Romney's Tax Cut
By David Henderson
There is a lot of controversy about Mitt Romney’s proposal for cutting tax rates and broadening the tax base by limiting deductions and exemptions. I’ve discussed this here and here and Garett Jones highlighted Josh Barro’s piece on it yesterday. Critics, including Barro, have concluded that the only way Romney can get his 20% across-the-board cut in tax rates, even with limits on deductions and exemptions, is to substantially raise taxes on the middle class. I highlighted Harvey Rosen’s contribution to the debate here. The bottom line is that increasing taxes on the middle class is not the only way to achieve Romney’s tax cuts. Now there’s more to say, from three sources: the Tax Foundation, John H. Cochrane, aka, The Grumpy Economist, and Alan Reynolds.
The Tax Foundation has put out a study finding that Romney’s tax cuts, even without the base-broadening, would, by improving incentives to produce, create tax revenues that would offset 60 percent of the static revenue loss from the cuts. I have not studied their study carefully, but it does not seem unreasonable. Then, it wouldn’t be hard (economically, not necessarily politically) to cut deductions to make the tax change revenue-neutral. I’ve already highlighted Rosen’s analysis of this.
John Cochrane highlights the Tax Foundation study. Here’s how Cochrane puts his and the Tax Foundation’s objection to “static scoring” of Romney’s tax cut, the kind done by Josh Barro:
the point of a revenue-neutral, income-neutral tax reform is to permanently and predictably lower marginal rates, giving rise to incentives to work, save, invest, and increase economic growth over the long run.
What possible sense does it make, then, to evaluate such a plan by assuming off the bat that it has no effect at all on output, employment, investment and so forth? Yet that is precisely what the standard “static” scoring does! We build a rocket ship to go to the moon, and we evaluate its cost effectiveness by assuming that it never leaves the launch pad?
Of course, if you can show that the rocket ship can never leave the launch pad, that’s a legitimate criticism of the rocket ship. But you can’t just assume it. By the way, check out the comments, including Cochrane’s responses to the commenters. Cochrane has some very good content there.
And I’m going to work together with Congress to say, OK, what — what are the various ways we could bring down deductions, for instance? One way, for instance, would be to have a single number. Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people. That’s one way one could do it.
Reynolds points out that Romney’s plan is close to the Simpson-Bowles plan and Obama’s is a movement in the other direction. Romney quotes economist Donald Marron, who was on the staff of the Simpson-Bowles Commission:
President Obama’s National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force (on which I served) both endorsed this strategy [of lower marginal tax rates on a broader base] in their recent deficit reduction proposals. The fiscal commission’s “Illustrative Tax Plan” would scale back and redesign many of the largest tax preferences (e.g., mortgage interest, employer health insurance, and retirement saving), eliminate many others (e.g., state and local interest), and use the resulting revenue to
• Cut individual tax rates, bringing today’s six brackets (10, 15, 25, 28, 33, and 35 percent) down to three (12, 22, and 28 percent);
• Repeal the alternative minimum tax (AMT), the personal exemption phase-out (PEP), and the phase-out of itemized deductions (Pease);
• Cut the corporate income tax rate from 35 to 28 percent.
After laying out the details of the Romney plan, Reynolds does a comparison:
When it comes to tax policy, the main difference between Romney’s and Obama’s National Commission on Fiscal Responsibility and Reform and Bipartisan Policy Center’s Debt Reduction Task Force advisers is that Romney proposes 1) a slightly lower corporate tax rate, and 2) a much lower bottom rate of 8 percent rather than 12 percent. (The fact that there would be six rates rather than three is insignificant.)
Reynolds also points out:
Like most other news sources, The Economist (October 6) claims, “Mr. Romney has not specified which loopholes he would close.” On the contrary, Romney has been quite specific that he would prefer a firm dollar cap on total deductions. This is a much tougher plan than the president’s commission proposed, which cuts or caps some deductions but allows taxpayers to game the others. Romney’s plan is even tougher than a proposal from economist Martin Feldstein, which would limit deductions as a percentage of adjusted gross income (AGI).
One qualification, though, not on the substance but on the identities of the players: whereas Reynolds writes that Marron is someone whom “President Obama appointed to advise him on such matters,” I don’t think that’s true. The Simpson-Bowles Commission, not Obama, chose him.