Politics & Policy

Obama’s Middle-Class Tax Hike

Democrats have been saying — or, in the case of Joe Biden, trying to say — that Mitt Romney plans to raise taxes on the middle class. This claim is flatly untrue. The word “lie” probably is thrown around too casually in our politics, but this qualifies. Romney has no such plan, has forsworn taking such a course of action, and has in fact proposed to cut tax rates for the middle class — and everybody else who pays the federal income tax — by reducing all brackets by 20 percent.

Romney’s plan would be revenue-neutral, making up for forgone tax revenue by eliminating certain exemptions and deductions. How many and which of those deductions would need to be reduced or eliminated would be determined by the economic facts on the ground come January: If the economy is growing more quickly than expected, then fewer offsets will be required to keep tax revenue level. Romney has been nothing if not consistent in his guiding principles for tax reform: lower rates and fewer deductions, producing a system that is fairer and flatter.

Analysts at the Tax Policy Center estimated that Romney could not both cut rates and maintain revenue neutrality, and published an estimate that this would necessitate an $86 billion tax increase on the middle class. Many of the center’s assumptions were either tendentious or incorrect, as we argued in an earlier editorial, and as has been amply demonstrated by budget scholars at the American Enterprise Institute and elsewhere. The center later cut its $86 billion estimate by more than half. And even that doesn’t quite get the story: For example, Romney proposes to “pay for” repealing the taxes associated with Obamacare by (this is a subtle point) repealing Obamacare, and no further offset is required. According to AEI’s Alex Brill, the Romney plan could produce anything from a $14 billion shortfall that would need to be made up elsewhere to a $1 billion surplus, depending upon how the plan is implemented and how fast the economy grows. An extra one-tenth of 1 percent in annual economic growth substantially changes the federal fiscal picture for the better. That fact, of course, is the animating idea behind Romney’s tax-reform agenda, the point of which is not to lower federal revenue but to increase economic growth by simplifying tax law, lowering compliance costs, and reducing economic distortions.

The Obama campaign’s dishonesty about this is striking even by the very low standards of Democratic election rhetoric. But the White House is also misleading the public about the consequences of its economic policies, specifically about elevating levels of federal spending that have produced an unbroken chain of deficits exceeding $1 trillion — which ultimately will force a very large tax increase on, yes, the middle class and all other taxpayers.

Gigantic deficits such as these can be sustained for only so long, and the Democrats’ spending spree — and their unwillingness to try any approach to restraining entitlement spending that hasn’t already failed — puts the country in a very risky situation: Interest rates are at present very low, but if they should return to something like their historic average, the increasing costs of financing our national debt will be catastrophic. The president’s most recent budget proposal would add some $7.6 trillion in new federal debt. The additional debt-service costs would add up to an average of about $1,300 per family per year under the current tax system. Families of relatively modest means would see hundreds of dollars a year in new taxes, and better-off families would see thousands or tens of thousands of dollars a year in new taxes. But not until after the November election, of course.

Ultimately, a dollar in spending is a dollar in taxes. There are better ways to organize the tax code, such as the way Romney has proposed. And a tax code that encourages enterprise, work, savings, and capital formation encourages economic growth, and thereby makes the broader fiscal reforms the country needs much easier to achieve.

Obama proposes ever-higher spending, which means, unavoidably, ever-higher taxes. Romney proposes to restrain spending and to reform the tax code in the hopes of turning around our sclerotic economy. But only one of the candidates is telling the truth about his tax proposals. 


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