The Obama campaign claims that the Romney tax plan would result in an increase in taxes on the middle class, if you take it at its word that it would be revenue neutral. I took a look at an analysis done by the Tax Policy Center to get a more objective view. One of the authors, William Gale, worked in the CEA during the Bush I administration and another, Adam Looney, during the Obama administration. Their description of the Romney plan is:
This plan would extend the 2001-03 tax cuts, reduce individual income tax rates by 20 percent, eliminate taxation of investment income of most taxpayers (including individuals earning less than $100,000, and married couples earning less than $200,000), eliminate the estate tax, reduce the corporate income tax rate, and repeal the alternative minimum tax (AMT) and the high-income taxes enacted in 2010’s health-reform legislation.
Their preliminary conclusion:
We estimate that these components would reduce revenues by $456 billion in 2015 relative to a current policy baseline.
Therefore, over ten years this comes to 4.56 trillion. The Obama estimate seems to add in interest payments to round it out to 5 trillion dollars.
Since the Romney plan is meant to be revenue neutral where is this money coming from? First, some of it is recouped by eliminating various corporate tax breaks. Second, if the tax changes trigger greater growth this would generate tax revenue. Third it could come from closing other tax breaks on individuals. Once the TPC analysis accounts for the first two factors, they come up with a figure of $360 billion per annum of reduction in federal revenue from reducing income tax and eliminating the estate tax. This favors the rich. Even if deductions like mortgage interest tax deduction, tax free health insurance tax are adjusted or eliminated to raise revenue, this still leaves a hole of $86 billion/annum to be raised by increasing taxes on low and middle income taxpayers. The precise definition of middle class is a matter of debate. The TPC uses incomes below 200k and Marty Feldstein uses incomes below 100k and looks at 2009 data not a 2015 forecast like the TPC. There are other differences between the calculations but they are really not inconsistent: tax deductions would have to be eliminated to make up for the tax cuts. In Feldstein’s analysis, the burden falls on those with incomes between $100-200k.
The TPC does a robustness test on its growth estimates. If you use growth rates proposed by Romney advisor Greg Mankiw, federal revenue would fall by $307 billion still leaving $33 to be covered by people making less that $200k/annum.
But there are two points one can add which are implicit in the TPC analysis.
If you cut taxes but then eliminate deductions, there is no tax cut in aggregate – you give with one hand and take with the other. This means the impact on the work/leisure tradeoff is minimal, hence so is the impact on economic incentives and hence so is the impact on economic growth. Hence, the main impact of the Romney tax plan is distributional along the lines suggested by the TPC. A nice clear article from the American Enterprise Institute explains why reducing taxes while eliminating deductions does not have much effect on work incentives.
More dramatically, if the Romney plan gives with one hand and takes with the other, his whole economic plan collapses. It is founded on having tax cuts and triggering trickle down. But there is no real tax cut as deductions are eliminated at the same time taxes are cut. Hence, there is no Romney tax cut plan to stimulate growth.
Updates: Linked to TPC article and also an AEI article about revenue neutral tax policy.
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October 9, 2012 at 8:22 am
Ryan
“there is no tax cut in aggregate…. This means the impact on the work/leisure tradeoff is minimal, hence so is the impact on economic incentives”
Economic incentives for work/leisure tradeoff depend primarily on the marginal income tax rate. If marginal rates are cut, even if total taxes paid remains the same, incentives for work are distorted less. Tax rates on the margin matter much more than the average tax bill.
Also, Romney has made clear the principle of the tax reform is revenue neutrality. If the economic analysis comes back infeasible, is Romney more likely to support a $2000 tax hike on the “middle class” or rate cuts of, for example, 16% instead of 20%? All the analyses you cite assume the former, but it seems in the debate Romney would support the latter. Clearly, 20% was picked to be a nice round-number guesstimate by the campaign, and is not the foundational principle of the reform — revenue neutrality is.
October 9, 2012 at 9:20 am
Sandeep Baliga
Some marginal tax rates will go up, others will go down. Hence, net effect ambiguous. Empirical work suggests little or no impact (Piketty, Saez and Stanchev) and theory tries to explain (Jaimovich Rebelo).
October 9, 2012 at 12:25 pm
Brittany
Growth can also come from better investments. The current tax code encourages overinvestment in debt-financed real estate, high-premium health plans, etc. Each deduction entails the government picking ‘winners’ deemed worthy of investment/consumption. If you think gov’t is good at this, then this isn’t a problem. Most people, though, tend to think ill of govt’s abilities here.
These distortions suck money away from more productive uses, retarding growth.
October 9, 2012 at 6:37 pm
TuringTest
Whatever the specifics of Obama’s or Romney’s dueling tax plans, I agree with Nozick that taxes are (for the most part) theft
October 10, 2012 at 3:59 am
gg
There may not be big aggregate effects on growth from cutting taxes and closing taxes but there must be distributional effects and big effects along some dimension or else what’s the point.
If the plan relies on growth to keep the burden on the rich the same, then it is regressive: without growth, taxes paid by the rich would fall.
That said, to solve the deficit problem taxes will have to go up. Too bad that a lot of debt went into things like wars that didn’t benefit the American consumer (no joy from consumption, not even indirectly from, say, lower oil prices)