The Agenda

Matt Jensen and Alex Brill on the TPC Analysis of the Romney Tax Plan

The original Tax Policy Center analysis of the Romney tax proposal continues to be treated as the last word on the subject by many of Romney’s critics. Yet as Matt Jensen of AEI observed back in August, the report’s authors have accepted that their initial estimates could be revised: 

In a recent blog post, I pointed out that these two exclusions would likely be “on the table” in a Romney reform package—and  the Wall Street Journal has recently verified this assertion by asking Glenn Hubbard, one of Romney’s top economic advisors. TPC, however, had assumed they were “off the table.” I went on to point out that eliminating these two exclusions could bring in “upwards of $90 billion,” much of which would come from those earning more than $200,000 a year, and I requested that TPC do a more thorough analysis.

To my great delight, they did. They found the value of these two exclusions to be $49 billion, $45 billion of which could be redistributed downwards. These numbers were derived from careful analysis that relied on assumptions consistent with those elsewhere in their study. The difference between the $49 billion that they find and my $90 billion, however, is primarily due to differences between those assumptions and mine: They assume that a rate-cutting corporate tax reform would be enacted simultaneously (eliminating some interaction effects), and that the revenue from eliminating the exclusions for corporations would not be included in the individual reform. For the sake of providing a rough upward bound, which seemed appropriate when discussing whether something is “mathematically possible,” I assumed neither.

TPC’s assumptions are reasonable, though, and accepting them brings us within $41 billion of distributional neutrality. That is awfully close.

More recently, Alex Brill, also of AEI, has suggested that the Tax Policy Center was using an inappropriate baseline, as the Romney campaigned hasn’t pledged to make their tax proposal revenue-neutral with respect to the tax increases in the Affordable Care Act:

TPC assumed that the baseline against which Romney is seeking revenue neutrality includes a 0.9 percent surcharge on “earned” income and an additional 3.8 percent surcharge on “unearned” income of high-income taxpayers that were adopted in the healthcare law. Romney has proposed repealing these taxes, but has not suggested that the cost of repeal would be paid for by tax reform. Instead, the budget effect of repealing these taxes should be analyzed in the context of the repeal of various other healthcare provisions.

Despite TPC’s assertion that adjusting its baseline assumption “does not alter our primary conclusion,” the revenue consequence of repealing this tax in 2015 is a full $29 billion, all of which falls on high-income earners. Correcting the baseline by removing this provision means that more of the revenue raised by broadening the tax base on high-income taxpayers can be used to finance tax reductions for the middle class. The result: A $41 billion tax increase shrinks to $12 billion.

Suffice it to say, the difference between $86 billion and $12 billion is considerable. A more straightforward approach, as Jensen suggests, would be to set caps on tax expenditures that vary by income quintile, an approach that could eliminate that remaining $12 billion. And this is before we make reference to potential growth effects.

I have to say, I am not a fan of the Romney tax plan. But the notion that it can’t possibly be made revenue-neutral without raising the federal income tax burden on middle-income households is false. 

Part of me wishes Romney’s critics would move on to making the case for something like Thaler’s 28 plan.


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