Again, the vice president, last night:
Now, there’s not enough — the reason why the AEI study, the American Enterprise Institute study, the Tax Policy Center study, the reason they all say it’s going — taxes go up on the middle class, the only way you can find $5 trillion in loopholes is cut the mortgage deduction for middle-class people, cut the health care deduction, middle-class people, take away their ability to get a tax break to send their kids to college. That’s why they arrive at it.
Some of the specific assumptions that TPC made in its analysis of Romney’s tax plan are also highly questionable. By reconsidering just three components of the TPC’s analysis, the conclusions it draws get turned upside down.
More base-broadeners are on the table. TPC originally claimed that the Romney plan would raise taxes on the middle class by $86 billion. After a critique by AEI colleague Matt Jensen, who pointed out additional opportunities for base-broadening, TPC downgraded its estimate considerably. Specifically, Jensen pointed out that the exclusion of interest on state and local bonds and the exclusion of inside buildup on life-insurance products could yield more revenue. TPC then acknowledged that repeal of these provisions would raise approximately $45 billion from high-income taxpayers, reducing any need to tax the middle class by the same amount. The result: A purported $86 billion tax increase on the middle class shrinks to $41 billion.
The TPC revenue baseline assumption is inflated. TPC assumed that the baseline against which Romney is seeking revenue neutrality includes a 0.9 percent surcharge on “earned” income and an additional 3.8 percent surcharge on “unearned” income of high-income taxpayers that were adopted in the healthcare law. Romney has proposed repealing these taxes, but has not suggested that the cost of repeal would be paid for by tax reform. Instead, the budget effect of repealing these taxes should be analyzed in the context of the repeal of various other healthcare provisions.
Despite TPC’s assertion that adjusting its baseline assumption “does not alter our primary conclusion,” the revenue consequence of repealing this tax in 2015 is a full $29 billion, all of which falls on high-income earners. Correcting the baseline by removing this provision means that more of the revenue raised by broadening the tax base on high-income taxpayers can be used to finance tax reductions for the middle class. The result: A $41 billion tax increase shrinks to $12 billion.
Even modest economic growth makes a difference. And finally, the important factor that I discussed above. Based on Table 3-1 of the “Analytical Perspectives” report by the president’s Office of Management and Budget, I compute that if the economy were to grow just 0.1 percentage point faster per year as a result of the reform, the additional revenue in 2015 would be approximately $13 billion. The result: A $12 billion tax increase on the middle class actually becomes a tax cut.
And just like that, the Democrats’ attacks that Romney wants to raise taxes on the middle class become false.
If Obama and Biden are looking for some interesting AEI tax studies, how about this one showing that their new budget creates a massive middle-class tax liability?