President Obama and the press keep saying Governor Romney’s goal of revenue-neutral tax reform is vague on specifics and arithmetically impossible, citing a flawed study from the Tax Policy Center that has been debunked by several economists, including Harvey Rosen of Princeton University.
Here is what the director of the Tax Policy Center, Donald Marron, had to say about a tax reform proposal that is nearly identical to Romney’s:
President Obama’s National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force (on which I served) both endorsed this strategy [of lower marginal tax rates on a broader base] in their recent deficit reduction proposals. The fiscal commission’s “Illustrative Tax Plan” would scale back and redesign many of the largest tax preferences (e.g., mortgage interest, employer health insurance, and retirement saving), eliminate many others (e.g., state and local interest), and use the resulting revenue to
• Cut individual tax rates, bringing today’s six brackets (10, 15, 25, 28, 33, and 35 percent) down to three (12, 22, and 28 percent);
• Repeal the alternative minimum tax (AMT), the personal exemption phase-out (PEP), and the phase-out of itemized deductions (Pease);
• Cut the corporate income tax rate from 35 to 28 percent.
How does that tax plan compare with Romney’s? Romney would:
• Cut individual tax rates, bringing today’s six brackets (10, 15, 25, 28, 33, and 35 percent) down to 8, 12, 20, 22, 26, and 28 percent;
• Repeal the alternative minimum tax (AMT), the personal-exemption phase-out (PEP), and the phase-out of itemized deductions (Pease);
• Cut the corporate income-tax rate from 35 to 25 percent.
When it comes to tax policy, the main difference between Romney’s and Obama’s National Commission on Fiscal Responsibility and Reform and Bipartisan Policy Center’s Debt Reduction Task Force advisers is that Romney proposes 1) a slightly lower corporate tax rate, and 2) a much lower bottom rate of 8 percent rather than 12 percent. (The fact that there would be six rates rather than three is insignificant.)
Like most other news sources, The Economist (October 6) claims, “Mr. Romney has not specified which loopholes he would close.” On the contrary, Romney has been quite specific that he would prefer a firm dollar cap on total deductions. This is a much tougher plan than the president’s commission proposed, which cuts or caps some deductions but allows taxpayers to game the others. Romney’s plan is even tougher than a proposal from economist Martin Feldstein, which would limit deductions as a percentage of adjusted gross income (AGI). Romney instead proposes a very tight lid on the total of itemized deductions — during the first presidential debate, he suggested a cap no higher than $25,000 to $50,000.
Unlike the Obama plan, the Romney plan would collect huge revenues from many “millionaires and billionaires” such as Warren Buffet and Mitt Romney, who would be unaffected by higher tax rates on salaries but unable to follow their usual practice of deducting millions in charitable donations every year. Charitable donations have long been a nearly constant share of GDP regardless of tax rates, so the surest way to increase charitable donations is to increase GDP.
Aside from the fact that Romney has a stronger, less selective plan for limiting deductions, another key difference is that the President’s National Commission and Tax Force proposes a flatter, less progressive structure for individual income-tax rates. Because everyone who pays income tax gets the lowest rate on the first few thousand dollars of income, setting the lowest rate to 12 percent would indeed raise more revenues than an 8 to10 percent rate would (which is also why the 1986 Tax Reform has a minimum tax rate of 15 percent). That modest increase in the lowest tax rate is why the President’s National Commission and Tax Force can plausibly claim that their plan would raise more revenue than current law — or, as Marron puts it, “reduce the deficit by $80 billion in 2015 and more in later years.” Romney’s plan, on the other hand, just aspires to be revenue-neutral in a static sense (ignoring faster economic growth and reduced tax avoidance), but such minor details are properly left to Congress.
In marked contrast with the two groups of experts President Obama appointed to advise him on such matters (including Mr. Marron), the president proposes to do almost the exact opposite of what they advised. Obama would:
• Raise the top two individual tax rates (including Obamacare taxes) to 39.8 and 43.4 percent, and raise top tax rates on dividends and capital gains to at least 30 percent (the Buffet Rule);
• Retain the alternative minimum tax (AMT) and bring back rather than repeal the personal-exemption phase-out (PEP) and the phase-out of itemized deductions (Pease);
• Consider cutting the corporate income-tax rate by an unspecified amount only in exchange for eliminating alleged, inexplicable deductions “for moving a plant overseas.”
Nobody who has taken a serious look at designing a more efficient tax policy has ever suggested, as the president does, that we should trade fewer deductions for much higher tax rates on the rewards for investment, education, and entrepreneurship. When it comes to tax policy, some of the president’s wisest critics include his own National Commission on Fiscal Responsibility and Reform and his Bipartisan Policy Center’s Debt Reduction Task Force.
— Alan Reynolds is a senior fellow with the Cato Institute and the author of a critical new study about “top 1 percent” incomes.