What would really happen with taxes under Obama vs Romney?
The Obama campaign has taken the recent analysis of Romney's proposed tax plan as an opportunity, creating an Obama 'tax calculator' where any household can plug in their own income level, marital status, and number of children, and compare what their tax burdens would be under Obama versus under Romney. But is it fair?
Last week the Tax Policy Center (TPC) released this distributional analysis of the Romney tax plan, exploring how the plan could be made revenue neutral as Romney has claimed it would be. The TPC analysis found that it is impossible to pay for Romney’s proposed additional tax cuts (which are skewed heavily toward the rich) with base-broadening revenue offsets (which according to the Romney plan cannot include increasing the taxation of capital income) without increasing tax burdens on net for most Americans. (I quickly summarized what I took as the main findings of the TPC analysis in my previous post.)Skip to next paragraph
'EconomistMom' (Diane Lim Rogers) is Chief Economist of the Concord Coalition, a non-partisan, non-profit organization which advocates for fiscal responsibility, and the mom of four (amazing) kids to whom she dedicates her work. She’s been blogging since Mother’s Day 2008.
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By later the same day the Obama campaign had seized the moment by building the TPC calculations into an Obama “tax calculator” where any household can plug in their own income level, marital status, and number of children, and compare what their tax burdens would be under Obama versus under Romney.
The Obama campaign’s tax calculator produces honest numbers based on TPC distributional tables, but its presentation is confusing. It makes Obama tax policy look like it gives tax cuts for everyone, even the rich (which is indeed true relative to current law) and to make Romney tax policy look like it raises tax burdens on the middle class (which is indeed true relative to Obama policy, a different baseline). It seems to purposefully switch the baseline–or march from one to another–to come up with the most politically effective punch line that Romney wants to raise taxes on most Americans. The truth is that both Romney and Obama want to cut taxes by a lot relative to current law; it’s just that on net, Romney will cut taxes relatively more for the rich and less for everyone else (and more on average). The Bush tax cuts that Obama’s calculator touts as the benefits of Obama’s first-term tax cuts are relative to the current-law (no Bush tax cuts) baseline. The Obama tax cuts that would happen in 2013 are also relative to the current-law (no Bush tax cuts) starting point. But the “Romney tax plan” numbers are relative to an Obama policy baseline, accurately labeled in the Obama tax calculator as “compared to President Obama’s plan.” For the vast majority of Americans (the 95 percent or so with incomes below $250,000), the number for “under Romney” will show a tax increase for them. Relative to current law, however, Romney’s tax proposal would cut taxes for the middle class–just not by as much as Obama would. And both Romney and Obama plan to cut taxes for the rich; it’s just that Obama would cut them less than Romney would.
This strikes me as like shopping for a new car and comparing two cars in the dealer’s lot. One car has a sign on it that says it gets 25 miles per gallon (mpg). The car next to it has a sign that says “10 mpg—relative to the first car. ” Maybe for some reason the dealer wants to get rid of the first car more than the second, and that’s why he chooses to emphasize the relative, plus “10 mpg” of the second rather than the absolute 35 mpg that the second car actually gets. Most buyers wouldn’t catch the “relative to” comparison—and would reasonably expect the measures to be based on the same absolute scale (no matter the fine print)—and would thus incorrectly conclude that the second car had (absolutely) poor fuel efficiency when in fact it has relatively better fuel efficiency.
I admit this is not a perfect analogy to the Obama tax calculator, however, because there’s no such thing as negative miles per gallon, and a middle-class family’s tax burden under Romney would be higher than under Obama (so higher relative to Obama policy), but would still go down compared with current law. Conversely, a rich household’s tax burden under Obama policy would be relatively higher than under Romney policy, but would still go down compared with current law. The Obama tax calculator (conveniently) emphasizes how Obama policy in 2013 would compare with current law, because that suggests tax cuts for everyone—even the rich. By switching to the Obama-policy baseline only in the last step of comparing Romney policy to Obama policy, the calculator emphasizes that Romney raises taxes on the middle class (relative to Obama policy), while avoiding calling attention to the fact that Obama raises taxes on the rich (relative to Romney and relative to current policy extended).
For example, the Obama tax calculator highlights these three figures about the tax burdens facing a married, two-child household with $100,000 in annual income—emphasis added:
“Your Tax Savings during President Obama’s First Term, 2009-2012”: $5,600
“Tax Savings Under Obama, 2013”: $3,999
“Tax Increase Under Romney, 2013…Compared to President Obama’s plan…”: $1,339
…but this really means that under Romney this family would still get a tax cut in 2013, compared to current law, of $3,999 - $1,339 = $2,660. In other words, an “apples to apples” comparison of tax cuts measured against the same yardstick (baseline) would compare a $3,999 tax cut under Obama with a $2,660 tax cut under Romney. The smaller tax cut under Romney is because reduced tax preferences (those “base broadeners” aside from those affecting capital income taxation) would be used to pay for further tax rate reductions at the top of the income distribution.
For a household with $500,000 in annual income, the Romney tax change is in the opposite direction, because Romney would cut high-income households’ taxes even further than under President Obama’s plan (which extends the Bush tax cuts except for the highest brackets). The Obama calculator returns these three figures (again, emphasis added):
“Your Tax Savings during President Obama’s First Term, 2009-2012”: $8,676
“Tax Savings Under Obama, 2013”: $8,295
“Tax Savings Under Romney, 2013…Compared to President Obama’s plan…”: $36,319
…and this means that the $500K family would get a $8,295 tax cut under Obama in 2013, compared with current law, but a much larger tax cut under Romney, of $8,295 + $36,319 = $44,614, also compared with current law. A different “apples to apples” comparison could have compared tax changes under both candidates to the policy-extended baseline, in which case there would not be any tax savings under Obama for this $500K household but instead a large tax increase. (This is why the choice of the baseline matters and was not likely random in this campaign material; even President Obama would prefer to avoid showing tax increases, and even on the rich.)