Another study tries to undermine the central premise of the Romney tax plan — and fails

Here we ago. Another study attempts to show that it’s pretty much impossible to pay for marginal tax rate cuts by broadening the tax base (via Bloomberg Business Week):

Immediate repeal of some of the most popular tax benefits would pay for only a 4 percent cut in U.S. income tax rates, according to an estimate by Congress’s nonpartisan scorekeeper that illustrates the mathematical and political challenges of financing rate cuts by limiting tax breaks.

The analysis by the Joint Committee on Taxation emphasizes the difficult choices facing lawmakers as they balance the benefits of rate cuts against the consequences of changing or ending deductions, such as for mortgage interest and charitable contributions. Republican presidential nominee Mitt Romney proposes a 20 percent income-tax rate cut and says he would pay for it by limiting deductions, credits and exemptions.

Not quite. The bipartisan Committee for a Responsible Federal Budget finds three huge flaws with the JCT’s analysis;

  • The study is revenue-neutral relative to a baseline in which all the tax cuts from the last decade expire — a policy which neither party supports or measures against. Relative to the more commonly-used baseline, this plan raises taxes by $4.5 trillion over a decade.
  • The study only repeals itemized deductions and the preference for newly-issues state and local bonds. It therefore does not account for dozens of additional tax expenditures worth trillions of dollars – including the largest tax expenditure in the code which excludes employer health insurance from taxation.
  • The study taxes capital gains at 38 percent, which according to JCT would actually lose revenue. JCT tends to estimate the revenue-maximizing level at about 28 percent.

Eliminating all tax expenditures would actually allow the top rate to fall as low as 23% — and still leave about $1 trillion in revenue leftover for deficit reduction this decade.

Now this is all proof of concept. No president is likely to eliminate all those tax breaks. But it does show there is room for significant and revenue-neutral tax rate cuts in the 28% to 33% range even without a big boost to economic growth. And let’s also consider that common estimates of revenue loss from slashing the corporate tax rate are wildly too high.

4 thoughts on “Another study tries to undermine the central premise of the Romney tax plan — and fails

  1. I must admit, both tax plans don’t sit well with me. Both actions (tax raises under Obama and spending cuts under Romney) will likely tip the US economy back into recession next year. As good as some of the sectors have been (especially the consumer), they will not be able to handle the changes next year, creating a minor recession end of 2013/early 2014.

    That being said, for a long term picture, I think Romney’s plan is better. Spending cuts are the proven better method for reducing the debt. Additionally, with the government’s role in the economy shrunk, there will be less crowding out of the private sector.

    President Obama’s plan would have limited short-term benefits followed by bad long-term consequences. Higher tax burdens will likely chase investors and businesses overseas, as well as private capital. Tougher regulatory burdens stemming from the ACA and Dodd-Frank will make expanding businesses and hiring much more difficult, especially for the little guys. Additionally, since many of the rules for Dodd-Frank have yet to be written and we are still testing out the ACA, the uncertainty of thee two major acts could hinder the subsequent economic recovery after the mild 2014 recession.

  2. How can it be revenue “neutral” when the people who lose the tax breaks end up having to pay more than before?

    Don’t the people who lose their tax breaks end up paying more than previous?

    Isn’t the money they were getting back from tax refunds also going into the economy as investments and spending?

    And WHERE in this plan does it reduce the current deficit after it “flattens” ?

    • Larry,

      All “revenue neutral” means is that, on aggregate, there is no change to the revenue. In other words, on aggregate, the lost revenue in tax cuts is made up for with gains in revenue from closing loopholes.

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