Newt Gingrich is proposing a massive tax cut aimed at the highest earning American households. His plan would add about $1 trillion to the federal deficit in a single year.
GOP Presidential candidate Newt Gingrich is proposing a massive tax cut aimed at the highest earning American households. Gingrich’s plan would add about $1 trillion to the federal deficit in a single year. And while most of the nation’s lowest income families would get no benefit from these tax cuts, the top 0.1 percent (who make an average of more than $8 million) would get about a quarter of the windfall, according to new estimates by my colleagues at the Tax Policy Center.
The Gingrich plan, which has gotten relatively little attention, gives taxpayers a choice. It is similar to the proposal offered by Texas Governor Rick Perry, only even more generous. Taxpayers could stick with today’s revenue code– Gingrich would permanently extend the Bush/Obama tax cuts. Or they could pay under an alternative system based on a flat 15 percent tax rate
regardless of income. Capital gains, dividends,, and interest income would be tax-free. The Alternative Minimum Tax would be abolished. Nearly all deductions and credits would be eliminated, except for the earned income, child, and foreign tax credits and the deductions for mortgage interest and charitable gifts. All taxpayers would get a $12,000 per-person exemption.
For corporations, Gingrich would reduce the rate from a maximum of 35 percent to 12.5 percent and allow most capital investment to be written off in the year it is purchased. However, his plan seems to exclude curbs on specific corporate tax preferences.
Gingrich’s option would be a win for most households. But, as always, to figure out what the tax cuts would mean, you have to make another choice: Do you compare Gingrich’s plan to a world where the 2001/2003/2010 tax cuts have expired (the current law baseline in budget-speak) or to one where they remain in place (aka current policy).
In 2015, when TPC figures all of the changes would be fully effective, 70 percent of all households would get a tax cut compared to what they’d pay if today’s rules were extended. Everyone in the top 0.1 percent would be better off than under 2011 rates and they’d get an average tax cut of $1.9 million.
Among those in the bottom 20 percent, only about one-quarter would be better off under the Gingrich plan. Overall, low-income households would get an average tax cut of $63.
Of course, because taxpayers have a choice between today’s rules and Gingrich’s new tax code, nobody would be worse off (TPC assumes everybody makes the right choice although surely some people won’t).
However, this largess doesn’t come cheap. In just the single year of 2015, Gingrich’s plan would increase the deficit by about $850 billion. Remember, while we are used to seeing numbers such as this describing the 10-year revenue loss of some tax plan, this is just the one-year cost. It is half again as generous as Perry, who would add merely $570 billion to the deficit.
Compared to the current law world where the 2001-2010 have expired, taxpayers across-the-board do even better. Nearly 82 percent would get a tax cut. About 45 percent of the lowest-earners, and 98 percent of middle-income households come out ahead. For those roughly 130,000 lucky duckies in the top 0.1 percent, the windfall is eye popping. They’d get an average tax cut of $2.3 million. And their total federal tax bill would plunge from 38 percent of their income to barely 10 percent.
Because the plan is so much more generous when compared to current law, the overall cost of the Gingrich plan is even greater. He’d reduce revenues in 2015 by nearly $1.3 trillion, or 35 percent of federal taxes that year. Talk about starving the beast!
A plan such as this seems tailor-made for anti-tax Republican primary voters. But if Gingrich wins the nomination, he may not have such an easy sell to independents, who may wonder why adding a $1 trillion a year to the deficit is a good idea—especially when so much of the tax cut goes to a handful of very rich households.