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Mitt Romney’s Latest Tax Idea Would Create Big Winners and Losers

Updated: 7:30 p.m.

GOP presidential nominee Mitt Romney and his campaign have started to get specific about how he might pay for his signature 20 percent cut in tax rates, and his latest idea is sure to create both winners and losers.

Romney floated a $17,000 cap on itemized tax deductions in a local television interview Monday night as one option to pay for his plan. Establishing a cap would limit how much taxpayers could deduct from such popular tax breaks as mortgage interest, charitable donations and state and local taxes.

A Romney policy aide said there would be two other pieces to the tax reform option: adjustments to personal exemptions and a separate cap on the exclusion of employer-provided health care insurance from income.

That health care tax break is a particularly fast-growing and expensive one, and has been targeted by both parties.

The Romney aide said the three caps could be adjusted to ensure that middle-class families – in the aggregate – don’t see higher taxes. But the aide acknowledged that some in the middle class could pay more.

“There could be folks in certain circumstances who see a rise instead of a fall. … I can’t make any pledge to the person sitting next to me how tax reform will impact any particular individual,” the aide said.

That’s in part because Romney hasn’t settled on any one plan and has said he’d have to work out the details with Congress.

“There’s nothing in stone,” the Romney aide said.

Of course, any big tax reform plan necessarily creates winners and losers – even if the overall economy and the country as a whole benefit. Indeed, critics say Romney’s latest trial balloon would still result in a net tax cut for many wealthy people while increasing taxes on some middle-class earners.

President Barack Obama’s campaign quickly seized on the new details from Romney, pointing out that millions of families making less than $200,000 would blow through that $17,000 cap with mortgage interest alone, citing IRS figures.

“After months of failing to explain how he could make his $5 trillion tax plan add up, Governor Romney has finally admitted that middle-class tax breaks are on the table,” the Obama campaign said in a statement. “He said that he might cap deductions at $17,000 – meaning he would limit the charitable, home mortgage, health care and other deductions to that amount. It’s a new idea but, just like the many other ways Romney has described his tax plan, it would raise taxes for millions of middle-class families.”

The Romney campaign said the Obama camp mistakenly included the health deduction in its figures – which it would limit separately.

Romney’s plan looks similar to one Sen. Pat Toomey (R-Pa.) proposed last year during the failed super committee’s deficit reduction talks. Harvard economist Martin Feldstein also proposed the idea recently. The advantage, both noted, is that by setting an overall cap instead of wading through each individual deduction, lawmakers could try and blunt opposition.

“Obviously if you go after any one particular feature in the tax code, it’s there because a special interest put it in there and will defend it very aggressively,” Toomey said in an interview today.

Toomey praised Romney for floating the idea.

“It’s the logical and sensible mechanism that allows you to lower marginal rates and lowering marginal rates is the necessary pro-growth aspect of tax reform,” Toomey said. “If you put a cap on the itemized deductions as a category, you allow people to choose among the individual deductions they might prefer to take and you don’t go after any particular one.”

Toomey acknowledged that some would pay more.

“Any time if you make any changes to the tax code and you do it in a way that’s overall revenue neutral, necessarily some people are going to pay a bit more and some people are going to pay a bit less at first blush,” Toomey said.

But he argued that the benefits to growth from lowering rates would be substantial, with similar tax reform plans repeatedly getting bipartisan support.

Toomey also insisted that the plans can be tweaked in various ways to make sure the rich continue to pay the same share they do now.

“Mitt Romney has been abundantly clear, he is not going to support a tax reform plan that raises taxes on the middle class, and there’s no reason to doubt that,” Toomey said.

It will take more, however, to convince experts that Romney’s numbers add up.

The plan to cap tax benefits is “not enough to pay for the rate cuts for the rich,” let alone the additional rate cuts for low and middle-income earners that he has proposed, said Roberton Williams, an Urban Institute senior fellow who is associated with the Tax Policy Center.

Williams pointed out that the Tax Policy Center had run an earlier analysis of Romney’s plan and concluded it would result in a large tax cut for the rich, even if it took a more aggressive approach to reducing their tax benefits. The reason is that households that earn millions of dollars typically benefit more from reduced tax rates on investment income – which Romney has pledged to preserve – than they do from breaks such as the mortgage interest deduction.

Williams noted that Romney would have a much easier time selling his plan as mathematically possible if he said he wanted to reduce tax rates by an unspecified amount, rather than by 20 percent specifically.

So far, the Romney campaign continues to insist that a 20 percent across-the-board cut is achievable, but has not provided any arithmetic of its own to show how that is possible, referring instead to friendly analyses by the American Enterprise Institute and others.

The AEI analysis, however, relied on the possibility of higher growth projections to argue that it’s possible the rich wouldn’t benefit.

That interpretation wouldn’t pass muster with official, nonpartisan Congressional budget scorekeepers, however.

The Romney idea is certain to face headwinds from various interests such as the real estate industry and nonprofits that rely on charitable contributions. Obama has repeatedly proposed limiting tax deductions for the wealthy so that each dollar of deduction does not cut their tax bill more than 28 cents – the same rate paid by many middle-class taxpayers – as opposed to the 35 percent rate they pay today.

Conservative groups, Republicans and charities opposed the idea, warning it could hurt charitable giving.

But Romney’s proposal is far more extreme. In his own case, he has taken millions of dollars in tax deductions from his charitable donations. A $17,000 cap would increase his own tax bill substantially as a result.

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