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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, August 29, 2012

Feldstein: Romney's Tax Plan Can Raise Revenue

Wall Street Journal op-ed:  Romney's Tax Plan Can Raise Revenue, by Martin Feldstein (Harvard University, Department of Economics):

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.

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Reagan had to raise taxes several times. And he is on record as saying a tax increase to balance the budget is the responsible thing for legislators to do.

I swear sometimes it feels like I am the only person in the world who read Reagan's entire autobiography. (This might be true - it was 748 pages, but that's not that bad for the genre).

Posted by: Liz | Aug 30, 2012 12:24:02 AM

Liz: Most of the people who worship Reagan are too lazy to actually care about facts.

Without major tax increases on the middle and lower class, no way this works. We should not count of fantasies about a surge in economic growth.

Posted by: save_the_rustbelt | Aug 30, 2012 7:05:04 AM

Feldstein refers to "the very successful Reagan tax cuts of 1986." Very interesting. The Tax Reform Act of 1986 increased taxes on the middle class and working poor, eliminated many deductions, and reduced rates for the wealthy. Tax cuts? Yes, but for whom? Although I will resist a post hoc, ergo propter hoc claim in honor of Woody, the following is true. Before the TRA of 1986, the top 1% of Americans received 8.4% of all income. By 1989, the top 1% of Americans were receiving 13.5% of all income. We know the history after 1989. Let those who have ears hear. That includes Woody.

Posted by: Publius Novus | Aug 30, 2012 8:23:51 AM

Whenever a liberal tells me what Reagan did, you can be sure that the story is incomplete and misinterpeted, accompanied by gleeful slobbering and wetting their pants over what they perceive as some point they think they made.

Reagan agreed to initial tax increases based upon Democratic promises to cut spending, which they didn't do, of course -- and that would have been the responsible thing to do.

In addition, Reagan grew the economy to such an extent that everyone was better off...the pie was bigger. But, of course, to liberals it's about everyone being equal, even if everyone is equally worse off. There's joy in the Democratic Party when the poor and middle class have a larger percentage of wealth...even if the pie was shrunk to half its former size.

Posted by: Woody | Aug 30, 2012 8:54:49 AM

Not mentioned is that Marty in his article states that because Mr. Romney has not released the details of his plan it is impossible to assess the plan. He then goes on to do so.

Harvard must be very proud.

Posted by: David R. | Aug 30, 2012 4:59:34 PM