The Americans for Prosperity Foundation held its’ first-ever “Defending the American Dream Summit” in Washington last week. Billed as evidence of a “real and powerful national movement” to rein in “out-of-control government spending and taxation,” the event attracted a roster full of Republican presidential candidates who touted their respective economic credentials and proposals to the pro-growth interest group. Thankfully, many of the candidates have already offered innovative free-market ideas to grow the economy, (contrary to what Gail Collins said in a New York Times opinion piece on October 6). But in a field of strong candidates with bold ideas, one candidate stands out from the rest: Mitt Romney.
Romney has already established that he will make the Bush tax cuts, which did so much to help the economy rebound after September 11, permanent. But that’s only one part of his economic vision. Consider another: Romney’s tax-free savings plan—a proposal that some political pundits believe could be the policy that distinguishes Romney from the crowded Republican field. Indeed, James Pethokoukis of U.S. News and World Report wrote recently that Romney’s “radical” plan could “be a difference maker” as the former Massachusetts Governor “is proving to be a bit of an ‘idea man’ in a Republican race that has shown little bold or original thinking.”
You don’t need an economics degree to understand the plan. It is as straightforward as it is innovative: Romney’s proposal would change the tax rate on interest, dividends, and capital gains to zero percent, allowing middle class Americans whose combined salary and investment income is $200,000 per year or less to save and invest tax-free.
According to the campaign, 95 percent of American households earn less than $200,000 a year and therefore stand to reap tangible benefits from the proposal.
If such a policy had been in place in 2005, 56 million taxpayers who earned interest, 28 million taxpayers who earned dividends, and 23 million taxpayers who earned capital gains would have paid zero taxes on their savings and investments. In 2004, the median income for a family of four fell into the $50,000 to $75,000 tax bracket—and that income group paid over $796 million in capital gains taxes. Under the Romney plan, that income group would have paid nothing.
Romney’s plan also offers help to homeowners and would-be homeowners. Tax-free savings will assist current homeowners in meeting their mortgage payments; it will also accelerate the rate at which future homeowners can save for their first down payment.
Additionally, the policy ushers in opportunities for millions more to join the more than half of adult Americans who already participate in the stock market. The plan essentially says to Americans not currently in the stock market, ‘Come play: You can keep what you win.’ This powerful participation incentive will pay significant dividends both for individual investors and the economy at large.
Easing the burden on millions of taxpayers is also likely to produce further economic growth—growth the United States needs to continue to lead and compete in an increasingly competitive global economy.
“As we’re saving our money and investing in the bank or investing in stocks, we’re going to help encourage the creation of new businesses and grow the businesses that already exist,” Romney said when he announced the plan. He added that business growth will ensure “growing additional jobs.”
What’s the catch? Estimates suggest the tax-free savings plan will cost the federal government $32 billion each year. Romney, however, has a plan to make up for the lost revenue: to limit growth in nondefense discretionary spending to the inflation rate minus one percentage point. Thus part of the appeal of the plan is that the “downside”—mandatory spending restraint—can hardly be considered bad policy.
The 2008 election will turn, in large part, on competing economic visions for the future of the country. The Democratic candidate will inevitably propose policies that increase the size—and consolidate the power—of government. Governor Romney, on the other hand, has a distinctly people-centered economic vision—one that sees on every Main Street corner potential investors, not future government beneficiaries. With a worldview such as this, Americans can trust that a President Romney would champion economic freedom and fiscal responsibility in Washington. That ought to be good news to the folks who attended the American Dream Summit—and to millions of other hard-working Americans across the country.