(Solved Homework): In the 2012 presidential election, there was a lot of debate about our current personal income tax system. On…

In the 2012 presidential election, there was a lot of debate about our current personal income tax system. On the one hand, President Obama wanted to keep Bush era tax cuts when they expired at the end of 2012, except for family making over S250,000. For these families, their highest marginal tax rates would increase from 31%,33% and 35% to the pre-Bush era tax rates of 33%, 36% and 39.6%. On the other hand, Mitt Romney, the Republican presidential candidate. wanted to cut tax rates further for all family from the current tax rates and expand the income tax base to make up for the revenue loss by eliminating tax loopholes such as deductions and credits, although without specifying what they are. (3 points) What are the economic rationales for these two tax plans of the two parties?

In the 2012 presidential election, there was a lot of debate about our current personal income tax system. On the one hand. President Obama wanted to keep Bush era tax cuts when they expired at the end of 2012, except for family making over $250,000. For these families, their highest marginal tax rates would increase from 31%, 33% and 35% to the pre-Bush era tax rates of 33%, 36% and 39.6%. On the other hand. Mitt Romney, the Republican presidential candidate, wanted to cut tax rates further for all family from the current tax rates and expand the income tax base to make up for the revenue loss by eliminating tax loopholes such as deductions and credits, although without specifying what they are. What are the economic rationales for these two tax plans of the two parties?

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Prsident Bush had made tremendous cut in tax during his period. The tenure of such cut was scheduled to prevail till 2012. After that Obama maintained the same cut. Only there was marginal income tax increase for families earning more than $250,000. For them extra percentage of tax payable ranged from 2% to 4.6%.

According to Obama, these groups are capable of paying this small extra tax. It will not affect their satisfaction level much. But there will be a significant addition in tax revenue of the economy. That extra collected money will be used in welfare activities. Thus benefits received will be much higher than welfare sacrificed by the people paying extra tax. So country as a whole will be better off. Welfare of US economy will be maximized.

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But Romney replublican presidential candidate was in favor of maintaining same tax cut. According to him tax rate increase will adversly affect an affluent section of the people. So welfare will decrease. So he thought that no increase in tax rate is needed. He was in favor of identifying loopholes of the taxation system existing now. If these loopholes are repaired, then automatically more people will be covered to pay tax. Automatically tax collection will increase.

This logic is valid if such loopholes are clearly indentifies and possible increrase in tax is properly ascertained.

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