What Investors Love About the Romney Tax Plan

With Election 2012 less than one hundred days away the verbal slingshots between the two candidates have picked up in negativity. Tax returns and tax policies have been the subject of the latest round of insults and political maneuvers.

The nonpartisan Tax Policy Center released a report claiming Mitt Romney's tax plan would "provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers."

President Obama responded by calling the Romney tax plan a Robin Hood reversal and dubbed the former governor's plan "Romney Hood."

Romney responded with a childish quip of his own calling the president's remarks "Obamaloney."

But if you want to take a step back from the negative tone of campaigning, one tax plan clearly stands out as a winner for investors.

Romney Hood Helps the Rich and Poor Investor

No matter what tax bracket you are in, if you have investment income you will benefit from the Romney tax plan.

The Romney tax plan would eliminate any tax on long-term capital gains, dividends, and interest income for married couples filing jointly with income under $200,000 ($100,000 for single filers and $150,000 for heads of household) and repeal the federal estate tax.

That means that a married couple with $150,000 of income from sources other than long-term gains, dividends, and interest would pay no tax on the first $50,000 of investment income.
If you are a married couple with income from other sources above $200,000, all capital gains, dividends, and interest would continue to be subject to current tax rules.

Short-term capital gains will still be taxed at ordinary rates but Romney plans to lower those rates 20% for all individuals. That across-the-board 20% cut in marginal rates means:

    • The top income rate falls from 35% to 28%.
    • The middle-bracket tax rate drops from 25% to 20%.
    • The lowest tax bracket rate is cut from 10% to 8%.

As an investor it's hard not to side with Romney on this issue, but not everyone is certain that lower capital gains rates would do the economy any good.

"The evidence that a lower rate on capital gains actually changed the amount of investment that occurred over time was actually pretty weak," Laura Tyson, an economics professor at the University of California at Berkeley and former advisor to Bill Clinton told Bloomberg News. "The evidence is divided. The effect isn't large."

Tyson advocates raising capital gains rates to help pay for reductions in the corporate rate.

The plan is criticized for its advantages to wealthy individuals because it calls for an extension of the Bush tax cuts. President Obama now wants to extend the Bush tax cuts on the first $250,000 of taxable income for all families, but will raise taxes on many investment-related income sources.

President Obama's War on Investors

The majority of investment income comes from capital gains and dividends. President Obama plans to raise taxes on both of these sources of income.

"If you want to tax the rich, a really effective way to do it is to tax capital gains," Leonard Burman, a professor at Syracuse University told Bloomberg.

Currently long-term capital gains are taxed at 0% if you are in the lowest two tax brackets and 15% for anyone at or above the 25% level. Short-term capital gains are taxed at your ordinary income tax level.

The president's plan will change the 0% rate for long-term capital gains to 10% and raise the 15% level to 20%. Short-term capital gains will still be taxed at ordinary income levels but both types of gains will be subject to the 3.8% Medicare tax.

That "tax" stipulates that if your gross income is more than $200,000 ($250,000) for joint filers, you'll pay a 3.8% surtax on your "investment income." That includes dividends, interest, rent, capital gains, annuities, and house sales.

"It's significant to go from 15 to 20," Tim Speiss, a partner in charge of the personal wealth group at EisnerAmper LLP in New York told Bloomberg. "It makes it much more significant if you're going to take it to 23.8."

Romney has stated he will try to repeal Obamacare and with it the investment surtax.

The dividends tax rate will see the biggest hike if the president is re-elected.

Currently taxed at the same rates as long-term capital gains, dividends will switch to ordinary tax rates, meaning the highest level will rise to 39.6% plus state and local taxes. When you add the fact that dividends are taxed first at the corporate level, which President Obama said he would lower to 28%, then at another 39.6% for individuals, it makes the highest tax rate on dividends a whopping 56.5%!




"It will decrease investment," Peter Schiff, chief executive officer of Euro Pacific Capital Inc. told Bloomberg. "It will raise the hurdle rate."

Senate Democrats have even issued plans opposing President Obama where the dividend rate would only increase to 20%.

The two plans offer very opposing taxes on investments and investors should keep that in mind before and after the election. We'll see if the Romney tax plan gets any adjustments now that Rep. Paul Ryan, R-WI, has been added as his vice presidential nominee.

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