David Frum on How Romney Would Screw the Ordinary Rich

Romney on the stump in Virginia. Jewel Samad / AFP-Getty Images

The Mitt Romney campaign has pledged that its tax plans—mainly cuts to the top income-tax rate combined with the elimination of loopholes and deductions—won’t reduce the tax burden on “the rich.” But who are the rich? Take a closer look and you see that even if the plan works exactly as advertised, Romney would transfer the tax burden from the plutocrats to the orthodontists.

You see, the top 1 percent has its own top 1 percent—the richest of the rich—and those lucky enough to count themselves within its ranks would be the big winners from a cut in the top rate of income tax to 28 percent—and they’d be even bigger winners from Romney’s proposal to extend indefinitely the present 15 percent rate on capital gains and dividends.

Meanwhile the lower 99 percent of the top 1 percent—and the next 2 percent after them—will lose much more from the removal of the tax deductions than they will gain from lower rates.

Just ask Jeff Johnson, a successful businessman in a family-owned company in the D.C. area. He’s no Occupy Wall Street type. He’s as vexed by the many lower-income Americans who pay no income taxes at all as he is by the ultra-rich few who pay 15 percent rates or less. He agrees with President Obama: somebody has to pay for the roads and bridges that make America successful. But he wants to know why so much of the cost falls on him and people like him: not the fabulously wealthy but the ordinary rich. “Why am I slaving away at W-2 wages?” Johnson wonders. “The ultra-wealthy don’t care about W-2 wages. They’re working for stock appreciation, distributions, and so on.”

“People who are multimillionaires or billionaires have enormous numbers of things at their disposal, within the law” to avoid tax, says Mike L., who works for a mid-size software company that bought the small company he started with some friends. But such techniques for tax avoidance are not practical for people like him.

It’s no surprise that President Obama wants to raise the taxes of people like Mike L. and Jeff Johnson.

Here’s what you may not know.

Romney adviser Martin Feldstein, one of America’s most distinguished tax economists, recently crunched the numbers of the Romney tax plan in The Wall Street Journal. Against those who claim that Romney’s tax plan is arithmetically impossible, Feldstein argues it could be done. All it would take is a 30 percent -reduction in the tax deductions available to everybody reporting taxable income of more than $100,000.

In other words, a big tax cut of greatest value to those earning more than $500,000 a year (the people who pay the top rate on the majority of their income) will be offset by a tax increase that will fall most heavily on those who earn between $100,000 and $300,000 of taxable income.

People in the $100,000–$300,000 group are likely to think of themselves as “middle class.” They’re wrong about that: $100,000 of adjusted gross income puts you into the top 20 percent of taxpayers; at $300,000, you are richer than 98 percent of your fellow Americans. You might call people in the $100,000–$300,000 range the “lower upper class.”

When Mitt Romney talks of capping itemized deductions at $17,000 to finance a cut in the top rate of federal income tax to 28 percent, he is talking about paying for a tax cut for the Porsche customer with a tax increase on the Porsche salesman. Both may be “rich” from the point of view of the typical American worker. But they are not rich in anything like the same way.

This doesn’t mean that we have to defend every deduction in the tax code. Gradually phasing out the mortgage-interest deduction would be a good idea on its own merits, encouraging Americans to spend less on their houses and save more in financial assets. But it does mean that we have to be more attuned to the huge internal differences within the American upper class.

A congressional staffer friend once joked that Congress spends its days “arbitrating differences between the merely affluent and the genuinely wealthy.” That may have once been true. But in recent years the merely affluent have begun to wonder if Washington has gamed the system to make their lives more difficult while showering perks on the genuinely wealthy.

Mike L., the software engineer, says that this country has never resented the successful.

That’s true. But nowadays it sometimes seems that the very most successful resent everybody else—starting first with the people occupying the rungs of the ladder immediately below their own.