Wednesday, August 29, 2012
Mitt Romney's plan to cut taxes and offset the resulting revenue loss by limiting tax breaks has been attacked as "mathematically impossible." He would reduce all individual income-tax rates by 20%, eliminate the Alternative Minimum Tax and the estate tax, and limit tax deductions and loopholes that allow high-income taxpayers to reduce their tax payments. All this, say critics, would require a large tax increase on the middle-class to avoid raising the deficit.
Careful analysis shows this is not the case.
The critics' claims are based on calculations by the Tax Policy Center (update here) ... , which used a computer model to forecast personal tax revenue and AMT liabilities of taxpayers at each income level in 2015. Such forecasts are inevitably speculative.
To avoid the resulting uncertainties, I decided to analyze the Romney plan using the most recent IRS data, which is based on tax returns for 2009 and published in the current issue of the IRS quarterly publication. (Although 2009 was a low-income year because of the recession, using that year is preferable to looking back to some earlier period.) ...
Since broadening the tax base would produce enough revenue to pay for cutting everyone's tax rates, it is clear that the proposed Romney cuts wouldn't require any middle-class tax increase, nor would they produce a net windfall for high-income taxpayers. The Tax Policy Center and others are wrong to claim otherwise.
The Romney plan can reduce the current tax system's distortions, increasing national income in the short run and economic growth in the years ahead. That was the key to the very successful Reagan tax cuts of 1986. It was also the tax-reform strategy embraced by the bipartisan Bowles-Simpson commission in 2010. And it could put the economy back on the right track in 2013.
Update: Tax Vox Blog: Feldstein’s Analysis Doesn’t Refute TPC Findings, It Confirms Them:
Romney economic adviser Martin Feldstein attempts to contradict our finding. Instead, his analysis actually confirms our central result. Under the stated assumptions in Feldstein’s article, taxpayers with income between $100,000 and $200,000 would pay an average of at least $2,000 more.