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Turning the Cliff Into a Good Thing by Recycling the Fiscal Cans

October 7th, 2012 . by economistmom

cbo-fiscal-cliff-and-beyond-aug2012

Last week the Tax Policy Center (TPC) released an analysis and held an event (which I participated in) on the tax changes that comprise the so-called “fiscal cliff”–the combination of policies scheduled under current law that according to the Congressional Budget Office (CBO) in their latest budget outlook would reduce the federal budget deficit by around half a trillion dollars between fiscal years 2012 and 2013.  (CBO had also done this earlier analysis in May (based on their previous baseline forecasts) focused specifically on the economic effects of avoiding or reducing the 2013 fiscal cliff.)

I’ve made the point before (here and here) that the scary part of the “cliff” that everyone is talking about and wants to avoid is just the first year of the current-law baseline; the drop from deficits in fiscal year 2012 to the baseline deficits in fiscal year 2013 that are represented by just the first two bars in the chart above (from the CBO outlook report).  CBO themselves referred to this one-year fiscal contraction as enough to send us back into recession:

Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.

While it is thus understandable that everyone says we can’t “go over” (or “run into”) the cliff, that doesn’t tell us what we should do on the other side of the one-year cliff–the remainder of the chart above.  Are we going to reject the entire current-law baseline in favor of “business as usual” that continues to extend and deficit finance the type of spending and tax cuts we’ve enjoyed over the past dozen or so years?  Or are we going to try to get back on the current-law baseline path eventually, given that CBO says that not doing so–continuing to avoid the cliffs and kick the cans along the way–would be harmful to the economy later on? (emphasis added):

Under the alternative fiscal scenario, deficits over the 2014–2022 period would be much higher than those projected in CBO’s baseline, averaging about 5 percent of GDP rather than 1 percent. Revenues would remain below 19 percent of GDP throughout that period, and outlays would rise to more than 24 percent. Debt held by the public would climb to 90 percent of GDP by 2022—higher than at any time since shortly after World War II.

Real GDP would be higher in the first few years of the projection period than in CBO’s baseline economic forecast, and the unemployment rate would be lower. However, the persistence of large budget deficits and rapidly escalating federal debt would hinder national saving and investment, thus reducing GDP and income relative to the levels that would occur with smaller deficits. In the later part of the projection period, the economy would grow more slowly than in CBO’s baseline, and interest rates would be higher. Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective.

Note that most of the difference between “take the cliff” or current law and “avoid the cliff” or “alternative fiscal scenario” is tax policy; CBO’s figures for the one-year decline in the deficit under current law show that higher revenues alone account for $478 billion, or 98 percent, of the $487 billion “cliff.”  Alternatively, if defined as the difference between current-law and policy-extended (business as usual, alternative fiscal) deficits in fiscal year 2013, higher revenues account for 83 percent of the difference ($330 billion of $396 billion).

Thus, it’s pretty important that we take a closer look at the tax policies that comprise the “fiscal cliff,” in order to address it in the best way not just over the next year (when we want to avoid it because of the recession factor) but in the future (when we want to come closer to embracing it for long-term economic growth reasons).  The Tax Policy Center’s analysis is very helpful in this regard, effectively pulling apart the pile of fiscal cans that have all been kicked to this particular point in time (the end of 2012) and studying the tax-policy labels on each one of the tax-policy cans (that are most of the cans).  See, I believe the approach we need to take is not to simply avoid the fiscal cliff and kick the whole pile of current-law policy cans away (either into the trash or yet again “down the road”), but to commit to honoring the mix of spending cuts and (mostly) revenue increases imbedded in those fiscal cans and the current-law baseline, without feeling stuck with the particular timing and shape of the revenue- and spending-side policies.  What I mean is that we should strive to achieve (and commit to achieving) the same amount of deficit reduction over the 10-year budget window as is implied by the current-law baseline, and even the same amount achieved via the spending side vs. the revenue side of the budget–except with economically smarter, better-timed spending cuts and revenue increases.  I think of this as “recycling the cans” instead of continuing to kick them.  If we can’t use them usefully now, in their current spending-cut or revenue-increase form, let’s carry them along with us as we go along and figure out how to use them better later.  But the rule is that we have to use them; we aren’t allowed to trash them.

The Tax Policy Center analysis takes apart the pile of fiscal cans and sorts the current-law tax increase cans according to their “likelihood of occurring”–basing this admittedly very subjective ranking on “public discussion, proposals advanced by the two presidential candidates and members of Congress, and past congressional actions.”  This ranking is because TPC is trying to show the effects of what is most likely to happen–basically, what to expect when expecting our dysfunctional political and policymaking processes to continue. Here’s that list, from the tax increases they judge as most likely to occur (tax cuts most likely to expire) to those they judge as least likely to occur (tax cuts most likely to be extended)–see the TPC report for description of the policies in each category:

  1. Payroll Tax
  2. Health Care Law Provisions
  3. High-Income Capital Gains and Dividends
  4. High-Income Rates, Pease, and PEP
  5. Stimulus Legislation EITC, CTC, and AOTC
  6. Extenders
  7. Estate Tax
  8. 2001/2003 Tax Provisions Primarily Affecting Low- and Middle-Income Households
  9. Alternative Minimum Tax Patch

The TPC analysis demonstrates that we’re facing significant tax increases over the next year under current law, and that even if policymakers opt to avoid significant portions of the impending fiscal cliff, any parts of the cliff that do occur are likely to involve higher tax burdens on almost all of us (at least 90 percent of us), because the most likely tax increases to occur are some tax increases on mostly lower-and-middle-income households (such as items 1 and 5) and only some on just higher-income households (such as items 2, 3, and 4).

But TPC’s ranking of the “likelihood” of the tax increases above shouldn’t be taken as their endorsement of that policy ranking.  What if TPC had chosen to rank the policies according to economic intelligence instead–or how they would do it if their economists (or other smart economists) had their say?  That is, what if TPC had adopted my “recycle the cans” approach and tried to put out a ranking to guide policymakers on how to best deal with the tax-increase cans–from an economic perspective?  This kind of ranking would have to change over time, based on economic conditions at the time.  Right now, the entire fiscal cliff is a scary proposition because in an economy still in recovery, still facing a shortage of demand, any form of fiscal contraction can worsen conditions (as the CBO warning of “recession” underscores).  But ranking the tax increases from least harmful to most harmful, we economists would prioritize and use the tax-increase cans this year differently.  We would either avoid using any cans this year, or we would use the tax-increase cans that increase burdens on just the richest of households first–so we would probably rank tax increases 2, 3, 4, and 7 in the TPC list as the least harmful to the economy and the hence the most acceptable to exercise first.  We would push tax increases 1, 5, and 8 (the more regressive or proportional tax increases) further down this year’s list, because those are tax increases more likely to adversely reduce demand and suppress job creation.  Or we would simply replace this year’s scheduled regressive tax increases with other more progressive, less harmful to demand, tax increases–”recycling” the tax-increase cans (by changing their timing or shape) while keeping their essential revenue-raising element.

But on the other hand, an economist-determined ranking of these tax policies would change once the economy got back to full employment, a couple years out (hopefully).  In a full-employment economy, economic growth becomes once again constrained by the limits of our productive capacity, or the “supply side” of our economy–how large our human and physical capital stock is, and how intensely and efficiently we are choosing to use it.  Under those full-employment conditions the adverse influence of higher marginal tax rates on labor supply and saving, and uneven effective tax rates across different sources and uses of income, will matter relatively more than they do now in our currently-still-demand-constrained economy.  So in a couple years when we reexamine the tax-increase cans we have yet to use or re-purpose, we economists may rank tax increases that are skewed heavily to the rich and in the form of higher marginal tax rates much lower than we might this year.  At that time we economists will also likely press harder for “base broadening” revenue increases that would raise effective burdens on all taxpayers, not just on the rich, because in a full-employment economy we will be more concerned with minimizing tax policy’s distortions on economic decisions than on steering more cash to the most cash-constrained households or businesses (who won’t be as cash-constrained at that time).

So my idea is to stop “kicking the can(s)” and instead follow a “recycle the cans” approach.  Stop rejecting the current-law baseline levels of revenues and instead more strongly embrace them, because: (i) those revenues lead to economically-sustainable deficits over the next 10-20 years and represent a “grand bargain,” “go big” level of deficit reduction; (ii) those are policies our policymakers actually agreed to (to let tax cuts expire); and (iii) contrary to the spending-side portions of the current-law baseline, which we haven’t really experienced before, we have lived through the revenue-side portions (as in Clinton-era tax policy).  Whatever parts of current-law revenues we can’t tolerate at the moment, save them for future, more thoughtful revenue increases–don’t just abandon them.  And get the budget committees and the budget process to enforce this commitment.  “Recycle As You GO” (or “RAYGO”) can be the new budget mantra.  It sounds easier and more resourceful than “PAYGO,” doesn’t it?

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.  ;)

Feldstein and Summers on Tax Reform: A Lot of Common Ground–but Still Some Stumbling Blocks

October 1st, 2012 . by economistmom

Last week as part of the “Strengthening of America-Our Children’s Future” project that the Concord Coalition is a co-sponsor of, a forum was held in New York on the topic of “pro-growth tax reform.” Harvard economics professor and Romney adviser, Martin Feldstein, joined former Treasury secretary and Obama adviser, Lawrence Summers, to discuss what they consider “pro-growth” tax policy.  A preview of their discussion was provided by former Senator Sam Nunn’s co-anchoring of the CNBC “Squawk Box” show earlier that morning; in this segment Feldstein and Nunn discuss the potential for bipartisanship in tax reform, but Feldstein is also asked to react to comments that Summers had made on the show just before.  (This latter issue will be most appreciated by those who have been following the Tax Policy Center’s analysis of the Romney plan and Feldstein’s subsequent critique of the TPC analysis and defense of the Romney tax reform plan.)

At the event, Feldstein and Summers made it clear that when it comes to the notion of what is “pro-growth tax reform,” there is a lot of common ground between economists who favor the Rs and economists who favor the Ds.  Here are what I heard as some of the main points of agreement between Feldstein and Summers (what Summers referred to as the “structure that Marty and I have converged on”):

  1. “Pro-growth tax reform” means structuring the tax system to encourage longer-term expansion in the productive capacity (or “supply side”) of the economy.
  2. This suggests that a broader, more even tax base, which supports relatively low marginal tax rates, is the best way to raise necessary revenue with the least distortion to those supply-side economic decisions (how much to work, how much to save, how much to invest in human or physical capital).
  3. A first priority to follow the “broadening the tax base” strategy is to reduce existing “tax expenditures” that are considered inefficient and/or unfair.  Tax expenditures are economically equivalent to government spending programs and make government bigger than indicated by the levels of direct spending. (Cutting revenues by increasing tax expenditures grows, rather than shrinks, the size of government.)
  4. Tax expenditures could be reduced in a variety of ways that don’t have to target particular sectors of the economy (could be done in across-the-board, broad-brush ways–e.g., Feldstein likes the idea of capping the total amount to a percentage of gross income) and can be done in a progressive manner, where tax burdens are increased relatively more on higher-income households (e.g., the Obama budget proposal to limit itemized deductions and even other tax expenditures to the 28% rate).
  5. Tax reform does need to raise revenue (relative to the policy-extended, “business as usual” baseline, and even before any “dynamic scoring” type effects are accounted for) in order to contribute to deficit reduction and (therefore) be “pro-growth.”
  6. But “pro-growth tax policy” is a longer-term goal focused on mainly the supply side of the economy; we cannot immediately raise tax burdens in ways that would threaten putting our economy back in recession (by reducing demand for goods and services too severely).

But I also heard some remaining sources of disagreement between Feldstein and Summers, which are probably indicative of where “stumbling blocks” to bipartisan tax reform remain:

  1. Beyond decreasing tax expenditures/broadening the income tax base, what are some other features essential to “pro-growth” tax policy? (i) Feldstein seems to favor continued low or even lower effective tax rates on capital income (more consistent with a consumption base), while Summers seems to favor reducing or eliminating the current preferential rates on capital gains and dividends (consistent with reducing tax expenditures under an income base); (ii) Feldstein would favor keeping marginal tax rates low across the income spectrum, including at the very top, while Summers would favor a return to higher rates at the top as necessary to restore fairness (greater progressivity) to the system; (iii) Summers explicitly said that effective (average) corporate income tax rates are too low, not too high, while Feldstein argues for corporate tax reform that is revenue-neutral at best with lower marginal tax rates on profits earned abroad; (iv) Feldstein would probably argue for a lower upper bound on overall revenues/GDP than Summers would, as consistent with the “pro-growth” goal.
  2. Beyond deficit reduction, what is needed to grow the economy’s “supply side?” Feldstein would probably argue for working toward smaller government in scale and scope, while Summers clearly stated that pro-growth tax reform is (necessary but) “not sufficient” to address our nation’s growth needs, because we have “under-invested” in many things.  Beyond raising national saving by reducing the deficit, Summers believes government should more directly help the economy invest more in education, infrastructure, the environment, health care, etc.–the components of the productive capacity of the economy.  He stated that such public investments are a necessary complement to fiscal sustainability in a “pro-growth” fiscal agenda.  (And immediately, Summers emphasized that continued stimulus-type policies, to keep demand for goods and services up, are still necessary–although Feldstein did not disagree with this.)

The conversation between Feldstein and Summers is a good indicator of the potential for achieving bipartisan tax reform consistent with not just “growth” goals but fairness and fiscal responsibility goals as well.  The broad contours of the common ground are indeed well “grounded,” but some of the remaining points of disagreement might be significant-enough stumbling blocks to make meeting halfway still challenging.

Why Romney Still Has Work to Do on His Tax Plan

September 28th, 2012 . by economistmom

tpc_obama_attack_ad

Ezra Klein’s “Wonkblog” has put up this very nice “comprehensive guide to the debate over Romney’s tax plan.”  It explains why no one but Romney himself can properly “defend” his tax plan, because no one but Romney himself can decide which part of the doesn’t-add-up math in his plan will have to give.  Is it the deficit reduction?  Is it the protecting the “middle class”–and “middle class” defined how?  Is it protecting capital income from any increase in taxes?  Is it some of the across-the-board tax rate cuts?  So many people have speculated in so many different ways, trying desperately to discredit the Tax Policy Center’s analysis in order to defend the Romney “plan.”  Yet everyone has not only failed to damn the TPC analysis, but also failed to answer the basic question raised by the analysis: what exactly does Mitt Romney really want to do with tax policy? The only one who can put an end to the much-ado-about-what-should-have-been-just-another-boring-tax-analysis chatter is Romney, just coming clean and answering the question honestly.  (And I’m still talking about his tax reform plan and not even his own tax returns.)

Bill Clinton: Not a “Blood Bath”–Just Good Math

September 6th, 2012 . by economistmom

There’s no one quite like Bill Clinton to talk about how to achieve fiscal responsibility. He’s the master in terms of both the politics and the substance–or “mathematics” as he calls it. From the transcript of his speech:

[D]emocracy does not…have to be a blood sport, it can be an honorable enterprise that advances the public interest…

Now, we all know that [Obama]…tried to work with congressional Republicans on health care, debt reduction and new jobs. And that didn’t work out so well. (Laughter.) But it could have been because, as the Senate Republican leader said in a remarkable moment of candor two full years before the election, their number one priority was not to put America back to work; it was to put the president out of work…

In Tampa, the Republican argument against the president’s re-election was actually pretty simple — pretty snappy. It went something like this: We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in. (Laughter, applause.)

Now — (cheers, applause) — but they did it well. They looked good; the sounded good. They convinced me that — (laughter) — they all love their families and their children and were grateful they’d been born in America and all that — (laughter, applause) — really, I’m not being — they did. (Laughter, applause.)

And this is important, they convinced me they were honorable people who believed what they said and they’re going to keep every commitment they’ve made. We just got to make sure the American people know what those commitments are — (cheers, applause) — because in order to look like an acceptable, reasonable, moderate alternative to President Obama, they just didn’t say very much about the ideas they’ve offered over the last two years.

They couldn’t because they want to the same old policies that got us in trouble in the first place. They want to cut taxes for high- income Americans, even more than President Bush did. They want to get rid of those pesky financial regulations designed to prevent another crash and prohibit future bailouts. They want to actually increase defense spending over a decade $2 trillion more than the Pentagon has requested without saying what they’ll spend it on. And they want to make enormous cuts in the rest of the budget, especially programs that help the middle class and poor children.

As another president once said, there they go again. (Laughter, cheers, applause.)…

Now, let’s talk about the debt. Today, interest rates are low, lower than the rate of inflation. People are practically paying us to borrow money, to hold their money for them.

But it will become a big problem when the economy grows and interest rates start to rise. We’ve got to deal with this big long- term debt problem or it will deal with us. It will gobble up a bigger and bigger percentage of the federal budget we’d rather spend on education and health care and science and technology. It — we’ve got to deal with it.

Now, what has the president done? He has offered a reasonable plan of $4 trillion in debt reduction over a decade… for every $2 1/2 trillion in spending cuts, he raises a dollar in new revenues — 2 1/2-to-1. And he has tight controls on future spending. That’s the kind of balanced approach proposed by the Simpson-Bowles Commission, a bipartisan commission.

Now, I think this plan is way better than Governor Romney’s plan. First, the Romney plan failed the first test of fiscal responsibility. The numbers just don’t add up. (Laughter, applause.)

I mean, consider this. What would you do if you had this problem? Somebody says, oh, we’ve got a big debt problem. We’ve got to reduce the debt. So what’s the first thing you say we’re going to do? Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts heavily weighted to upper-income people. So we’ll make the debt hole bigger before we start to get out of it.

Now, when you say, what are you going to do about this $5 trillion you just added on? They say, oh, we’ll make it up by eliminating loopholes in the tax code.

So then you ask, well, which loopholes, and how much?

You know what they say? See me about that after the election. (Laughter.)

I’m not making it up. That’s their position. See me about that after the election.

Now, people ask me all the time how we got four surplus budgets in a row. What new ideas did we bring to Washington? I always give a one-word answer: Arithmetic. (Sustained cheers, applause.)

If — arithmetic! If — (applause) — if they stay with their $5 trillion tax cut plan — in a debt reduction plan? — the arithmetic tells us, no matter what they say, one of three things is about to happen. One, assuming they try to do what they say they’ll do…cover it by…cutting those deductions, one, they’ll have to eliminate so many deductions, like the ones for home mortgages and charitable giving, that middle-class families will see their tax bills go up an average of $2,000 while anybody who makes $3 million or more will see their tax bill go down $250,000. (Boos.)

Or, two, they’ll have to cut so much spending that they’ll obliterate the budget for the national parks, for ensuring clean air, clean water, safe food, safe air travel. They’ll cut way back on Pell Grants, college loans, early childhood education, child nutrition programs, all the programs that help to empower middle-class families and help poor kids. Oh, they’ll cut back on investments in roads and bridges and science and technology and biomedical research.

That’s what they’ll do. They’ll hurt the middle class and the poor and put the future on hold to give tax cuts to upper-income people who’ve been getting it all along.

Or three, in spite of all the rhetoric, they’ll just do what they’ve been doing for more than 30 years. They’ll go in and cut the taxes way more than they cut spending, especially with that big defense increase, and they’ll just explode the debt and weaken the economy. And they’ll destroy the federal government’s ability to help you by letting interest gobble up all your tax payments.

Don’t you ever forget when you hear them talking about this that Republican economic policies quadrupled the national debt before I took office, in the 12 years before I took office — (applause) — and doubled the debt in the eight years after I left, because it defied arithmetic. (Laughter, applause.) It was a highly inconvenient thing for them in our debates that I was just a country boy from Arkansas, and I came from a place where people still thought two and two was four. (Laughter, applause.) It’s arithmetic.

We simply cannot afford to give the reins of government to someone who will double down on trickle down. (Cheers, applause.) Really. Think about this: President Obama — President Obama’s plan cuts the debt, honors our values, brightens the future of our children, our families and our nation. It’s a heck of a lot better.

It passes the arithmetic test, and far more important, it passes the values test. (Cheers, applause.)

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.

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.

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.  ;)

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