Aug 29, 2012 at 2:48 pm
UPDATE: TPC debunks Feldstein. Here’s their analysis of the myriad ways Marty went wrong. It is still the case that Gov Romney tax plan will either increase taxes on households with incomes below $200K or not be revenue neutral, which I believe will lead to larger structural budget deficits.
“[Feldstein's]…analysis reinforces our central finding about the distributional impact of Romney’s tax proposals: the net effect would be cutting taxes on households above $200,000 and thus requiring net tax increases on households with less income. More broadly, both our analysis and Feldstein’s show that Romney’s tax plan cannot accomplish all of his stated goals. Either taxes must rise on those with income below $200,000, or tax preferences for saving and investment will have to be reduced, or revenues will be cut, or promised tax cuts for high-income households will have to be reduced.”
Based on the “you-can-have-it-all” campaign they’re running and the Norquist choke hold, I don’t believe that under an R administration taxes will rise or investment tax preferences will be reduced. That leaves less revenues and despite their antipathy toward government spending, history suggests that supply side tax cuts like these lead to larger budget deficits that persist even as the economy expands.
The first link shows yours truly using very high tech videography (my production asst on this was 10 years old, btw) to demonstrate that there’s not enough revenue in the loopholes to make up for the lost revenue in the tax cuts. The second, an oped in today’s WSJ, argues that there is, in fact, more than enough in the loopholes to offset the rate reductions.
Of course, they can’t both be true. Economist Marty Feldstein gets the result he seeks by changing the parameters of original TPC research upon which my vblog was based.
I’m sure the TPC will respond to Feldstein in greater detail but let me focus on one sleight of hand, or, to be more generous, a portentous change Marty makes that partly drives his result. Moreover, he does so without informing the reader how this is quite different from the way the TPC did the analysis.
The TPC argues that you can’t replace the revenue lost by Romney’s cuts on households with incomes above $200,000 by closing the tax expenditures from which they currently benefit. Basically, you lose $251 billion in revenue but there’s only $165 billion in tax expenditures that go to that group, so to maintain revenue neutrality, you’d have to raise taxes on somebody else.
This can be seen in TPC’s figure below in that for each income class above $200K, the blue bars (revenue reductions from lower rates) are taller than the red bars (revenue from “base-broadening,” or loophole closing). The opposite pattern prevails for all the other income classes.
It’s this last point that Marty must have noticed, because his case partly rests on defining $100K and up (not $200K) as upper-income. Once he defines things that way, he gets more of the revenue he needs (he also manages to shrink the revenue losses relative to TPC, so he’s got a smaller glass to fill as per my vblog).
Now, part of what we’re all struggling with here is the fact that Gov Romney hasn’t specified his plan, so maybe when he suggests he’ll pay for his high income rate cuts by broadening their tax base, he’s defining high income by $100K and up, not $200K.
As you see, this makes a very big difference. You’re now talking about cutting tax expenditures currently enjoyed by more than three times as many tax filers as you were before (see figure). If that’s what the R’s are contemplating here, it would be…um…quite germane to the debate.
Source: IRS SOI Table 1.4, (h/t: NF)
To be clear, I’ve consistently stressed that raising ample revenues will eventually mean going beyond the tax increases from allowing the Bush cuts to expire for households above $200K or $250K. But a) we should start at the top of the scale, as Senate Democrats have supported, while R’s have been deeply unwilling to go there b) I’d wait for the economy to improve before hitting lower income brackets with higher taxes, be it rates or base, and c) no one should take any of this base broadening seriously until those who espouse it get specific.
This last point is the most important. It’s the well know tax-reform trap that we’ve written about here at CBPP. In today’s climate, tax reform that’s premised on lower rates paid for by broadening the base risks ending up with a lot of the former and little, if any, of the latter. Remember, Rep Paul Ryan refused to support the allegedly beloved Bowles-Simpson because it raised taxes—which it did by broadening the base to pay for rate cuts.
So this whole debate is a bit of a blindfolded Kabuki dance. But given that, if you model R-style tax reform in a way that’s consistent with what we know and can reasonably surmise of their proposals, the TPC’s numbers consistently hold up.
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