Tuesday, September 11, 2012
Harvey S. Rosen (Princeton University, Department of Economics), Growth, Distribution, and Tax Reform: Thoughts on the Romney Proposal:
Governor Romney has proposed a personal income tax reform that would lower marginal tax rates and broaden the tax base. Critics of the proposal have argued that high-income taxpayers would receive a tax cut, and given that the proposal is meant to be revenue neutral, this would inevitably lead to increased taxes for families with low and moderate incomes. Because the Romney proposal does not specify in detail just what tax preferences might be eliminated or scaled back in order to broaden the tax base, much of the debate over it has focused on what provisions would be politically and administratively feasible.
While this discussion has been illuminating in some respects, something seems to be missing. Relatively little has been said about the possible effects of the Romney proposal on economic growth. This is curious because increasing growth is the motivation for the proposal in the first place.
In this paper, I analyze the Romney proposal taking into account the additional income that might be generated by economic growth. The main conclusion is that under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.
(Hat Tip: Greg Mankiw.)