Pethokoukis

Oops! That Tax Policy Center analysis of the Romney tax plan is based on one hugely questionable assumption

Here’s the killer paragraph from the recent Tax Policy Center study that supposedly shows Mitt Romney would raise taxes on middle-incomers:

The key intuition behind our central result is that, because the total value of the available tax expenditures (once tax expenditures for capital income are excluded) going to high-income taxpayers is smaller than the tax cuts that would accrue to high-income taxpayers, high-income taxpayers must necessarily face a lower net tax burden. As a result, maintaining revenue neutrality mathematically necessitates a shift in the tax burden of at least $86 billion away from high-income taxpayers onto lower- and middle-income taxpayers. This is true even under the assumption that the maximum amount of revenue possible is obtained from cutting tax expenditures for high-income households.

But since Romney has yet to detail exactly what tax breaks he would kill or trim — and for whom — the study made a bunch of guesses. And as my AEI colleage Matt Jensen highlights in a new blog post, some of those guesses were off target in a big way:

For example, a couple of items that TPC assumes are off the table are the exclusion of interest on tax exempt bonds and the exclusion of interest on life insurance savings. While Governor Romney has professed a desire to keep rates on savings and investment low, maintaining these exclusions is not necessarily what he meant. In fact, both of these exclusions largely benefit the wealthy, and, according to the Treasury Department, added together their repeal would net upwards of $90 billion that could be redistributed to lower-income individuals. That would go a long way towards balancing out the supposed $86 billion windfall for the rich and tax hike on the middle class and poor, and it could make the impossible suddenly possible.

Oh, so with one minor tweak — one that is totally in line with the broad tax reform principles put forward by Romney — Romney’s tax plan suddenly starts to look mathematically possible after all. As Romney told me a few months back, “My tax plan is lowering the marginal rates across the board by 20%. And I indicated that I would also limit deductions and exclusions, particularly for those at the higher-income levels.”

Maybe the Tax Policy Center should have examined the Romney plan under various scenarios. Drawing a definitive conclusion based on one set of assumptions seems to have led the TPC to a misleading conclusion — one easily exploited for partisan political gain.

3 thoughts on “Oops! That Tax Policy Center analysis of the Romney tax plan is based on one hugely questionable assumption

  1. As long as Mr. Romney flatly refuses to define his policies are, I’m afraid you’re going to have to live with the speculation of what he WILL raise to pay for what is a symbolic cut in marginal rates. The elimination of tax free status of municipal bonds will be far more deleterious to the nation’s welfare, for example, than a piddling hike in marginal rates- which again, offer HIGHER levels of deductibility for the well off.

  2. Getting rid of the exclusion of interest on tax-exempt bonds would just raise the cost of borrowing for the bond issuer, shifting the financial burden on to municipalities and their typically more regressive tax structures.

  3. How about this for a tax plan that really neither candidate is talking about. Generate more revenue by creating more tax payers. More people working = more people paying taxes = more Federal revenue. Even with the Obama plan to tax the rich we will still see the middle class hurt in the long haul as the tax burden of the wealthy gets passed down one way or another. If we want the middle class “beefed up” then we need to get more fo them back to work in full time jobs.

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