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Set aside debate over Romney tax math: Is tax reform a good idea?

The momentous policy challenge of how to fix America's dysfunctional tax system has been largely obscured by the debate over Mitt Romney's tax math. But there's broad support for tax reform.

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Like Romney, Obama has embraced the idea of lowering corporate tax rates, so that the US has a more level playing field against foreign competitors. But the two differ sharply on the details of how to do that (as explained in another Monitor story).

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"Sadly, no true debate over the merits or means of tax reform is happening," Brill argued in his recent commentary. He complained that Obama has offered no alternative tax reform plan. "Instead, his near-singular focus has been to raise statutory tax rates for high-income households."

Obama, for his part, contends that Republicans have a single focus on protecting tax cuts for the rich. In the second presidential debate, he said this is Romney's "one-point plan" for the economy.

In its budget proposal, released in February, the Obama administration endorsed the general concept of tax reform that lowers rates while broadening the base.

"The president is calling on the Congress to undertake comprehensive tax reform to cut rates, cut inefficient tax breaks, cut the deficit, and increase jobs and growth," the document said.

That's a statement Romney could agree with, except for the words "cut the deficit," since Romney argues for “revenue-neutral” reform, meaning he does not want to increase the total amount of taxes collected, and for attacking deficits through spending cuts.

Bipartisan plans

Several bipartisan fiscal plans have also followed the general strategy that "base-broadening" reform can enhance economic growth. Among them, plans released in 2010 by Obama's bipartisan fiscal commission, by the Bipartisan Policy Center, and by Sens. Ron Wyden (D) of Oregon and Judd Gregg (R) of New Hampshire.

Many policy experts argue that fiscal reform should include a mix of spending cuts and new tax revenue.

One matter of hot debate, regardless of the details of Romney's revenue-neutral approach, is how much of a positive effect tax reform can have on economic growth.

"Relatively little has been said about the possible effects of the Romney proposal on economic growth," Princeton University economist Harvey Rosen wrote last month. "This is curious because increasing growth is the motivation for the proposal in the first place."

Mr. Rosen offered optimistic estimates of the growth spinoffs from Romney-style reform. The Romney campaign echoes these, saying in a statement this week that Romney's plan "would increase economic growth – significantly – and generate additional tax revenue as a result."

Other economists argue that the growth effects would only be modest.

This hints at a larger point. Romney's ideas reflect only one of many approaches to tax reform.

Another approach is a flat income tax without deductions, except perhaps for a standard deduction to make the system progressive. Another is to shift from taxing income to taxing consumption, introducing a value-added tax (VAT). Some economists believe that shifting to a VAT, in particular, would offer a big growth dividend, even after modifying the tax to make it progressive.

If many economists argue that a simpler tax system will be better, that doesn't mean simplification will be politically easy. For one thing, many Americans like specific tax breaks, and politicians like to dole them out. In some cases, economists too argue that targeted tax incentives help achieve certain economic goals, like promoting corporate investment.

In the second presidential debate, in which Romney responded to a woman worried about losing cherished credits and deductions under his plan, Obama embraced the role that so-called tax preferences can play.

"I think what grows the economy is when you get that tax credit that we put in place for your kids going to college," he said. "I think that grows the economy. I think what grows the economy is when we make sure small businesses are getting a tax credit for hiring veterans who fought for our country. That grows our economy."

Given the political challenges of doing away with all deductions, Romney's idea of a cap could achieve the goal of reining in the size of tax breaks, while limiting the political controversy over which deductions should be kept or scrapped.


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