Pay no attention to the numbers behind the curtain

"You heard what I said about my tax plan. The top 5 percent will continue to pay 60 percent, as they do today."  -- Mitt Romney, October 16, 2012

With that one fascinating statement in the second debate, the self-described "severely conservative" candidate made a severely cunning move.  Amazing as it may sound, Romney could reduce the effective tax rate on the top 5 percent, and have it rise for everyone else (i.e. the bottom 95%), yet the top 5 percent would continue to pay 60 percent.

The reason for this has to do with income inequality, which has been rising in the U.S. and is currently on par with Uruguay, Argentina, and Ecuador. If it continues to rise, as it is likely to do, and will almost certainly do under a Republican administration, then the aggregate income of the top 5 percent will grow while everyone else's income stagnates, at least in relative terms.

(Sidenote: I'm assuming Romney is correct that the top 5 percent currently pay 60 percent of taxes.)

The top 5 percent then would receive a higher proportion of the nation's income while their tax burden stayed the same - hence, lower effective tax rates.  Everyone else would receive a lower proportion of the nation's income while their tax burden, currently 40 percent, stays the same - hence higher effective tax rates, at least relatively speaking.

This isn't the only way Romney could shift the tax burden away from the wealthy and onto the less wealthy, while abiding by his promise.  Stating that the top 5 percent pay 60 percent of taxes says nothing about how the tax burden is shared across the top 5 percent.  The tax burden could simply shift away from, say, the top 1 percent onto the top 2-5 percent.

As you go up the income ladder, over the past couple of decades the rungs have been getting farther apart.  Reducing marginal tax rates across the board guarantees a windfall for the super-wealthy in two ways:

1. The tax rate on long term capital gains, a form of income heavily skewed to the super-wealthy, is already very low, contrary to the spirit of Ronald Reagan, who argued the tax rates on long term capital gains and wages should be the same.
2. Many tax deductions are already phased out for the wealthy, so they are in large part immune to any efforts to further restrict deductions.

That windfall would be paid for by everyone else, while the top 5 percent would continue to pay the stated 60 percent of taxes.

Say what you will about the motives of Romney, Ryan, and their advisors, but surely they had a reason to focus on 5 percent, as opposed to 20 percent, or 10 percent, or 1 percent, or the .1 percent to which Romney personally belongs.  The cynic in me says it's because the 5 percent stratum allows Romney to shift the tax burden downward the most while sounding like he's not doing anything of the sort.  The end result is a less progressive, more regressive tax structure.

Take a second, careful look at everything the severely conservative candidate promises to do:

• Make permanent, across-the-board 20 percent cut in marginal rates
• Maintain current tax rates on interest, dividends, and capital gains
• Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
• Eliminate the Death Tax
• Repeal the Alternative Minimum Tax (AMT)

And remember Romney is on record claiming he can do all this in a revenue-neutral fashion.  Most comments focus on the fact this is severely impossible.  And that's maybe where the focus should be.  But I find it fascinating how Romney chose a statement that sounds good but would allow him to shift the tax burden downward.

Cut taxes.  Don't cut taxes. What's clear is this severely conservative candidate has done a lot of damage to his own positions as well as to basic arithmetic.

Update: The Economist has a thought provoking opinion piece on "Inequality and the world economy."