Does Romney’s tax plan make economic sense?


Lots of buzz about a big analysis of Mitt Romney’s tax reform plan from the Tax Policy Center and Brookings. Now remember, the Romney plan is supposed to be pro-growth — by cutting tax rates — and revenue neutral — by scaling back or eliminating tax breaks. Here are the core elements, via the Romney web site:

– 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)

The headline finding of the Brookings-TPC study is that the Romney plan would “provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers. In addition, we also assess whether these results hold if we assume that revenue reductions are partially offset by higher economic growth.”

As the below chart shows, taxpayers making $200,000 or more would get a tax cut, while those making below $200,000 are clipped by a small tax increase:

Explanation from Brookings and the TPC: Because the total value of the available tax breaks — setting aside ones for investment, which the study assumes Romney would keep — going to high-income taxpayers is smaller than the tax cuts they would get, their tax burden would fall.

But because the plan mustn’t add to the deficit — just cutting taxes would add between $360 billion to the deficit in 2015 — tax breaks further down the income ladder must be sharply reduced. We’re talking mortgage interest deduction, the exclusion for employer-provided health insurance, the deduction for charitable contributions, and benefits for low- and middle-income families and children like the EITC and child tax credit. The result is a net higher tax burden for those folks.

This scenario assumes the complete elimination of tax expenditures for taxpayers with income over $200,000 — other than investment-related ones — and the elimination of 58% of total tax expenditures for households making less than 200,000.

Without the revenue neutral requirement, here is how the plan would shake out:

[The study notes that "those at the very bottom of the income distribution—Americans who make less than $30,000 per year—would actually see a small tax increase because tax provisions in the 2009 stimulus bill and subsequently extended through 2012 expire.]

Now I don’t have a problem with the general analytical approach here, nor am I surprised by the findings given that approach. The U.S. has an extremely progressive income tax system where the top 1% pay 40% of the income taxes, while the bottom 50% pay just 2%. Across-the-board tax cuts will favor upper-income folks and “paying for them” will make the system less progressive in terms of the tax burden.

But I do have some issues with the study, as well as an observation or two.

First, the study assumes that Romney’s corporate income tax will be paid for by eliminating about $100 billion in business tax breaks. Yet an AEI study suggests that the U.S. corporate tax rate is deeply on the wrong side of the Laffer Curve and a cut to 25% might well pay for itself. So that $100 billion could help pay for individual income tax reductions.

Second, the study offers one scenario that assumes the tax plan produces greater economic growth than the TPC baseline scenario with a revenue loss of around $300 billion instead of $360 billion. Apply that $100 billion in corporate savings, and the revenue loss — before scaling back individual tax breaks — would be around $200 billion. At that point, the supposed tax hike for those making under $200,000 would likely be much less than 1%.

Third, I would guess the Romney campaign is betting on even higher GDP growth estimates than Brookings-TPC, assuming the economy might get a confidence bounce from business, investors and consumers after a Romney win, especially if he is able to produce major tax and entitlement reform.

Fourth, without more details from the Romney campaign, this sort of analysis is really not more than a very, very rough guestimate of the budgetary impact. For instance, Romney could cut rates but also fiddle with the tax brackets affected by those rates, pushing more people in the higher bracket. Certainly this argues for more detail from Team Romney.

Fifth, a broader tax code with lower marginal rates likely would boost growth as Romney says. This is the Simpson-Bowles route, by the way. But the tax code needs even bigger reform that what Romney is suggesting if we really want to make it as pro-growth as possible. One option is transforming it into a progressive consumption tax.

Another interesting option is the pro-growth, pro-family tax reform devised by my pal Bob Stein. His plan would a) eliminate the double-taxation of capital income; b) scrap the individual Alternative Minimum Tax and all itemized deductions except for mortgage interest and charitable donations, c) keep just two tax rates, 15% and 35% with the width of the 15% bracket twice the size for married couples as for singles; d) a new $4,000 per-child credit, offsetting both income and payroll taxes. More from Stein:

Overall, the plan is designed to be revenue neutral — and yet most taxpayers without children will pay a little bit less in taxes, while middle-­class families with children under 18 years of age will pay substantially less. So who pays more? Primarily high-income workers, but also upper-middle-class taxpayers who do not have children in the home (either because they have decided not to raise children at all, or because their children have already turned 18).

To be blunt, the plan is a tax hike on the rich and makes the tax code even more progressive than it is today. Given the loss of the state and local tax deduction, the tax hike will be particularly acute for high earners from high-tax states. And although the top income-tax rate would be capped at 35%, that rate would kick in at lower income levels than it does today. The result would be a marginal tax-rate hike — and a corresponding weakening of work incentives — for many workers who today find themselves in the 25%, 28%, and 33% brackets.

But the effect of this change on the overall economy is likely to be small. Most of the income taxed at those rates actually comes from wealthier people, passing through the upper-middle brackets on their way to earning their last dollars in the top bracket. Applying a higher rate of 35% to more of their income will not make them happy, but it should not dramatically change their incentive to work. Meanwhile, with the top rate set at 35%, rather than the 39.6% or more now scheduled … the very highest earners will have greater incentive to work harder and more productively.



10 thoughts on “Does Romney’s tax plan make economic sense?

  1. And sixth, Romney might be planning to bend over and pull a magical pony out of his rear which flies around giving wealthy business owners so much money that they’ll gladly hire employees they don’t need and buy inventory they can’t sell, just to get rid of the extra cash.

    Because after all, the real problem we’re facing is shortage of demand because consumers don’t have enough money to spend, and it’s entirely foolish for businesses to increase production or hire more employees if they don’t have customers to sell to. I mean, duh. Not to insult anyone’s intelligence here, but even a child running a lemonade stand knows that if you don’t have any customers you shouldn’t be buying more lemons.

    If you want businesses to spend more, consumers will need more money to give them. That ain’t rocket science. If you want the economy to improve, it’s workers who need more money, not millionaire business owners. And once they get the money, they business owners can earn the money, just like everyone else.

  2. It’s worth noting that the “current policy” baseline is ridiculous and partisan. They uses the Obamacare taxes that aren’t being collected yet as part of the “current policy”, and since those are significant and fall only on high incomes, removing them has predictable distributional effects. It’s worth noting that they didn’t play that game when Bowles Simpson was analyzed. Presumably they will worry about their reputation next year.

  3. Yet more pathetic hackery from a faux conservative (anyone who purports to peddle the trash that Pethokoukas does here is no “conservative” by any reasonable meaning of the word).

    The Tax Policy Centre also ran the numbers with fanciful supply-sider projections. No material difference.

  4. hey biobrain, how exactly do you propose the consumers get more money? free enterprise was based on people taking a risk with their own money and reaping the loss or rewards. America didnt automatically give all their citizens some money to start buying thing in 1776. rich people and entreprenuers started businesses and hired people and those people then bought things from others. capitalism is a beautiful thing when unencubered by meddling governments.

    • The government bought (or stole) land from the Native Americans and gave it to homesteaders free, or nearly so. That’s just one example.

      You might also consider the many recessions and panics (as they used to call them). With all its problems, the current system seems better.

      People like you, seek, never consider that they were the ones wiped out in the past. It’s like how “Past Lives” kooks are always re-incarnated princesses, never scullery maids.

      History and libertarian theology don’t always mix well.

    • Evidently you know nothng about capitalism. You might want to crack a book and gt yourself up to speed. Better yet, spend a day in the business world.

      • been in business for nearly 30 years have several businesses i started myself with my risk. did not start them based on consumers getting more money but based on my ability to provide a service better than anyone else in the market. it works. but if you’ve never been there you will never understand aka mr. obama.

        • SEVERAL!! You started “several”. LMAO! You give yourself away right there, my friend aka colossal internet phony.

          Lemonade stands and one-man “consultancies” that you “started” after you got canned don’t count, by the way.

          If there is not a demand for one’s product, or if demand is not strong enough to absorb the supply of more goods and services, the economy does not benefit.

  5. This is precisely the problem with Rowney’s campaign: it needs to be more specific. The author basically agrees with the main conclusions of the study, with some reservations. Romney has exactly three weeks to lay out a specific plan of how he is going to reform the tax system. If he doesn’t do that his tax cut will be defined by Obama as a tax increase on the middle class.

  6. Nobody who isn’t paid to say so believes that our current tax rates are on the “wrong” side of the Laffer Curve. What happened when Clinton raised tax rates: a boom and a surplus. What happened when Bush-43 lowered them? Recession and deficits. (Revenues also went down, alarmingly, after the Reagan tax cuts, causing him to reverse course and raise some taxes back again.)

    At what point do we recognize that the Magic Asterisk of massive growth through tax cuts is, as Bush-41 realized, voodoo? It doesn’t happen.

    Unless the cynics are right, and the point is not the revenue that never comes, but deficits so scary that they lead to the elimination of Social Security, Medicare, and everything else except the military, and maybe aid to Israel?

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