as $4,000 a piece. Such reductions may or may not include so-called 529 plans, which provide a tax break for families saving for their kids' college expenses. Other changes could include lower thresholds for employer-provided health care coverage, retirement plans such as 401(k) accounts, or child care tax credits.

The idea behind shifting taxes in this manner would be to simplify the tax code by lowering rates, while axing dozens of deductions that clutter the tax code and tend to favor taxpayers able to hire sophisticated tax advisors. In theory, it would give most Americans more control over their income, with fewer incentives meant to encourage certain behaviors, such as saving for college or retirement, that Congress has deemed important in the past.

But such reforms would also be fraught with peril for any politician seen as taking something away from one group of taxpayers and giving it to another. That helps explain why Romney is so reluctant to highlight the details of his plan. To get elected, he needs to promise something to nearly every voter—while not delineating winners and losers. There will be plenty of time for that later.

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