Donald Marron on the Challenges of Scoring the Unscorable

by Reihan Salam

Donald Marron, the director of the Tax Policy Center and a consummate straight-shooter, wades into the controversy surrounding a recent TPC analysis which found that Romney’s stated tax reform goals are going to prove very difficult to realize. 

Could Romney’s plan maintain current progressivity given revenue neutrality and reasonable assumptions about what types of base broadening he’d propose? There are roughly $1.3 trillion in tax expenditures out there, but not all will be on Governor Romney’s list. He has said, for example, that raising capital gains and dividend taxes isn’t an option and has generally spoken about lowering taxes on saving and investment. Based on those statements, the authors considered what would happen if Romney kept all the tax breaks associated with saving and investment, including not only the lower rates on capital gains and dividends, but also the special treatment for municipal bonds, IRA and 401ks, and certain life-insurance plans, as well as the ability to avoid capital gains taxes at death (known as step-up basis). The authors also recognized that touching some tax breaks is beyond the realm of political possibility, such as taxing the implicit rent people get from owning their own home.

Given those factors, the study then examined the most progressive way of reducing the other tax breaks that remain on the table—i.e. it rolls them back first for high-income people. But there aren’t enough of those preferences to offset the benefits that high-income households get from the rate reductions. As a result, a revenue-neutral reform within these constraints would cut taxes at the high-end while raising them in the middle and perhaps bottom.

What should we infer from this result? Like Howard Gleckman, I don’t interpret this as evidence that Governor Romney wants to increase taxes on the middle class in order to cut taxes for the rich, as an Obama campaign ad claimed. Instead, I view it as showing that his plan can’t accomplish all his stated objectives. One can charitably view his plan as a combination of political signaling and the opening offer in what would, if he gets elected, become a negotiation.

This is precisely my view of Romney’s plan. And I’m on record as having argued that Romney was wrong to have released this new tax plan, as his earlier, more provisional course of action was far wiser on both political and substantive grounds. 

My favorite tax plans, in order of preference, are:

(1) Robert Stein’s two-bracket income tax proposal, which retains a (reduced) preference for capital income relative to current law, simplifies and pares back various tax expenditures, and a $4,000 per-child credit that would offset income and payroll taxes;

(2) a progressive consumption tax, as outlined in “Fiscal Solutions,” AEI’s contribution to the Peterson Solutions Initiative;

(3) and the Bipartisan Policy Center’s two-bracket income tax proposal, which offers a lower top marginal tax rate than (1) or (2) yet that, among other things, taxes capital gains and dividends as ordinary income.

These are the kinds of reform proposals I’d want to see emerge from a grand bargain discussion. Romney’s proposal, in my view, resembles the status quo too closely for comfort, and I don’t think it would be politically sustainable. In contrast, (1), (2), and (3) are either (a) superior from the perspective of enhancing growth or (b) more likely to form the basis of a durable political settlement or both.  

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.