Wednesday, October 3, 2012
In August, the Urban-Brookings Tax Policy Center (TPC) released a report [updated here] claiming to show that Mitt Romney's tax reform plan would necessarily raise taxes on middle-class taxpayers and reduce their after-tax incomes, while giving a significant tax cut to high-income taxpayers. This conclusion is based on a distributional analysis that assumes Romney's revenue-neutral tax reform plan, which includes an across-the-board 20% cut in marginal income tax rates and an elimination of the alternative minimum tax, would require a significant reduction in most tax expenditures, including most notably the child tax credit, mortgage interest deduction, state and local tax deduction, and the exclusion of employer-provided health insurance.This TPC study showing Romney's tax plan as "raising taxes on the middle-class yet cutting taxes for the rich" has generated quite a bit of attention. Some economists such as Martin Feldstein and Harvey Rosen have taken issue with the study, arguing that Romney's tax plan would not necessarily require raising taxes on the middle class.
One shortcoming of the TPC paper pointed out by Rosen is its "static" nature, meaning it fails to account for any income growth effects from the tax reform plan. Most economists would agree that revenue-neutral tax reform like that pushed by Romney would reduce economic distortions in the tax code and thereby increase economic efficiency and incomes by some degree over the long-term. Furthermore, unlike tax cuts that require debate over the economic effects of their financing, revenue-neutral tax reform does not need financing. In fact, if the plan was revenue-neutral on a static basis, it would likely raise revenue because it increases the size of the overall income tax base in the long-run.
[I]f one assumes a 1% dynamic income growth effect under Romney's plan (as interpreted by the TPC), then low-and-middle income earners would experience a slight increase in after-tax income as opposed to a decrease. A more modest growth of less than 1% would imply a decrease in after-tax income for low-and-middle-income earners, but a more robust growth of more than 1% would imply a substantive increase in after-tax income.
- Wall Street Journal: The Romney Hood Tax Fairy Tale (Aug. 9, 2012)
- Forbes: The Romney Tax Plan, the Tax Policy Center, and the Wall Street Journal (Aug. 10, 2012)
- Wall Street Journal: Mathematically Possible -- Correcting the False Assumptions of Obama's Tax Gurus (Aug. 14, 2012)
- FactCheck.org: Do Five Economic Studies Support Romney's Tax Plan? (Sept. 22, 2012)
- Heritage Foundation: The Tax Policy Center’s Skewed Analysis of Romney's Tax Plan (Sept. 25, 2012)
Update: Tax Foundation: Simulating the Economic Effects of Romney’s Tax Plan:
While the debate over tax reform has been consumed with distributional issues, the economy continues to limp along in the worst recovery since the Great Depression. To be sure, this economy faces headwinds that even an ideal tax code will not address, but pro-growth tax reform can provide substantial benefits. Our results indicate that by lowering tax rates on investment and labor, the Romney tax plan would grow the economy by 7.4%, the capital stock by almost 19%, wages by almost 5%, and hours worked by 3%. The benefits would be widely enjoyed, as every income group would experience at least a 7% increase in after-tax income. It would benefit the federal budget as well, in that fully 60% of the static revenue loss from Romney’s plan would be recovered from taxing a larger economy.