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Refutation by Redefinition: Feldstein’s Redo of TPC’s Analysis of the Romney Tax Plan

August 30th, 2012 . by economistmom

Earlier this week, Martin Feldstein, a Romney campaign economic adviser and Harvard professor, published this op-ed in the Wall Street Journal, critiquing the Tax Policy Center’s viral (thanks to President Obama) analysis of the implied distributional effects of Mitt Romney’s self-proclaimed-revenue-neutral tax reform plan.  If you recall, the Tax Policy Center’s analysis showed that it was mathematically impossible to cut marginal tax rates as much as Romney proposes, not increase capital income taxes, and broaden the tax base in a revenue neutral way, without the reform resulting in a shift of tax burdens away from the richest households and towards other households (the “non-rich” you might say)–in other words, a “regressive” distributional effect.

Feldstein decided to do the calculation for himself, looking into which tax expenditures he himself could find to reduce/broaden the tax base that would reverse the conclusion that the Romney plan would cut taxes for the rich and raise them on everyone else (…remember, this is relative to Obama’s tax proposals, not relative to current law).  He reports his discovery, which he characterizes as not just a critique of the TPC analysis, but an outright refutation (emphasis added):

The key question raised by the Romney plan’s critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals. It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn’t specified what he would do. But refuting the Tax Policy Center’s assertions doesn’t require that. It only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost.

The IRS data show that taxpayers with adjusted gross incomes over $100,000 (the top 21% of all taxpayers) made itemized deductions totaling $636 billion in 2009. Those high-income taxpayers paid marginal tax rates of 25% to 35%, with most $200,000-plus earners paying marginal rates of 33% or 35%.

And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.

In other words, Feldstein refutes that the Romney plan would raise taxes on the non-rich by redefining the non-rich.  Obama, the TPC, and I’ll bet Romney himself, don’t consider households in the $100,000 to $200,000 range the “rich.”  We know President Obama has always made the dividing line between the “rich” and the “middle class” somewhere in the $200K to $250K range.  Households in the $100K to $200K range are squarely within Obama’s definition of the middle class households who would never be subjected to any increase in tax burdens under Obama tax policy.  (By the way, those households also happen to be the households that tax policymakers often talk about as unfairly bearing the bulk of the burden of the alternative minimum tax, in contrast to the truly “rich”–say, millionaires–who are typically not on the AMT because their marginal tax rate puts their ordinary income tax burden above their broader-based AMT burden.)

So as the Tax Policy Center counter-responded today:

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.

Gee, let’s repeat that Feldstein version/reinterpretation of the Romney plan (emphasis added):

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.

One has to wonder:  did the Romney campaign really want Feldstein to “refute” the TPC analysis of the Romney tax plan this way–in effect spelling out that it’s “just” the $100K to $200K households that might get socked with the burden of paying for the net tax cuts for the above $200K households?

I don’t get it.  But that’s probably why I’m not cut out to ever advise a political campaign. (I think I would have said “keep this quiet.”)

There are other, less-fundamental problems about Feldstein’s analysis including his use of 2009 tax year data (an unusually low-revenue year) which you can read more about in the same TPC blog post.

Key Questions to Ask the Candidates (About Fiscal Policy)

August 27th, 2012 . by economistmom

Just released by the Concord Coalition, this good reading material for the start of the back-to-back conventions.  The intro to the document explains:

With the federal budget running annual deficits in excess of one trillion dollars, and many official and unofficial sources warning that current fiscal policies are not sustainable, it is vital that voters in 2012 demand realistic solutions from the candidates.

The fiscal challenges ahead are not a simple matter of too much “pork” or too many tax “loopholes.”

Our nation is undergoing an unprecedented demographic transformation against the backdrop of rising health care costs and falling national savings. It is an ominous combination for our economic future.

The retirement of the baby boomers, which began  in 2008, is ushering in a permanent shift to an older population — and a permanent rise in the cost of programs such as Social Security, Medicare and Medicaid, which already comprise 42 percent of the federal budget.

There is no plan to pay for it all other than running up the national debt. Some say that our political system only responds to a crisis. If that turns out to be true, we’re in big trouble.

Current budget projections are dominated by two factors: demographics and health care costs.

The Trustees of the Social Security and Medicare trust funds project that the number of Americans aged 65 and older will increase by almost 80 percent by 2035. In contrast, the working age population will grow by only 12 percent. This alone will strain the economy and budgetary resources.

Demographic change, however, is only part of the problem. For the past 40 years health care spending has consistently grown faster than the economy. If the same growth rate continues over the next 40 years, Medicare and Medicaid will absorb nearly as much of our nation’s economy as the entire federal budget does today.

No one can say exactly when a crisis will hit, but by the time it does the economy would likely be burdened with a debilitating amount of debt — leaving painful benefit cuts and steep tax increases as the only options. Doing nothing now to avoid this would be an act of fiscal and generational irresponsibility.

Key Questions Voters Should Ask Candidates

The following questions provide a framework for ensuring that candidates address some of the toughest choices they will face concerning the federal budget if they are elected. Background information is given to provide context and to help with follow-up questions, which should be asked whenever a candidate’s answer appears incomplete.

Read on for the actual questions and background material, and be well prepared to decipher the candidates’ responses to implicit or explicit questions like these that may come up on the campaign trail and at the debates.  Who knows–maybe at least one of you out there will even have a chance to ask a candidate one of these questions directly!

The Economist-Mommy Track

August 27th, 2012 . by economistmom

No, not a discussion of how to become an EconomistMom like me, but rather, the Economist magazine’s take on the “Mommy Track” and the “real reason why more women don’t rise to the top of companies.”  I agree with this reasoning (especially where I have added emphasis):

Several factors hold women back at work. Too few study science, engineering, computing or maths. Too few push hard for promotion. Some old-fashioned sexism persists, even in hip, liberal industries. But the biggest obstacle (at least in most rich countries) is children. However organised you are, it is hard to combine family responsibilities with the ultra-long working hours and the “anytime, anywhere” culture of senior corporate jobs. A McKinsey study in 2010 found that both women and men agreed: it is tough for women to climb the corporate ladder with teeth clamped around their ankles. Another McKinsey study in 2007 revealed that 54% of the senior women executives surveyed were childless compared with 29% of the men (and a third were single, nearly double the proportion of partnerless men).

Many talented, highly educated women respond by moving into less demanding fields where the hours are more flexible, such as human resources or public relations. Some go part-time or drop out of the workforce entirely. Relatively few stay in the most hard-driving jobs, such as strategy, finance, sales and operations, that provide the best path to the top.

Consider this example. Schumpeter sat down with a mergers-and-acquisitions lawyer who says that, before starting a family, she was prepared to “give blood” to meet deadlines. After the anklebiters appeared, she took a job in corporate strategy at an engineering firm in Paris. She found it infuriating. Her male colleagues wasted time during the day—taking long lunches, gossiping over café au lait—but stayed late every evening. She packed her work into fewer hours, but because she did not put in enough “face time” the firm felt she lacked commitment. She soon quit. Companies that furrow their brows wondering how to stop talented women leaving should pay heed.

But I don’t like how the Economist insinuates it’s up to the new Yahoo CEO to prove that working moms really can rise to the top, this way:

Ms Mayer of Yahoo! is an inspiration to many, but a hard act to follow. She boasts of putting in 90-hour weeks at Google. She believes that “burn-out” is for wimps. She says that she will take two weeks’ maternity leave and work throughout it. If she can turn around the internet’s biggest basket case while dandling a newborn on her knee it will be the greatest triumph for working women since winning the right to wear trousers to the office (which did not happen until 1994 in California). To adapt Malia Obama’s warning to her father on his inauguration, the first pregnant boss of a big, well-known American company had better be good.

I think it’s all too easy to claim before the baby comes that you will be just as committed to your professional job, time-wise as well as attention-wise, once the baby arrives.  And in my own experience, going back to work full time soon after the baby is born is far easier than staying at work full time after the baby has turned into a teenager with needs that can’t really be properly met by anyone other than their actual parent.  Mothers have an obvious comparative (biological) advantage to fathers in caring for our newborn kids, but I think mothers keep the comparative advantage in terms of the “tug” we feel toward home over office (i.e., where we feel we make the biggest difference) throughout our kids’ childhoods.

The 10-Year Fiscal Outlook Is a Story About Tax Policy Choices

August 22nd, 2012 . by economistmom

cbo-baselines-tax-vs-spending-aug2012

The Congressional Budget Office released their latest budget and economic outlook today, and although the basic messages are not really new, they do show some new ways of presenting their numbers that help reinforce those basic messages.

First, Figure 1-1 above, from page 3 of the report, highlights the difference between deficits under the current-law baseline (the bottom segment of the deficit bars) and deficits under the CBO’s “alternative fiscal scenario” where scheduled spending cuts are bypassed and expiring tax cuts are extended.  What’s clear from this chart is that:

  1. while current law produces economically-sustainable deficits (meaning deficits as a share of GDP that are lower than the growth rate of the economy), the alternative scenario produces hugely unsustainable deficits;
  2. it is choices over tax policy, not spending policy, that account for the bulk of the difference between the two policy scenarios within the 10-year budget window;
  3. by the end of the 10-year budget window, the additional interest payments alone associated with the extra deficit-financed policies under the alternative scenario swamp the entire deficit under the current-law baseline.  (Interest payments swell because: (i) the big difference between the scenarios starts immediately, (ii) interest compounds, and (iii) interest rates rise significantly over the 10-year window.)

Second, in Table 1-5 of the report (pages 18-19), a table showing the “budgetary effects of selected policy alternatives  not included in CBO’s baseline,” this year CBO offers a comparison of the cost of extending all the expiring Bush tax cuts (and continuing the related alternative minimum tax relief) with the cost of extending all but the upper bracket rate cuts.  The cost of extending all the tax cuts is $4.5 trillion over ten years.  The cost of extending all but the top bracket cuts is $3.7 trillion over ten years.  (Both costs are without associated interest costs.)  In other words, allowing the upper brackets to expire saves only about $800 billion out of $4.5 trillion–or just 18 percent of the total cost.  In other words, change the choice to extend the tax cuts to one extending just the “middle-class” tax cuts, and you only shave less than one fifth from the tax policy segments in the chart above, and policymakers would still be choosing to deviate quite substantially from the current-law baseline by extending and deficit-financing those tax cuts.  Based on the (over-)dramatic, political mud-slinging over the two parties’ tax policy positions, one would think there was a much bigger difference between extending the tax cuts “for the rich” and not.  (One big reason: the “not” isn’t really a “not,” because upper-income households still benefit the most, in dollar terms, from the lower-bracket rate reductions.)

By the way, it’s the data in Table 1-5 that the Concord Coalition uses to construct our “plausible baseline”–which I have emphasized before is not necessarily a statement of what is most likely to happen, but what is at least very “plausible” (possible, believable) from a “business as usual” perspective.  Concord’s updated plausible baseline, based on the updated CBO numbers, can be found here.

Third, Table 2-2 in the CBO report, on page 37 in the economic outlook chapter, makes an interesting comparison of the economic effects of the two different baselines at the beginning of the 10-year budget window (2013) and at the end (2022).  Because the alternative fiscal scenario involves higher deficits throughout, in 2013 GDP growth is higher and unemployment is lower, compared with the current-law baseline, because of the benefits of the continued stimulus to the demand side of the still-recovering economy.  But by 2022, GDP growth is lower and interest rates are higher under the alternative fiscal scenario, because of the longer-term economic cost associated with the higher debt and lower national saving.  This is a useful reminder that while the particular timing of the “fiscal cliff” (and sticking to current law, literally, over the next year) is problematic for the current economy, this shouldn’t rule out achieving the same amount of deficit reduction over the 10-year window that is implied by the current-law baseline.  (I’ve made this point before, and I’ll make it again and again until policymakers address the fiscal cliff appropriately.)

Don’t Talk About Offsets on the Campaign Trail: Part 2

August 15th, 2012 . by economistmom
The Daily Show with Jon Stewart Mon - Thurs 11p / 10c
Paul Ryan’s Bipartisan Appeal
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

The Daily Show segment above and Ruth Marcus’ column in today’s Washington Post emphasize that, gee, the Romney-Ryan Medicare reform approach–no matter that the GOP team is still trying to define/refine it–is not that different from “Obamacare.”  As Ruth explains:

The Republican National Committee chairman says President Obama has “blood on [his] hands” for cutting Medicare. Mitt Romney blasts the president for having “robbed” the program of $700 billion.

Vice President Biden accuses Romney and running mate Paul Ryan of “gutting” Medicare. And, inevitably, President Obama warned that Romney-Ryan would “end Medicare as we know it.”

Aren’t you glad we’re having a sober policy discussion about how to rein in entitlement spending?

Such hyperbole was inevitable. The laws of political gravity drag every debate from the lofty realm of ideas to the grungy plain of invective. The more complex and weighty the issue, the more it is at risk of being distilled — distorted — into a 30-second caricature.

Let’s pause for a bit of fact-checking.

The cheeky response to the critique of Obama’s Medicare cuts is that Ryan assumes those very cuts in his budget — the one passed by the House and endorsed as “marvelous” by Romney. So there are robbers galore and blood to spread around.

The slightly less cheeky response is to say: Aren’t these the people who have been screaming about Medicare bankrupting the country? Shouldn’t they be praising cuts, not denouncing them?

The on-the-merits response is that the cuts — more accurately, reductions in the rate of growth — involve lower reimbursements to hospitals and nursing homes, reduced payments to insurers, higher premiums for better-off beneficiaries, and savings from reforms such as lower hospital readmissions.

In other words, Grandma might lose her free eyeglasses, but her basic benefits remain untouched.

So what are the candidates blaming each other about?  In essence, it’s the exact same part of their largely-the-same overall proposals: the part that saves money. The Democrats demonstrate this by showing Grandma being pushed off a cliff by the Republicans.  The Republicans characterize this as the Democrats throwing the $700 billion off the cliff–”robbing” it from the Medicare program (and the very same Grandma!) and “wasting” that money.

It’s part 2 of “don’t talk about saving money” lesson on the campaign trail–part 1 being the lesson I’m afraid Romney got on his tax reform approach once the implied details of a base-broadening offset were spelled out by the Tax Policy Center.  My point on that lesson (summarized best in my Concord version of the blog post) was that the lesson for Romney should have been for him to pare back his tax-cutting plans and make any offsets more progressive–rather than for him to rethink paying for the policy at all.

But any policy talk that honors the inevitable budget constraints–that there’s no such thing as a free tax cut or spending program–paints an easy target for a candidate.  The offset or “pay for” always involves a spending cut or a revenue (tax) increase, at least relative to a not-paid-for baseline, and instead of leading to a healthy debate about the different ways to reform our tax and spending programs in fiscally responsible ways, it leads to attacks on the other side for even suggesting their version of the “fiscally responsible” part–no matter how similar it actually is to one’s own fiscally responsible part!

This is how it’s going to go through the November election.  Expect the candidates to get looser and looser about the “fiscally responsible” pieces of their policy proposals.  Expect them to spell out only the goodies, not how they would pay for the goodies.  For voters to be able to see past the rhetoric and understand the real substance of the differences between the two presidential candidates’ policy positions, we’re going to need constant translations from people like Ruth and Jon Stewart, I guess.

Ryan as Romney’s VP

August 11th, 2012 . by economistmom

romney-and-ryan-podium-cnn

Wow!  It looks like the federal budget will be front and center in the presidential campaign after all, with this breaking news that Mitt Romney has picked the chairman of the House Budget Committee, Paul Ryan (R-WI), as his running mate.  (CNN’s live blog on the announcement is here.)

Ezra Klein summarizes the implications well here. I like Ezra’s points about what Romney’s choice of Ryan means for the stark choice that will face voters in Romney-Ryan vs. Obama-Biden:

5. It’s worth recalling how Ryan became a semi-household name. It wasn’t a Republican strategy to put him forward. As Ryan Lizza recounts in his New Yorker profile of Ryan, it was a Democratic strategy to put Ryan forward. Ryan, he writes, “was caught between the demands of the Republican leaders, who wanted nothing to do with his Roadmap, and his own belief that the Party had to offer a sweeping alternative vision to Obama’s. Ryan soon had an unlikely ally, in Obama himself.” While Republicans were trying to keep Ryan quiet, the Obama administration was trying to make him famous. They saw his plans as the clearest distillation of the GOP’s governing philosophy — and they thought it would drive voters towards the Democrats. We’ll know in November whether that was a genius strategy or an epic miscalculation…

7. Ryan upends Romney’s whole strategy. Until now, Romney’s play has been very simple: Don’t get specific. In picking Ryan, he has yoked himself to each and every one of Ryan’s specifics. And some of those specifics are quite…surprising. For instance: Ryan has told the Congressional Budget Office that his budget will bring all federal spending outside Medicare, Medicaid and Social Security to 3.75 percent of GDP by 2050. That means defense, infrastructure, education, food safety, basic research, and food stamps — to name just a few — will be less than four percent of GDP in 2050. To get a sense for how unrealistic that is, Congress has never permitted defense spending to fall below three percent of GDP, and Romney has pledged that he’ll never let defense spending fall beneath four percent of GDP. It will be interesting to hear him explain away the difference.

8. It’s not just that Romney now has to defend Ryan’s budget. To some degree, that was always going to be true. What he will now have to defend is everything else Ryan has proposed. Ryan was, for instance, the key House backer of Social Security privatization. His bill, The Social Security Personal Savings Guarantee and Prosperity Act of 2005, was so aggressive that it was rejected by the Bush administration. Now it’s Romney’s bill to defend. In Florida.

Like it or not, America, we’re going to be talking a lot about deficits, debt, the federal budget, and the fundamental role of government in this election.  While the Ryan pick might not be great for future bipartisanship in developing compromise deficit-reduction plans, it will sure get people talking about, and hopefully thinking more about, what they expect the government to do for them and how they are willing to pay for it.

What Would Really Happen to Tax Burdens Under President Obama vs. President Romney?

August 6th, 2012 . by economistmom

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.)

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.)

My bigger criticism about the Obama tax calculator is that it ignores the distribution of the burden of deficit financing—as Bill Gale and Peter Orszag emphasized way back during the Bush Administration about the Bush tax cuts. (The lesson from that analysis was that if deficits at least eventually have to be offset by future tax increases or spending cuts, then the distribution of the burden of those future fiscal policy changes should be considered, not ignored, in the policy choice to deficit-finance a current tax cut.) By ignoring the cost of deficit financing any tax cuts (even those “fiscally irresponsible” Bush tax cuts!), the Obama calculator implicitly suggests that there is no cost of tax cuts if you deficit finance them. Instead, the calculator scores a monetary cost if the tax cuts are paid for, but no monetary cost if they are not paid for. This is not the message that encourages politicians to say “ok then, I’ll propose fiscally-responsible tax cuts from now on.”

The Obama tax calculator calculates the benefits of the extended Bush tax cuts without the burden of deficit financing and claims those (ironically) as the good of Obama tax policy. They then use the net burdens of the Romney plan as estimated in the TPC analysis (which average to zero across all households but burden middle income families on net) to claim Romney’s supposedly-paid-for plan raises taxes while the Obama (Bush-extended, deficit-financed) plan reduces taxes.

This gets back to my even broader concern about the Obama campaign’s emphasis in their touting of the TPC analysis. (To be clear, I mean no criticism of the TPC analysis itself here.) The Obama campaign has jumped at the chance to highlight the burden of the implicit Romney revenue offset–which should be criticized because of its adverse distributional effect, but not because it is an offset, nor because it is a base-broadening offset. In my view, the most important and very objective, basic-math lessons of the TPC analysis are (i) we can’t afford the Romney tax cuts, and (ii) it’s not possible to offset the cost of those tax cuts while taking capital income tax expenditures off the table without creating a very regressive tax reform on net. In an ideal world this TPC analysis would lead policymakers on both sides of the aisle to scale back their tax cutting plans and/or restructure the offsets to make for a more progressive package. Unfortunately, the Obama campaign’s political capitalizing on the TPC analysis has probably resulted in the Romney campaign saying to themselves now: “gee, we shouldn’t have proposed a fiscally responsible version of our huge tax cuts for the rich; we should have just said we would deficit finance it.”

In this PBS Newshour segment where Judy Woodruff speaks with one of the authors of the TPC analysis, Bill Gale, and the Tax Foundation’s Scott Hodge, at one point Hodge actually suggests it may be wrong to assume Romney would pay for his proposed tax cuts at all (emphasis added):

SCOTT HODGE: …There are many ways in which Romney could fill out the details of his plan. They of course are not forthcoming with that, because they would like to keep to a big-picture approach. So we have to be very careful about reading too much into this, because it really is not the Romney plan.

(CROSSTALK)

JUDY WOODRUFF: All right, so filling in a lot of assumptions, what about that?

BILL GALE: Let me respond to that.
It’s correct that Governor Romney has not specified all the details of his tax reform plan. He has specified the goodies, the tax cuts, but he’s not specified how he will pay for them. If he would do so…

(CROSSTALK)

SCOTT HODGE: He may not even pay for them. He may decide that we are going to scrap revenue neutrality.

Indeed, why should any politician propose a fiscally-responsible, as opposed to deficit-financed, tax cut then? By offsetting the cost of one’s tax cuts, whether with specific policy or not, your opponent will attack you on the burden of the offset on whichever households would bear that burden. In contrast, if you don’t offset the cost, you can claim all households win.

It’s a shame that Romney’s particular version of base-broadening tax reform might be a bad-enough version such that the more general (and wise) strategy of tax base broadening for deficit reduction—the kind of tax reform recommended by all of the bipartisan deficit-reduction groups—has now been tainted. Both the President’s commission (Bowles-Simpson) and the Bipartisan Policy Center’s task force (Domenici-Rivlin) showed that we can broaden the tax base, lower tax rates, and raise revenue—and yet still maintain or improve the progressivity of the overall tax system. But the TPC analysis of the Romney plan makes clear that going further with tax rate cuts, even beyond extension of the Bush tax cuts, is not feasible in any practical sense if we are not willing to pay for it by giving up the major tax expenditures that currently benefit all taxpayers very broadly, and is not palatable from a distributional perspective if we’re not willing to increase, not decrease, the taxation of capital income.

The TPC analysis of the Romney tax plan should be taken as a good teaching moment to help policymakers on both sides start constructing better tax policy. But both campaigns have just used it to ramp up their political posturing and sharpen their blame games. Let’s hope that this blow to the idea of fiscally-responsible, progressive tax reform is purely superficial and temporary and does not prove deadly.

The Most Important Lesson from the TPC Analysis of the Romney Tax Plan Is Neither What Obama Nor Romney Suggests

August 1st, 2012 . by economistmom

tpc-on-romney-tax-plan-080112

Today the Tax Policy Center (TPC) released this analysis of the distributional effects of Mitt Romney’s proposed tax reform plan, and it got so much (deserved) attention that both President Obama and presidential candidate Romney talked about it.  Too bad both candidates were speaking entirely as candidates and not as policy analysts or even as the supreme policymaker that we will elect one of them to be.

President Obama decided that the report was sufficiently unfavorable to the Romney plan as to make it great campaign speech fodder.  As reported in Politico:

President Obama is set to attack Mitt Romney on Wednesday for pushing tax reforms that would cut taxes for the rich while raising the burden on other taxpayers.

It’s an argument that Obama often makes, but as he speaks in Mansfield, Ohio, it will come with the added weight of a new report from the nonpartisan Tax Policy Center — which is affiliated with the Urban Institute and the Brookings Institution — that backs up his claim.

“Just today, an independent, non-partisan organization ran all the numbers,” Obama is to say, according to excerpts of his speech released by the Obama campaign. “And they found that if Governor Romney wants to keep his word and pay for his plan, he’d have to cut tax breaks that middle-class families depend on to pay for your home, or your health care, or send your kids to college.  That means the average middle-class family with children would be hit with a tax increase of more than $2,000.”

“But here’s the thing – he’s not asking you to contribute more to pay down the deficit, or to invest in our kids’ education,” Obama adds. “He’s asking you to pay more so that people like him can get a tax cut.”

Romney’s response?  As reported by Lori Montgomery in the Washington Post:

The Romney campaign on Wednesday declined to address the specifics of the analysis, dismissing it as a “liberal study.” Campaign officials noted that one of the three authors, Adam Looney of Brookings, served as a senior economist on the Obama Council of Economic Advisers. The other two authors are Samuel Brown and William Gale, both of whom are affiliated with Brookings and the Tax Policy Center.

“President Obama continues to tout liberal studies calling for more tax hikes and more government spending. We’ve been down that road before – and it’s led us to 41 straight months of unemployment above 8 percent,” said Romney campaign spokesman Ryan Williams. “It’s clear that the only plan President Obama has is more of the same. Mitt Romney believes that lower tax rates and less government will jump-start the economy and create jobs.”

But what does the TPC analysis actually tell us–meaning us people who aren’t campaigning to be president–about the Romney tax plan?  It’s well summarized by Figure 2 from the paper, above, which decomposes the bottom line conclusion that a revenue-neutral Romney plan would give generous tax cuts to the rich paid for with net tax increases on everyone else, into two parts:  (i) how much the tax cuts from the tax rate reductions are skewed toward the rich; and (ii) how much the revenue offsets from (Romney-limited) base broadening are skewed toward lower- and middle-income households.  Combined, we would end up with a revenue-neutral (relative to a business-as-usual, policy-extended baseline) and highly “regressive” tax reform, with relative and absolute tax burdens falling for “the rich” (defined here as households with incomes above $200,000–about the top 5%) and increasing for everyone else.

This makes the Romney proposal, specifically, a bad idea, but this should not be taken as a blanket indictment of any kind of tax reform proposal that tries to pay for low (or even lower) marginal tax rates by broadening the tax base.   From a purely mechanical standpoint (leaving aside politics, I mean), both parts of the reform could be modified fairly easily to come up with a revenue-neutral but much more progressive (with average tax burdens rising more steeply with income) tax reform package.  On part (i)–the rate cuts–just don’t cut rates so much (or at all) at the top.  On part (ii)–the base broadeners–just make sure you reduce some of the tax expenditures that currently benefit capital income (which is highly skewed toward the rich) and ideally additionally limit other tax expenditures such that higher-bracket households don’t receive  higher percentage subsidies.  (The President’s proposal to limit itemized deductions to the 28 percent rate is an example of this latter strategy.)  Romney goes wrong on both parts because he chooses to cut tax rates the most for the rich and at the same time refuses to reduce current tax subsidies that produce very low effective tax rates on capital income (and hence the rich).  The TPC analysis explains that taking tax preferences on capital income completely off the base-broadening table (as Romney would do) means that the revenue-raising potential from base broadening is cut by about one third.  So from my perspective, this particular version of a base-broadening tax reform scores poorly on fiscal responsibility grounds and not just distributional grounds.

But it seems that President Obama’s emphasis on the TPC analysis was to underscore that the offsets would imply higher taxes for most of us, even more than to complain about the proposed rate cuts lowering tax burdens on the rich.  So I’d hate for the message heard from the President to be “we shouldn’t pay for tax cuts with base broadeners”–as the shorthand for a more accurate characterization of TPC’s conclusion that “we shouldn’t pay for large tax rate cuts on the rich with base broadeners that fall disproportionately on the non-rich.”

And by the way, the main lesson from the TPC analysis is also not what Romney suggests–that the Tax Policy Center is (suddenly) “liberal” and biased.  ;)