David Henderson expresses disappointment with Martin Feldstein’s reply to critics regarding the viability of reconciling Mitt Romney’s various tax policy commitments. Specifically, Henderson finds Feldstein’s analysis uncharacteristically imprecise. Henderson also point us to Harvey Rosen’s analysis, which he finds somewhat more compelling. Rosen focuses on the extent to which the Romney tax proposal might increase economic growth by improving work incentives:
In this paper, I analyze the Romney proposal taking into account the additional income that might be generated by economic growth. The main conclusion is that under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on the upper income classes about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.
Rosen draws on the work of Jonathan Gruber and others to estimate the behavioral effects of the Romney proposal, and he finds that it would have the following impact on revenues relative to the 2012 law baseline:
For the over $100,000 group, the reduction in revenue because of rate cuts is about $144 billion; the increase in revenue due to base broadening is $200 billion;and with a 3 percentage point growth assumption, the additional revenue from a rise in incomes is $25 billion.15The net impact is a positive $81 billion. That is, under these assumptions, taxpayers with incomes of $100,000 or more would pay $81 billion more in taxes. The second row shows analogous computations for taxpayers with incomes of $200,000 or more. Again assuming a 3 percent growth rate, members of this group would pay about $29 billion (or 6.5 percent of current revenues) more in taxes. The implication is that $29 billion less of revenue from base broadening would be necessary in order to keep the taxes levied upon these highincome individuals about the same.
Relative to the 2013 law baseline, in which the Bush-era tax cuts expire, it would have a somewhat different impact:
We next turn to the estimates using the 2013 law baseline, for which I think the 5 percent growth assumption is more appropriate. For taxpayers with incomes of $100,000 and above, the net change in taxes is $25.8 billion. For taxpayers with incomes of $200,000 and above, the net change is now negative, $28.1 billion (about 5.5 percent less than baseline revenues of $509 billion). It seems fair to say that if the scheduled tax increases for 2013 actually went into effect and the definition of “high income” excludes people with 6-digit incomes below $200,000, then under the Romney proposal, maintaining an approximately constant tax burden on highincome individuals would be more challenging. But I imagine that doing so would not be mathematically impossible.
I can’t imagine that Rosen’s intervention will settle the debate, but it is worth a look.