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Romney’s Tax Plan: What We Learned (or Not) from the Debate

October 4th, 2012 . by economistmom

From last night’s debate (emphasis added to NPR transcript, video above from Wall Street Journal):

MR. ROMNEY: Well, sure. I’d like to clear up the record and go through it piece by piece. First of all, I don’t have a $5 trillion tax cut. I don’t have a tax cut of a scale that you’re talking about. My view is that we ought to provide tax relief to people in the middle class. But I’m not going to reduce the share of taxes paid by high- income people...

…look, I’m not looking to cut massive taxes and to reduce the — the revenues going to the government. My — my number one principle is there’ll be no tax cut that adds to the deficit.

I want to underline that — no tax cut that adds to the deficit. But I do want to reduce the burden being paid by middle-income Americans. And I — and to do that that also means that I cannot reduce the burden paid by high-income Americans. So any — any language to the contrary is simply not accurate.

First, Romney says he will have “no tax cut that adds to the deficit.” How to reconcile this with not raising burdens on “middle-income” Americans and not reducing burdens on “high-income” Americans–given the Tax Policy Center’s analysis of the kind of base broadening needed to support a 20% across the board reduction in marginal income tax rates (in addition to the proposed extension of the full complement of Bush tax cuts) and no increase in effective tax rates on capital income?

A few possibilities I see: (i) Romney is willing to back off the 20% figure for the marginal tax rate cuts; (ii) Romney is implicitly fiddling around with his definition of “middle income” vs. “high income” (consistent with Martin Feldstein’s point that you might be able to avoid raising burdens on middle-income households as long as “middle-income” ends at $100,000); and/or (iii) Romney is using “dynamic scoring” assumptions that assume growth effects offset any “static” revenue loss.  Some combination of those three tradeoffs is being exploited here.

Second, Romney says he is “not going to reduce the share of taxes paid by high- income people.” How to reconcile this with reducing marginal tax rates and keeping capital income tax expenditures out of the tax base?  Well, two cautions here, noting what Romney is literally saying:

  1. If the Romney plan is actually revenue losing, then maintaining the high-income households’ share of a smaller overall tax burden would still imply a reduction in the progressivity of the income tax system–”progressivity” referring to the existing pattern of rising average tax burdens (taxes paid/income) at higher income levels.  A constant share of a shrinking progressive policy means the rich person’s burden, relative to his or her income, goes down more than it does for someone with lower income.  The reference to “shares of taxes paid” was a favorite way of talking about the (claimed “increased”) progressivity of the Bush tax cuts by the Bush Administration.  Given that a lot of the Romney advisers are the same people who created, promoted, and managed the Bush tax cuts (way back in 2001), the use of this statistic to advertise the “fairness” of the Romney plan is not at all surprising.
  2. Exactly who are the “high-income people” in this category?  (Go back to point (ii) above, regarding the deficit-neutrality claim.)  As the Tax Policy Center pointed out in their response to the Feldstein critique, if we change the definition of “high income” to above $100,000 instead of above $200,000 or $250,000, it’s much easier to keep the burdens of this much broader category of households constant (or higher), by paying for net tax cuts on those above $200,000, with net tax increases on those between $100,000 and $200,000.  You can technically call that “not a reduction” in the tax burdens of (all) “high-income people” (meaning the aggregate category of people with income above $100,000), but most of us wouldn’t find that a sensible way to increase the “fairness” of the tax system.

So Romney was very effective in last night’s debate at making his tax plan sound, contrary to the President’s claims, both fiscally responsible and fair, but that’s because he was just able to declare it without explaining the details.  And the President coming back with the details of the TPC analysis didn’t work as well as it did when he first touted the analysis two months ago in his campaign speeches and TV ads.  (CNN’s real-time sentiment meter of their sample of Colorado undecided voters recorded that point in Obama’s remarks as his lowest point in last night’s debate, in fact.)  And the debate moderator certainly didn’t follow up with the questions I would have.  ;)

17 Responses to “Romney’s Tax Plan: What We Learned (or Not) from the Debate”

  1. comment number 1 by: Marlene Resnick

    Thanks, Diane.

  2. comment number 2 by: Jim Glass

    So Romney was very effective in last night’s debate at making his tax plan sound, contrary to the President’s claims, both fiscally responsible and fair, but that’s because he was just able to declare it without explaining the details

    The Tax Reform Act of 1986 was the most successful tax reform in US history, greatly reducing and simplifying marginal tax rates while broadly wiping out tax preferences and killing the tax shelter industry to greatly widen the tax base, all on a revenue neutral basis both overall and by income level. It was copied around the world, by countries from Sweden on. And the political fight over getting it enacted is very educational still, giving lessons on the practical hardball politics of meaningful tax reform. (I’m old enough to remember.)

    It would never, never, never have had a prayer of being enacted if its proponents had “explained the details” before the body politic had been won over to its fundamental principle of “lower rates, broader base, fewer deductions and special tax breaks” in the coming tax reform.

    Instead the story would have been “What??? You are going to kill my deduction for credit card interest! Kill all my tax breaks from my real estate investments! Slash my depreciation deductions!”, etc., etc. And its enemies would all have been going: “But how are they ever going to lower tax rates on a revenue neutral basis without killing this deduction, and that one, and crippling billions of dollars of real estate investments, and killing subsidies the energy industry needs??? And so much more?? They can’t! It’s impossible!! The liars are playing you for fools with false promises to win an election!!”

    And TRA ‘86 would have been DOA ‘86.

    To get a meaningful tax reform you must get people to buy into the principle of it before giving the details, there is no other way. (Besides, you can’t possibly even know the details in advance, they come from all the political head-butting that results while applying the principle. Nobody knew what the details of TRA ‘86 would be before they were actually worked out in Congressional committee combat.)

    You have an election and give people the choice. Do they want: (A) as in 1986, a lowering of rates and broadening of the base, or (B) following the policy since 1986, more special interest “incentives” and breaks and loopholes every year with marginal rates going up to cover the cost. Pick one.

    That is a question of fundamental principle. Attacking the principle because the details haven’t been spelled out in advance — and then imputing very unattractive details of one’s own selection, and proclaiming “Ha! Ha!” — is classic bogus political partisanship.

    E.g. there are literally *dozens* of reform proposals for Social Security that have been scored by CBO as being fiscally sound and returning it to permanent financial balance. Yet *none* of them have come anywhere close to being enacted. Why? Because each plan has *details* — and its enemies *attack the details* to kill the reform, ignoring the principle at stake. It works every time!

    This is political hit tactics 101 — demand details before principle, and attack the details to kill the principle.

    But we know it is possible to significantly lower rates and broaden the base on a neutral basis because it has already been done. If we just re-enacted TRA 86 to go back to where we actually were it would be a big improvement. The rest of the world has been moving in this direction for the last 25 years, while we have been reversing course and heading away from it.

    And the President coming back with the details of the TPC analysis didn’t work as well as it did when he first touted the analysis …

    Well, maybe since then people have looked at the details of the gimmicks, games and deceits he’s used to manufacture his own budget number claims (e.g., as per Hennessey).

    It’s within a month of an election, so one can hardly expect any politician to be honest, um, free of disingenuousness.

    But we should appreciate the disingenuousness of both sides. Not just one.

  3. comment number 3 by: Patrick R. Sullivan

    One thing we definitely learned last night–and there is bi-partisan agreement on this, from Chris Matthews to Ann Coulter–is that Barack Obama was in way over his head.

    He was exposed as a dilettante, which is what he is. Someone with none of the usual life experience or education relevant to the job he holds.

  4. comment number 4 by: Vivian Darkbloom

    “This is political hit tactics 101 — demand details before principle, and attack the details to kill the principle.”

    This is the adjustment I would have to an excellent comment:

    Actually, in the case of these persistent attacks on the Romney plan, it is political hit tactics 201. The advanced political hit course of action is to demand details before principle and, when they are not forthcoming to your satisfaction, make up your own details and attack those.

  5. comment number 5 by: B Davis

    A few possibilities I see: (i) Romney is willing to back off the 20% figure for the marginal tax rate cuts; (ii) Romney is implicitly fiddling around with his definition of “middle income” vs. “high income” (consistent with Martin Feldstein’s point that you might be able to avoid raising burdens on middle-income households as long as “middle-income” ends at $100,000); and/or (iii) Romney is using “dynamic scoring” assumptions that assume growth effects offset any “static” revenue loss. Some combination of those three tradeoffs is being exploited here.

    I think that Romney is using “dynamic scoring” assumptions. In the debate, he said the following:

    The second area, taxation, we agree, we ought to bring the tax rates down. And I do, both for corporations and for individuals. But in order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions, so that we keep taking in the same money when you also account for growth.

    Note the final phrase “when you also account for growth“. Later in the debate, he said the following:

    And number three, I will not under any circumstances raise taxes on middle-income families. I will lower taxes on middle-income families.

    In order to avoid raising taxes on any middle-income family, Romney could not cut any middle-income family’s total deductions more than he cut their tax rate. I believe that this is what Obama and the TPC analysis assume. However, it’s not totally clear whether Romney is talking about every middle-income family or just the average. Afterall, he is obviously talking about the average high-income person when saying he will not reduce their share of taxes paid. A high-income person who takes no deductions would almost surely pay a smaller share of taxes due to the rate cut. Also, as you said, the dividing line between middle-income and high-income is not clear.

    Second, Romney says he is “not going to reduce the share of taxes paid by high- income people.” How to reconcile this with reducing marginal tax rates and keeping capital income tax expenditures out of the tax base? Well, two cautions here, noting what Romney is literally saying:

    There’s one other misleading thing about looking at the share of taxes paid. As can be seen in the second graph at this link, the income of upper-income families has grown at a faster rate than middle-income families during the last several decades. As the share of income earned by a group increases, the share of taxes paid by that group will naturally increase. That does not mean that their burden is increasing or that the tax system is becoming more progressive. That’s just simple math. Hence, it would be better to look at some measure like effective tax rate.

    By the way, you can see a transcript of the entire debate at this link.

  6. comment number 6 by: Vivian Darkbloom

    Regarding the dynamic scoring issue, John Cochrane has recently posted a very good column that comments on the also recently published Tax Foundation analysis of the Romney plan.

    Read Cochrane’s analysis especially and then consider that the effects of increasing rates would move in the opposite direction of reducing them.

  7. comment number 7 by: Richard Sloat

    Romney wants to eliminate all inheritance taxes. A great tax cut ONLY for the most wealthy!

  8. comment number 8 by: Patrick R. Sullivan

    Richard, read your own post carefully. You’ll see that you’ve refuted yourself.

  9. comment number 9 by: Patrick R. Sullivan

    From that Tax Foundation analysis, that Vivian cites;

    http://taxfoundation.org/article/simulating-economic-effects-romneys-tax-plan

    ‘The Romney tax plan would recover nearly 60 percent of the static projected revenue cost due to economic growth, higher wages and employment, and higher tax collections on the higher incomes. To keep the reform revenue neutral, the government would only need base-broadeners equal to about 40 percent of the static cost.[6]

    ‘People need to be aware that each dollar of federal spending costs them several dollars in lost wages and income from saving due to the economic damage from the taxes imposed. In the case of the Romney tax plan, each $1 of lost government revenue would raise incomes by nearly $8. Would the public be willing to trade a $1 reduction in government spending for an additional $8 in personal income?’

  10. comment number 10 by: Brooks / Gordon

    Seems to me both politically stupid and disingenuous for Obama to claim that Romney wants a $5 trillion tax cut.

    It’s disingenuous because it’s not even close to what Romney says he wants. He is saying — albeit without any specifics even at a broad level, which is worthy of strong criticism — that much/most of the revenue effect of the tax rate reductions will be recouped from reducing deductions, etc.

    It’s stupid politically because it’s not just a straw man, but a straw man that Romney could point out as such easily and credibly, backed (I’m assuming) by fact-checkers and other reporting in the media which will provide the very simply explanation re: reducing tax deductions. Thus, Obama’s general credibility in the campaign is diminished: as people find out he was clearly, grossly misrepresenting Romney’s policy goal on this important issue, they will be more inclined to doubt Obama’s claims generally.

    Additionally, Obama apparently went with a static-scoring number, as if it is most reasonable to assume zero dynamic effects or just to ignore such potential effects conceptually, leaving Romney to make the point that there will be some revenue feedback effect, and leaving Obama looking like he either doesn’t understand the concept or was seeking to mislead people. Again, bad for his credibility.

    Instead of erecting that straw man, Obama should have made the legitimate point that even the highest-profile pro-Romney economist seeking to defend his set of promises — Martin Feldstein — could only make the numbers work by increasing the tax burden on many in the middle class based on Romney’s own definition of middle class (middle income), and perhaps Obama could add (if this is the case) that Feldstein also had to assume growth effects that most economists consider unrealistic.

    And, since Romney went with the response that there are different studies that (he claims) dispute/debunk the TPC study (leaving viewers without much sense of whom to believe), Obama could pointed out (if this is the case) that all the fact-checkers back up his assertion, per the TPC study, and reiterate emphatically that even Romney’s defender had to gear his analysis to include a higher tax on much of the middle class — perhaps even pointing out specifically that Feldstein had to exclude households starting at $100k household income (if that’s the case) because folks between $100k and $200k will have to pay more so that folks above $200k can pay less. And that’s the least impact on the middle class that Feldstein could come up with, and it depends on an unrealistic increase in the economic growth rate; It’s quite possible that even more of the middle class — at lower income levels — would have to pay more to make up for the lower tax burden of those over $200k.

    That’s the argument Obama should have made. Instead he repeatedly served up an easily toppled straw man, teeing up that ball for Romney to hit over the fence (if I may mix metaphors), hurting his own credibility, and losing a chance to explain more clearly and convincingly and impactfully the point I make above.

    Plus, by engaging in that sort of bullsh*t himself, Obama diminished his ability to slam Romney (credibly) as having won through dishonesty and/or by supposedly disavowing his policy goals. Obama could have nailed Romney on misleading, incompatible promises on his tax “plan” that could only provide the planned level of tax rate cuts and be revenue-neutral by increasing the burden on the middle class. Obama could have also included in this “Romney misled you” theme — again, much more credibly — Romney’s bullsh*t that the healthcare policy he (Romney) seeks would cover people with pre-existing conditions (it would only do so for people with continuous or nearly continuous coverage). Etc. Instead, Obama and his supporters are screaming “Liar! Liar!” at Romney, citing among the supposed lies (ironically) Romney’s denial that he wants a $5 trillion tax cut, and moreover complaining about grossly misleading statements when Obama was guilty of some himself.

  11. comment number 11 by: Patrick R. Sullivan

    Brooks, what Obama is doing is known to psychologists as ‘projection’. He’s created a simple-minded reality (essentially, dime-store Marxism) in his own head about what Romney (and people like Romney) believe, or want.

    When Romney points out that he doesn’t think as Obama claims, that’s personally offensive to him. He seems to really believe that Romney wants a $5 trillion tax cut (and to starve the poor, torture kittens….). That’s why he could go on the attack the next day, indignantly claiming Romney lied during the debate.

    Politicians misrepresent their opponents positions all the time, it’s SOP. The difference between Bill Clinton and Barack Obama is that Clinton was/is self-aware enough not to believe his own BS.

  12. comment number 12 by: Brooks / Gordon

    Patrick,

    And what do you think of Romney implying that people with pre-existing conditions will be just as protected (re: ability to get insurance at reasonable cost) as they would be under Obamacare?

  13. comment number 13 by: Patrick R. Sullivan

    I don’t consider people to be ‘protected’ unless medical treatment is actually available to them, Brooks. Whether Romney’s plan is better than Obama’s on that metric is debatable.

  14. comment number 14 by: Brooks / Gordon

    Patrick,

    Let me put it this way: Romney implied that people with pre-existing conditions would be just as protected from adverse treatment from insurance companies — in terms of the latter’s willingness to issue insurance or the charging of higher premiums — as under Obamacare. Per what I’ve heard/read, this implication is false. Romney’s plan would only provide such equal treatment for those who have had continuous or nearly continuous coverage (I think no more than a 90-day gap in coverage), whereas Obamacare would not require such a qualification.

    Unless I’m missing something, Romney deliberately, grossly misled people on that point. So I’m asking you this: Unless you dispute my characterization of the above, what do you think of Romney grossly misleading people about this important issue?

    You’ve psychoanalyzed Obama over his bullsh*t, going as far as to claim it’s indication of some sort of psychosis. Frankly, I’m just wondering if you are willing to call Romney on his bullsh*t, or if you’re a hyperpartisan with obvious double standards.

    So, what do you think of Romney’s bullsh*t, or do you dispute that it was bullsh*t?

  15. comment number 15 by: Patrick R. Sullivan

    Well, Romney isn’t claiming that he’s going to merely avoid overpaying health care providers and that that won’t have any repercussions for people relying on those providers. But, Obama did claim that.

  16. comment number 16 by: Brooks / Gordon

    Patrick,

    Apparently you are only interested in serving up partisan talking points, not interested in answering my question. I have no interest in continuing that kind of exchange.

    I do, by the way, concur with your criticism of those who imply that the $716 billion reduction won’t adversely affect beneficiaries. But when you are entirely non-responsive to someone else’s question, and respond instead with just unrelated partisan talking points, you lose the chance to keep that person’s interest long enough to have as much influence as you might have if you engaged in good faith.

  17. comment number 17 by: Vivian Darkbloom

    Gene Steuerle, who is probably now the dean of tax policy analysis, made the following very sensible observation (among many others) that seems to echo very closely Jim Glass’ comment above:

    “During a campaign, I don’t want or expect politicians to identify whose taxes would be increased or benefits cut. Such actions would be political suicide and unrealistic, to say the least. Broad-based reform requires more thoughtful analysis than is possible in an electoral process dominated by sound bites and tweets.”

    http://blog.governmentwedeserve.org/2012/09/13/the-1-percent-political-solution/

    (Thanks AMT for reminding me about his blog).