Friday, October 5, 2012

More on Romney's tax plan

In the heat of last Wednesday's debate, there was little opportunity for Romney to explain the key features of his tax plan. It was clear that Obama was totally unfamiliar with the details of Romney's plan, which is why he kept repeating that it equated to a $5 trillion tax cut for the rich. Since this is such a key issue—on which Obama's and Romney's plans differ tremendously—I want to point readers to John Cochrane's excellent discussion of "Dynamic Tax Scoring." In it he offers critical insights that are not too difficult for the layman to follow (unlike some economists' discussions):

Gov. Romney has proposed, at heart, a reduction in marginal rates, together with tightening of deductions. He hopes to make the latter large enough so that the program is revenue neutral, or at least deficit neutral when some spending cuts are included, and as close to neutral across the income distribution as possible.
... the point of a revenue-neutral, income-neutral tax reform is to permanently and predictably lower marginal rates, giving rise to incentives to work, save, invest, and increase economic growth over the long run.
[According to the Tax Foundation study] ... The Romney plan would raise actual and potential GDP by about 7.4 percent over a five to ten year adjustment period.
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.
... the original Tax Policy analysis of Romney's plan [the one Obama referred to] concluded that, since in their static analysis there weren't enough base broadeners, that Romney must have a secret plan to raise middle-income taxes. OK, but Obama's budget numbers don't even pretend to reduce deficits. So what sense does it make to say, Romney has a secret plan to raise taxes because we forecast a deficit, but Obama's plan has... a deficit? If we're going to hold plans to a deficit path and make up taxes to do it, shouldn't we see how both plans stack up on the same deficit path?

UPDATE: Here is a good article in the WSJ which discusses why Romney's proposal to cap deductions could be a brilliant idea.

By limiting the amount of deductions that any individual tax filer can take, Mr. Romney is avoiding this lobby-by-lobby warfare. He'd let individual taxpayers decide which deductions they want to take up to the limit. In effect, the deductions would compete with one another as taxpayers decided which one was most important to them.


Unknown said...

The sooner Romney changes the tax system to a flat tax, the better it is for the country. Current tax system and codes are a joke.

Gloeschi said...

It would be helpful if you posted a link to Romney's tax plan (not what other people claim to know about it)

bt1138 said...

The George Bush tax cut plan also sold with the premise that the increased growth would make up for the lower rates.

The Clinton tax increase was decried by the supply side establishment who said that the increased tax rates would reduce growth and result in less total revenue.

After the Bush cuts were implemented there were enormous deficits and relatively low growth. Under the Clinton tax rates there was good growth, and a surplus.

Why is recent history of tax rates and outcomes ignored so thoroughly, in favor of ideology and / or personal preference?

Benjamin Cole said...

Scott Sumner has proposed consumption taxes, a position I have long favored.

Consumption taxes are fair--your income or wealth is meaningless, and you are taxed only on what you spend. Perhaps exempt food and medical outlays for humanitarian reasons.

Add on some sin taxes--recreational drugs, nicotine and alcohol, gasoline, and perhaps pollution taxes.

Cut federal outlays to 15 percent of GDP.

The Romney plan might have some virtue is Cochrane and Romney also advocated broadening the base and cutting the rate on Social Secutity taxes.

Why tax only the first $100k in wage income--why not all income, and lower the rate?

Oh, that is different.

McKibbinUSA said...

Taxes should be outlawed -- governments need to find other ways to make money, or simply go away -- none of these tax plans, Democrat or Republican, pass the laugh test...

PS: What is needed is a 40% cut in real government spending at a minimum -- talking about taxes is just a sly way of avoiding that discussion...

Bob said...

Unknown said "Why is recent history of tax rates and outcomes ignored so thoroughly, in favor of ideology and / or personal preference?"

You should take a look in the mirror.

"After the Bush cuts were implemented there were enormous deficits and relatively low growth"

Prior to the 2008 Housing/financial meltdown and the subsequent deficit bailout package, the deficit under GWB reached to just over $400bil in 2004. Seems like a puddle compared to today's ocean of deficits. In 2007 it was $161billion. Overall GDP grew by some 2T and Federal Tax receipts were at record highs.

It is a reflection of the power of the liberal biased main stream media that the lie continues to floorish that the Bush administration had a failed economy.

It is important to know that there is a lot of gray area between "highly successful" and "failure". But these distinctions tend to go unnoticed in the liberal mind. Bush/Repubs spent way to much money and failed in other areas also, including SS, managing the war in Iraq effectively, passing more big government entitlements, etc.

But the Bush administration had little to nothing to do with the financial collapse. That trophy goes to the Dems and the idea that people should own a house, whether they could afford it or not.


McKibbinUSA said...

@Bob, you said that "the Bush administration had little to nothing to do with the financial collapse. That trophy goes to the Dems and the idea that people should own a house, whether they could afford it or not." Well, your editorial contains grains of truth, no doubt. But, that truth is not what will get Romney elected. The Republicans need to come up with a new way to make their case for change. The case you make is one of the reasons Romney and Republicans at large are losing in the polls right now. Truth is not an inspiring message -- far from it. How else can Republicans make that case in worlds that will appeal to the 47% crowd. The Republican who can answer that question will become our next president.

PS: I believe the Republicans need to merge more of their platform (not all) with the Libertarian platform in order to achieve their goals politically -- more at:

I am not clear who will win the coming Presidential election -- but let's fact it, the election does not look good for the Republicans at this point -- my comments above warrant consideration by Republicans for the future...

McKibbinUSA said...

PS: Alternative taxation schemes need to be considered by the Federal government by the way -- for example, why not outlaw individual and corporate taxes by the Federal government, and instead tax the states directly -- states would be permitted to tax, but the Federal government would only be permitted to tax the states and the people indirectly -- I am not saying this idea is a winner, but I am saying new ideas need consideration.

PPS: If a Presidential candidate stood up and promised to outlaw individual and corporate taxation, and would instead tax the states directly to fund only essential Federal services (defense and printing money exclusively), I would vote for that candidate -- but then, I am a Libertarian -- neither the Democrat or Republican tax plans now on the table pass the laugh test for me...

bt1138 said...

I'm still wondering how Mitt Romney's tax plan will work any better the GW Bush's tax cut plan did.

The growth the was promised for the Bush tax cuts did not really occur, why will Romney's work any better?

And not to mention the additional defense spending he wants. Romney is calling for America to send the troops into Syria this morning. Please make it stop...

Bob said...

Dr. W, I think there is more than a "grain" of truth in my comments.

I do agree that Romney shouldn't be relying on the Bush admin. other than to point out the falacies that the liberal media make concerning his tenure.

Your libertarian views are well documented. :) I don't consider myself a libertarian although some of the planks in their platform I do agree with. '

Unknown however, intends to ignore the statistics and my qualifying statements, i.e. clarifying the economic picture of Bush's era is not an advocacy of his administration along party lines, but is an attempt to reveal the demogoguery of the left. GDP rose 2 and 3 percent every year of his presidency. That's called growth. Part of the reason were the tax cuts. Tax cuts are stimulative even if they benefit the rich, which they did as well as the middleclass. That they benefit the rich more than the middleclass, especially while the "rich" pay 80 or 90% of the tax is hardly something that should be considered terrible. Except if you need a cause to create division within the electorate. It was just a very short time ago when success and wealth were something strived for and admired by Americans. Demographics, poductivity, globalization all play a part in economic growth. Focusing on tax cuts alone, even though history has shown that everytime taxes are cut revenues (growth)increases, is an excersise in limited thinking.

It's not that Republicans are the great holders of all knowledge or have all the answers. It's not that we should be a totally conservative country. It's that Obama and the so called progressives (socialists in hiding) have moved this country so far to the left that if allowed to continue the uniqueness of America, that which has made us different and is the reason for our great successes, will be lost and we will become another chonically ill, semi free, statist, economically lacking, militarilly weak, nanny state. All the more disgusting because of our size and former leadership position. And why?, so we can give more "help" to our citizens than they really need.

Rick said...

Remember that Clinton and the Dems raised marginal rates in 1993 and a recession followed.

In 1997, Clinton and the Republican Congress lowered the capital gains rate from 28% to 21%. Also, Clinton and the Congress followed strict budget baselines. Four straight years of >4% annual growth in real GDP followed.

In 2001, the Bush changes in marginal tax rates were accompanied by similar limits on spending growth. Deficits increased a little.

In 2007, the Dems regained control of Congress and were in control from 2007 to Obama's inauguration. Spending and debt increased significantly. there were income tax rebates and other "temporary" tax cuts. Revenues fell dramatically as the recession took hold in late 2007. The $700 billion TARP appropriation was enacted in October 2008 by a Dem Congress and Bush. That appropriation occurred in FY '09 that ran from 10/1/08 to 9/30/09.

After his inauguration in January 2009, Obama and the Dem Congress enacted a $787 billion stimulus and an almost $500 billion omnibus spending bill. The combination of those appropriations plus TARP and a recession-caused decline in tax revenue caused the first of four consecutive $1 trillion plus deficits run by the federal government.

The 2009 omnibus spending bill and the stimulus bills contained permanent increases in the budget baselines for most federal departments and agencies. These new baselines became the starting points for all future appropriations. They are the main reason why the federal government continues to run huge deficits after the allegedly one year stimulus and TARP bills passed in FY 2009.

These expenditures of the last four years plus lower revenues due to the recession have forced the federal government to borrow over $5 trillion since Obama was inaugurated.