Tax Plan Square Off: Romney vs. Santorum

January 16, 2012 Tax Plan Square Off: Romney vs. Santorum

Following the Iowa Presidential Caucus in early January, 2012 where only 8 votes separated candidates Mitt Romney and Rick Santorum, we thought it would be a good idea to compare their proposed tax plans.  We wanted to get very specific, though.  So, before we delved into the details of either plan, we created four hypothetical taxpayers:

  • Single Parent with three dependent, minor children
  • A working Family, where both parents work with three dependent, minor children
  • An Executive with one high-earning parent working and three dependent, minor children
  • A Retired couple

The next step was to determine typical income and deductions for these hypothetical taxpayers.  In our opinion, the following are typical for these taxpayers:

Single Parent

Family

Executive

Retired

Filing Status

Head of Household

Married-File Jointly

Married-File Jointly

Married-File Jointly

Marital Status

Single/Divorced

Married

Married

Married

Dependent Children

3

3

3

0

Homeowner or Renter

Renter

Homeowner

Homeowner

Homeowner

W-2 Earnings – Parent One

$30,000

$85,000

$1,250,000

$0

W-2 Earnings – Parent Two

N/A

$35,000

$0

$0

Pension Income-Both   Spouses

N/A

N/A

N/A

$30,000

Social Security   Income-Both Spouses

N/A

N/A

N/A

$35,000

Interest Income

$0

$500

$10,000

$6,000

Dividend Income

$0

$0

$15,000

$1,000

Capital Gain Income

$0

$0

$250,000

$0

Mortgage Interest Paid

$0

$15,000

$40,000

$0

Charitable Donations Made

$0

$750

$10,000

$500

Real Estate Taxes Paid

$0

$4,000

$25,000

$2,500

State Income Taxes Paid

$900

$3,600

$45,000

$1,000

Now, we dove into the details of each tax plan.  We intentionally delayed this step until we determined the hypothetical taxpayers’ profile and the typical income and deductions, as we did not want the details of the tax plans to influence this determination.  Here are the results:

2011 Rates

Romney

Santorum

Single Parent:
Federal Taxes Paid

$0

$0

$0

Federal Taxes Refunded*

$5,270

$4,631

$5,943

Family:
Federal Taxes Paid

$9,469

$9,294

$5,616

Executive:
Federal Taxes Paid

$402,147

$402,147

$331,864

Retired:
Federal Taxes Paid

$3,594

$1,801

$3,063

* A refund would be realized due to the Refundable Earned   Income Tax Credit and the Refundable Child Tax Credit

 

A few very important notes:

  • The 2011 Rates column shows the taxes for each scenario under the existing tax rates and law.
  • For the Romney and Santorum columns, we applied the existing 2011 rates and law, but made changes based on their published tax plans on their websites.  We also consulted the Tax Policy Center of the Urban Institute and Brookings Institution for details on Romney’s position on the Earned Income Credit.
  • Where there was no specificity, such as with Romney’s position, “…in the long run, Mitt Romney will pursue a conservative overhaul of the tax system that includes lower and flatter rates on a broader tax base.,.”, we made no changes to the 2011 tax rates.
  • Santorum states that he would reduce the current 6 tier rate structure to a 2 tier rate structure.  His rates would be 10% and 28%.  We felt this position was specific enough for us to apply these two rates, but needed to make an assumption to the applicable income levels, as this specificity was not articulated by Santorum.
  • Most importantly, the results are reflective of only the income and deductions that, in our opinion, were typical for these hypothetical taxpayers.  Changing any of these variables can change the results and analysis greatly.  (Editor’s Note:  we spent a significant amount of time and effort building a model and very thoroughly understanding the tax plans of each candidate.  We can easily accommodate any request for “what ifs” using different input values for income and deductions.  Feel free to email us at [email protected] with any request).

Now some analysis:

Santorum’s plan’s results in lower taxes or a higher refund (due to the refundable earned income and child tax credits) in three of the four scenarios.

  • Romney’s plan results in lower taxes for the Retired couple only because he would not tax interest and dividend income for taxpayers with Adjusted Gross Incomes below $200,000.  In this scenario, we assumed $7,000 in interest and dividend income would not be taxed and the elimination of this income results in a smaller amount of the Retired couple’s Social Security being taxed.  In our tax compliance experience, we find that retired taxpayers often have significant interest income.
  • Romney’s plan does not significantly change the existing tax rates and law.  There is very little change for taxpayers with Adjusted Gross Income above $200,000.
  • Santorum’s plan is oriented very favorably towards families with multiple children, as he wants to increase the personal exemption for dependent children from $3,700 to $11,100.  In our opinion, there would need to be a separate rate category for taxpayers with one or no children.  It may be very difficult to significantly lower the income tax rate for families with many children and triple the amount of their dependency exemption, but lower rates are a part of the Santorum plan.
  • The results above for the Santorum plan would be significantly different for Single Parent and Family assuming one or fewer dependent children.
  • The results for the Executive under the Santorum plan are greatly influenced by our assumption on the Santorum income tax rate table.  We applied this assumed table to all scenarios, but it influenced the Executive scenario the most.

If you want to review our backup information, including tax returns for each of these scenarios, please email us at [email protected].

Three days prior to publishing this report, we sent this paper and our backup notes to the Romney and Santorum campaigns for their feedback.  We received no feedback.

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IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

 

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