Tax Plan Showdown: What About the 98 Percent?

July 11, 2012 -- The fight over creating jobs morphed into the battle of the tax plans this week after President Obama renewed his call to let the Bush Tax cuts expire for people earning more than $250,000 per year, a policy his Republican rival Mitt Romney dubbed a "kick in the gut."

But while the rhetoric over taxes revolves around what the wealthiest Americans will pay, little attention has been given to how the other 98 percent of Americans -- those that will most likely decide the 2012 election -- will fare under Obama's or Romney's tax proposals.

The short of it is under Romney's plan, taxes will go down for nearly every taxpayer. Under Obama's plan, middle and low income earners will pay virtually the same amount as they currently pay, while people earning more than $250,000 will see their taxes go up by between 2 percent and 5 percent.

While Romney and Obama split over the tax rates for the top 2 percent of income earners, they both agree that the Bush tax cuts should be extended for everyone earning less than $250,000, thereby preventing a nearly $1,800 tax hike, on average, for middle income earners starting in 2013, according to a Tax Policy Center analysis.

For a full run down on expiring taxes, check out this INFOGRAPHIC.

"Both the president and Romney would protect the middle class," said Roberton Williams, a senior fellow at the Brookings-Urban Institutes' Tax Policy Center. "Romney by saying 'I'm not going to raise taxes on anyone, in fact, I'm going to cut tax rates.' Obama says we aren't going to touch the middle class at all."

Taken as a whole, Romney's plan reduces taxes for three-fourths of tax payers by an average of $4,700, the Tax Policy Center estimates. Obama's plan would lower taxes for 12 percent of filers and raise taxes for about 27 percent. Nearly every person whose taxes would go up under Obama's plan earns more than $250,000 per year, according to the Center's analysis.

Romney has proposed cutting tax rates by 20 percent at every income level, including bringing the top rate down from its current 35 percent to 28 percent. Under his plan a middle-class family that earns between $35,000 and $60,000 per year would save about $810 on their yearly federal income taxes, according to an analysis by the Tax Policy Center.

"I want to make sure we don't reduce the burden on high income tax payers," Romney said at a town hall in Colorado today. "This campaign is about the middle class and the poor. The rich are going to do fine no matter who is elected."

Romney said Tuesday that he will "limit deductions and exemptions" to pay for the tax rate reductions. But the GOP candidate has not said exactly which loopholes he plans to close or how he plans to broaden the tax base to pay for his tax cuts.

"We have an incomplete version of the Romney plan that looks like a lot of tax cuts, but since he has said it's revenue neutral he has to raise the revenue somewhere," said Williams, who helped analyze Romney's tax plan. "He hasn't told us the whole story."

One of the only deductions Romney has singled out to be eliminated is the credit for mortgages on second homes, a credit that mainly benefits people earning between $100,000 and $200,000. Reporters overheard Romney floating this detail at a closed-press campaign fundraiser and he has not expanded on his plan in public.

Very few people would be affected by wiping out the credit because not many Americans have second homes and even fewer pay mortgages on them, since the very wealthy often buy their property outright, Williams said.

"That's not going to get you very far," he added.

Investment Tax Trickle Down

Romney would also extend the Bush tax cut provisions that keep the tax rate for capital gains and dividends at 15 percent and eliminate all federal income taxes on those investment incomes for people earning less than $200,000.

Obama would allow that provision of the Bush tax cuts to expire for people earning more than $250,000, making the tax rate on capital gains jump to 20 percent and dividends taxes rise to 39.6 percent.

The president's health care law imposes an additional 3.8 percent tax on investment incomes, further bumping those rates up to 23.8 percent for capital gains and 43.4 percent for dividends.

"It directly affects those making more than $250,000, but the indirect effect is that it affects the general level of the stock market," said William McBride, an economist at the conservative Tax Foundation.

Allowing the investment tax rates to rise to the levels Obama has proposed would make the value of dividend-paying stocks plummet about 30 percent McBride said.

"This is serious," he said. "When you suddenly triple the tax on dividends that means the price investors are willing to pay for dividend wielding stocks will go down."

People who earn less than $250,000 and do not directly see their investment taxes go up will still be affected if they own mutual funds or have a 401K retirement plan, both of which could see their value go down because of the increased tax rates on dividends, McBride said.

While Obama and Romney have both made taxes the focal point of their campaigns this week, with both candidates out on the campaign trail touting their plans Tuesday, their proposals are not new and their announcements are not fresh.

"These are elements of past speeches, budgets and campaign plans that have surfaced and submerged over the past several years," said Pete Sepp, a spokesman for the National Taxpayers Union, which supports limited government and low taxes. "These ideas have had a long shelf life and have been brought off the shelf and put back on more than a few times."