Romney plan would cut taxes for the rich, Romney adviser confirms

Romney economic adviser Martin Feldstein tries to contradict the Tax Policy Center's findings that Mitt Romney's tax plan would raise taxes on the middle class. But he actually confirmed it to be true.

|
Brian Snyder/Reuters/File
Republican presidential candidate and former Massachusetts Governor Mitt Romney poses for a photograph with the flight crew from his campaign plane after arriving in Tampa, Florida August 29, 2012.In a column in the Wall Street Journal, Romney's economic adviser inadvertently confirmed that Romney's tax plan would cut taxes for the wealthy and raise them on the middle class, TaxVox argues.

In a recent paper, we showed that any revenue-neutral tax reform that included Governor Romney’s specific tax cuts and that met his stated goal of not raising taxes on saving and investment would cut taxes for households with income above $200,000 and would therefore necessarily have to raise taxes on taxpayers below $200,000. This was true even when we considered an unrealistically progressive way of financing the specified tax reductions, and even when we accounted for economic growth and revenue feedback.

Writing in Wednesday’s Wall Street Journal, 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. (Feldstein uses a different income measure than we do – see technical note at end.)

Taxes would rise on families earning between $100,000 and $200,000 in Feldstein’s analysis because he considers a tax reform that would completely eliminate itemized deductions for taxpayers with income above $100,000. In 2009, taxpayers earning between $100,000 and $200,000 claimed more than half of these itemized deductions. Eliminating itemized deductions would raise more in taxes from people in this group than they would save from the rate reductions and other specified features of Governor Romney’s plan.

While his results confirm our earlier finding, Feldstein employs several questionable assumptions that understate the revenue loss of Governor Romney’s tax cuts and overstate the revenue gains from reducing tax breaks and deductions. Under more reasonable assumptions, Feldstein’s version of the Romney proposals would not be revenue-neutral; instead it would result in large revenue losses. Specifically:

1. He assumes that each dollar of itemized deductions lost by households with income above $100,000 would generate 30 cents in revenue. However, the Romney plan has a maximum tax rate of only 28 percent and most households with income above $100,000 would face an even lower rate on some or all of the additional income from eliminating deductions.

2. He assumes that taxpayers earning more than $100,000 who currently itemize would lose not only their itemized deductions but also their ability to take the standard deduction. Normally, taxpayers have the option of itemizing their deductions or taking the standard deduction.

If the standard deduction were retained for all households, and denying itemized deductions was assumed to raise revenue at a more realistic average marginal tax rate of 24 percent under Romney’s plan, Feldstein’s proposals would fall about $70 billion short of revenue-neutral, even if taxpayers don’t change their behavior.

However, JCT and Treasury estimates consistently show that the revenue generated by eliminating such deductions would be even lower because taxpayers would change their behavior. For example, taxpayers with positive interest income would likely pay down their mortgages if the mortgage interest deduction were eliminated, thereby reducing their taxable investment income. Hence, the revenue available from eliminating these items is smaller than Feldstein’s static estimates suggest, even after using an appropriate average marginal tax rate.

3. Feldstein does not offer a specific way to pay for the costs of repealing the estate tax, instead pointing to “other base broadening changes” and arguing that the estate tax repeal could actually raise revenue on net. The estate tax raised $21 billion in 2009, and the JCT, CBO, and Treasury have consistently estimated that estate tax repeal would not only lose revenue but could actually lose more revenue than the listed estate tax revenues, because it would create opportunities for tax avoidance.

Taking the estate tax and other effects into account, Feldstein’s proposals come up at least $90 billion short of revenue-neutral.

Although Feldstein uses a different methodology than we did, his analysis reinforces our central finding about the distributional impact of Romney’s tax proposals: the net effect would be cutting taxes on households above $200,000 and thus requiring net tax increases on households with less income. More broadly, both our analysis and Feldstein’s show that Romney’s tax plan cannot accomplish all of his stated goals. Either taxes must rise on those with income below $200,000, or tax preferences for saving and investment will have to be reduced, or revenues will be cut, or promised tax cuts for high-income households will have to be reduced. Trade-offs exist and solutions are possible, but tax reform cannot do everything that it is sometimes asked to do.

In addition, both Feldstein and we use stylized reforms that could not be implemented in practice and that overstate the progressivity of any cut in deduction or exemption. Under Feldstein’s proposals, for example, taxpayers earning $99,999 would pay dramatically lower taxes than an individual earning only one dollar more—implying enormous marginal tax rates. Any realistic, practical plan to limit tax expenditure cuts to a high-income group would require a phase-in of the cuts or other accommodations, which would add to marginal tax rates, reduce the potential revenue gain, and make the resulting tax change more regressive.

Finally, the debate over what is or isn’t possible distracts from the more important question of what the Romney plan actually is. The governor could settle this issue quickly simply by describing how he’d pay for his tax cuts.

Technical note: Feldstein uses adjusted gross income as his income measure. We use cash income, which is somewhat larger than adjusted gross income. His group of households with AGI of $100,000 and up filed 12.4 percent of tax returns in 2009; our group of households with cash income of $200,000 and up will file 6.3 percent of all tax returns in 2015.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Romney plan would cut taxes for the rich, Romney adviser confirms
Read this article in
https://www.csmonitor.com/Business/Tax-VOX/2012/0830/Romney-plan-would-cut-taxes-for-the-rich-Romney-adviser-confirms
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe