Brief Thoughts on the Romney Campaign’s Tax Proposal

by Reihan Salam

Recently, there has been a great deal of discussion of Mitt Romney’s proposed overhaul of the tax code. As I’ve noted on a number of occasions, I think that the Romney campaign’s current tax proposal is really disappointing, particularly when compared to Robert Stein’s pro-family tax reform and the Bradford X tax championed by Robert Carroll and Alan Viard in Progressive Consumption Taxation

Earlier this week, the Harvard economist Martin Feldstein, an advisor to the Romney campaign, made the case in a Wall Street Journal op-ed that the Romney plan could indeed sharply reduce marginal tax rates while raising as much revenue as current policy by reducing tax expenditures. Samuel Brown, William Gale, and Adam Looney, authors of a widely-cited Tax Policy Center report which claimed that the Romney plan could only achieve this feat by raising taxes on households earning less than $200,000, replied that Feldstein had done little more than confirm their findings. In a related vein, Len Burman, a leading center-left tax policy scholar, argues that even under Feldstein’s generous assumptions, the resulting tax code would dramatically increase implicit marginal tax rates:

Suppose you took seriously that this is the “tax reform” that Mitt Romney has in mind: Your income reaches $100,000 and your itemized deductions go to zero.

I can’t imagine that Professor Feldstein, Mitt Romney, or anyone who cares about economic incentives would support such a thing. It would produce a huge toll gate on entry into the upper middle class. Say you had $15,000 of itemized deductions and income of $99,000. If you got a $10,000 raise, your gross income would increase by that amount, but your taxable income (gross income minus deductions) would rise by $25,000. If you are in the 25 percent tax bracket, your effective tax rate would be 62.5 percent (2.5 times 25 percent)!

Given that I don’t think a Romney administration would actually pursue a tax reform that adheres to his campaign proposal in every detail, this doesn’t trouble me very much. Feldstein’s implicit point, as I understand it, is that capping individual tax expenditure benefits could facilitate base-broadening, rate-lowering reform, which is fair enough. It just so happens that the campaign proposal isn’t a great place to start.

What this discussion has reminded me of, however, is President Obama’s apparent endorsement of the Gang of Six deficit reduction plan, which included a significant tax code overhaul. Given the Gang of Six’s ambitious revenue target, how would it manage to prevent tax increases for households earning $200,000 or less?    

The Agenda

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