WASHINGTON — The tax reform plan that House Republicans have advanced would sharply cut taxes for the wealthiest Americans but could leave middle-class households facing much larger tax bills, according to a new analysis set to be released Wednesday.
The report, prepared by Senate Democrats and reviewed by nonpartisan tax experts, marks the first attempt to quantify the trade-offs inherent in the GOP tax package, which would replace the current tax structure with two brackets — 25 percent and 10 percent — and cut the top rate from the current 35 percent.
Those changes would benefit virtually every taxpayer, but they also would reduce federal tax collections by about $4.5 trillion over the next decade, according to the nonpartisan Tax Policy Center. To avoid increasing the national debt by that amount, GOP leaders such as House Budget Committee Chairman Paul Ryan of Wisconsin have pledged to “get rid of all the special-interest loopholes and tax shelters” that litter the code.
Republicans have declined to identify their targets. However, some of the biggest “loopholes” on the books are popular tax breaks for employer-provided health insurance, mortgage interest, state and local taxes, and retirement savings, which disproportionately benefit the upper middle class.
So although households earning $100,000 to $200,000 a year would save about $7,000 from the lower tax rates in the GOP plan, those savings would be swamped by eliminating major deductions, according to the report by the Democratically controlled congressional Joint Economic Committee.
The net result: Married couples in that income range would pay an additional $2,700 annually to the Internal Revenue Service on top of the tax increases that are scheduled to hit every American household when the George W. Bush-era tax cuts expire at the end of the year. With those tax hikes factored in, the total increase could approach $7,500, according to the report.
Households earning more than $1 million a year, meanwhile, could see a net tax cut of about $300,000 annually — or about $150,000 when the expired Bush tax cuts are factored in.
“According to this report, while millionaires will receive a huge tax break, earners making under $200,000 will see their taxes rise significantly,” said Sen. Robert Casey, D-Pa., who chairs the Joint Economic Committee.
“Ryan seems to want to have his cake and eat it, too, and this report shows that you can’t,” added Sen. Charles Schumer, D-N.Y., who requested the analysis. “If you want to cut taxes on the rich and not raise the deficit, you’re going to have to basically clobber the middle class.”
House Republicans called the report premature and unfair. For example, it assumes that Republicans would maintain lower rates for capital gains and dividends — which disproportionately benefit the very wealthy — a long-standing part of GOP tax orthodoxy. GOP presidential candidate Mitt Romney, for example, has said he would preserve the lower rates for the wealthy and eliminate taxes on investment income for the middle class.
However, the budget blueprint the House passed this spring sets no such conditions on tax reform, and Ryan spokesman Conor Sweeney said Republicans “are open to changes to those rates.”
GOP aides noted that the report assumes that major tax breaks such as the mortgage interest deduction would be eliminated. But some Republicans have argued that similar savings could be achieved by trimming the breaks, perhaps by limiting them for wealthy households, as Ryan suggested in a recent interview with Al Hunt of Bloomberg News.
“There is a saying about why you shouldn’t assume things, but I will just politely suggest that the actual tax writers would probably write a different bill than the staff at JEC,” said Sage Eastman, a senior adviser to House Ways and Means Committee Chairman Dave Camp of Michigan, who is leading the Republican tax-reform effort.
Roberton Williams, a senior fellow at the Tax Policy Center, reviewed the Joint Economic Committee report. Although the numbers are rough, he said, the conclusions are largely accurate.
“Even with eliminating fairly major tax preferences, the Ryan tax plan remains regressive. That’s the bottom line,” Williams said. “Unless you go after the tax preferences that benefit the wealthy” — capital gains, dividends, tax-free interest on municipal bonds — “it’s really hard to undo the regressivity of the rate changes. You’ll be shifting the burden of the tax code toward the middle class.”