Josh Barro, Progressive Taxation, and Public Choice
By Garett Jones
Josh Barro today claimed that the Romney tax plan can’t work.
The Romney plan is simple to summarize: Cut income tax rates across the board, then end enough deductions and exclusions (informally, “loopholes”) to make it revenue neutral. Plus, the Romney plan is to keep the system at least as progressive as it is today–so the overall tax bill paid by those earning over $200K per year wouldn’t change.
The Barro claim is that it’s impossible to cut taxes on those earning over $200K per year, make up for it by eliminating deductions and exclusions from that same group, and have the minus and plus sides balance.
The reason? High earners just don’t use enough deductions and exclusions: Even if you took away all their home interest deductions, the benefits of deductible health insurance, their child tax credits, and all the rest, it’s not enough to make up for a big cut in income tax rates for the top earners. Somebody else would have to chip in.
I won’t try to adjudicate this claim–far be it from me to judge IRS data–though I confess I do like Barro’s arithmetic. Also, note David’s useful post on the debate over the Romney tax plan.
This post is about something quite different.
Here’s what this post is about: If Barro is right, the rich are not buying themselves a disproportionate share of tax loopholes.
My inner public choice scholar wonders, “If Barro is right, why aren’t the rich getting a better deal from the U.S. government? What does this tell me about the ability of elites to control U.S. politics?”
So if the Romney plan doesn’t add up, then some people should change their views on progressive taxation and elite control of U.S. politics. Note that I’m not saying they will.
Update: Here’s my favorite part of Barro’s math: For the over-$200K crowd, taxable income is 82% of adjusted gross income (AGI). AGI is only a rough measure of income (aren’t they all?), but this group is paying tax on the vast majority of this income.
For the under-$200K crowd, taxable income is only 55% of AGI. This second group is almost halfway to being lucky duckies, with no taxable income at all.
The excellent Harvey Rosen offers a look at how Romney’s tax plan could work (PDF): I like his arithmetic too!
Rosen shows how it could work by scaling back deductions that are well outside the deductions included in Barro’s measure. The Rosen proposal (which you should consider illustrative only–it’s not a Romney campaign document) would be a massive base-broadening, a massive rise in AGI. It gives a sense of what would have to happen to make it all go. Economics aside, the public choice implications of reducing tax preferences for life insurance are well worth reflecting upon.
Perhaps the Governor would win a battle for a massive base-broadening. As of this writing, Intrade says there’s a 39% probability that he’ll get to try.