The Agenda

So How Should We Interpret the New Romney Tax Plan?

You can find the details at Mitt Romney’s campaign site. Ramesh Ponnuru has referred to the new plan as “the Bob Dole tax cut,” presumably because he remains partial to a proposal that increases the size of the child tax credit. Rob Stein, one of Ramesh’s erstwhile co-authors, has also written on this theme.

In broad outline, the Dole approach (not an entirely fair characterization, but let’s roll with it) does the following:

(1) it lowers marginal tax rates across the board, but (I believe) keeps the same number of rates;

(2) it curbs tax expenditures, particularly for high-earners.

The Ponnuru-Stein approach:

(1) reduces the number of tax brackets to two (at 15% and 35%), and the threshold for the top 35% rate is going to be lower than the current threshold for the top rate;

(2) it curbs tax expenditures, eliminating all but the charitable deduction and a much-reduced mortgage interest deduction (now available to all filers);

(3) and it increases the size of the child tax credit to $5K — but this credit is non-refundable (i.e., if your tax liability is less than $5K, you won’t get a refund check from the federal government) and it is payable against all federal taxes, including payroll taxes.

One of the more clever aspects of the Ponnuru-Stein approach is that it dramatically eases the tax burden on parents yet it also increases the tax burden on affluent childless individuals and two-earner couples in high-tax jurisdictions.  (Eliminating the state and local tax deduction and curbing the mortgage interest deduction do much of the work in this regard.) Given that most of these voters are left of center, concentrated in places like the New York metropolitan area, southern California, and the Bay Area, a Republican who advanced such a proposal would effectively shift the tax burden from “our” voters to “their” voters. This is a cynical view, which I definitely wouldn’t attribute to Ponnuru or Stein. But it does offer food for thought. 

There is at least one influential conservative constituency that would resist Ponnuru-Stein: affluent conservatives living in high-cost, high-tax jurisdictions and conservatives who take their cues from the supply-side Wall Street Journal editorial page, which has forcefully condemned using tax policy as an instrument of social policy, or social engineering. 

Why wouldn’t the Romney campaign embrace Ponnuru-Stein? Well, it could be that the Romney campaign believes that it would have little to gain from doing so, as the Journal would attack the proposal as social engineering and conservative primary voters aren’t likely to be swayed by it, perhaps because conservative primary voters are older than the Republicans and Republican-leaners who participate in general elections. 

But Ponnuru-Stein could be a potent weapon in a general election — it could appeal to middle-class suburbanites in swing states by offering a tangible benefit as opposed to tax cuts that appear to be skewed to the wealthy.

Does the Dole approach help Romney move the ball forward? Politically, I can’t see how it helps him much. Jon Huntsman proposed a fairly sweeping tax proposal that featured eye-catchingly low rates and it did him little good. Rick Perry proposed extremely deep tax cuts and an optional single-rate tax, yet his proposal barely registered. Newt Gingrich has also proposed a Perry-like plan that has been largely ignored. And while Herman Cain’s proposal did give his presidential candidacy a boost, but that’s due to its highly idiosyncratic nature and its bumper-sticker appeal. The same can’t really be said of the Dole approach. 

All that said, I actually think there is much to be said for the new Romney tax proposal, particularly if it does a very thorough job of stripping out tax expenditures that benefit high earners. It bears close resemblance to the excellent Growth and Investment Tax Plan (PDF). I’m just not sure it’s going to change the dynamic of the race. 

I almost forgot to mention the carried interest component. Per Patrick O’Connor and Sara Murray in the Wall Street Journal, Romney is calling (cautiously) for raising taxes on investment managers:

The former private-equity investor also would wade into the contentious fight over so-called carried interest, the tax investment managers pay on capital appreciation.

These investment managers are currently taxed at the 15% capital gains rate. Glenn Hubbard, dean of the business school at Columbia University and a Romney economic adviser, said Mr. Romney would direct his Treasury secretary to determine what portion of these investment returns should be taxed as income, which carries a higher tax rate, and what should be taxed at capital gains rates.

Leaving aside the substantive merits, this clearly makes good political sense.


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