Wednesday, August 29, 2012

Even if Governor Romney's Tax Plan Could be Made to Add Up, It Wouldn't Make Any Sense

Harvard Professor Martin Feldstein weighed in on the mathematical feasibility of Governor Romney’s tax plan in today’s Wall Street Journal. His bottom line: using his assumptions and his preferred dataset, the plan could raise revenue without raising taxes on the middle class.
Mitt Romney’s plan to cut taxes and offset the resulting revenue loss by limiting tax breaks has been attacked as “mathematically impossible.” He would reduce all individual income-tax rates by 20%, eliminate the Alternative Minimum Tax and the estate tax, and limit tax deductions and loopholes that allow high-income taxpayers to reduce their tax payments. All this, say critics, would require a large tax increase on the middle-class to avoid raising the deficit.
Careful analysis shows this is not the case.
Professor Feldstein’s critique basically shows that if you use different assumptions and data, you can come up with a different conclusion–possibly not the most earth-shattering finding ever.  There are substantial differences between Marty Felstein’s analysis and the earlier study that he critiques (and possibly an oversight or two).
Marty based his conclusions on published IRS tabulations of data for 2009.  The original Tax Policy Center study was based on projections for the year 2015.  Marty’s calculations were at the aggregate level whereas TPC’s were based on a tax calculator that uses data from 100,000-plus individual income tax returns. Marty does not consider the cost of repealing the high-income surtaxes enacted as part of the Affordable Care Act whereas TPC assumes that is part of the baseline.  Possibly the most significant difference is that Marty seems to have significantly narrowed the definition of middle class.  He assumes that the loophole closers would apply to people with incomes over $100,000, whereas TPC assumes that taxpayers with incomes below $200,000 would be held harmless in Romney’s plan.
Under those assumptions, Marty estimates that the Romney tax cut would have cost about $186 billion in 2009 (after accounting for taxpayers’ reporting more income when their tax rates are cut). Taxpayers with incomes over $100,000 reported itemized deductions totaling $636 billion (including the deduction for charitable contributions, which the GOP platform pledges to preserve).  Assuming an average tax rate of 30 percent (which is too high given that the Romney plan would cut top rates to 28 percent), this generates “[e]xtra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.”  (Presumably, Professor Feldstein is also assuming that the standard deduction would no longer be available to people with incomes over $100,000; otherwise, the tax savings would only be the excess of itemized deductions over the standard deduction.)
I obviously have some issues with Marty’s assumptions, but will let them go for a moment.  Suppose you took seriously that this is the “tax reform” that Mitt Romney has in mind:  Your income reaches $100,000 and your itemized deductions go to zero.
I can’t imagine that Professor Feldstein, Mitt Romney, or anyone who cares about economic incentives would support such a thing. It would produce a huge toll gate on entry into the upper middle class.  Say you had $15,000 of itemized deductions and income of $99,000.  If you got a $10,000 raise, your gross income would increase by that amount, but your taxable income (gross income minus deductions) would rise by $25,000.  If you are in the 25 percent tax bracket, your effective tax rate would be 62.5 percent (2.5 times 25 percent)!
For people with very high incomes, the rise in marginal tax rates would be smaller, but to the extent that itemized deductions rise with income, the loss of those itemized deductions means that the cut in marginal effective tax rates on high income people will be less than the cut in statutory rates.  That is, taxpayers currently in the 35-percent bracket don’t face an effective rate of 35 percent because they can shelter some of each dollar of additional income with additional itemized deductions.  (This is why the TPC was skeptical of claims that Gov. Romney’s plan would produce significant behavioral responses.)
So even if it were “mathematically possible” for Romney’s plan to be revenue neutral (which it’s not), such a plan would make no sense as policy.
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Tuesday, August 28, 2012

Note to Governor Romney: Growth by Itself is not an Anti-Poverty Program

Today is not only the start of the GOP Convention, but the start of classes at Syracuse University, where I teach a class on Social Welfare Policy to MPA students.  This semester, we’ll obviously be talking about the presidential candidates’ positions on issues such as welfare and poverty.  I looked for the Romney campaign’s position statement, though, and came up empty.  Theirissues page lists 23 topics, but those two apparently do not merit inclusion.
When asked, Mitt Romney summarized his policy this way: “I’m not concerned about the very poor. We have a safety net there. If it needs repair, I’ll fix it.” But the Ryan budget plan would slash the social safety net.  According to the Center on Budget and Policy Priorities, almost two-thirds of Mr. Ryan’s spending cuts come from programs that help lower-income Americans.  You can quibble about the details of CBPP’s analysis, but there’s little evidence to support Governor Romney’s pledge to repair the safety net if necessary.
The cornerstone of the Romney program is that his policies will fuel much more economic growth.  There are many reasons to doubt Romney’s growth projections, but even if they materialized, would they trickle down to help the poor?
The first reading for my class is from a book called Changing Poverty, Changing Policies, edited by Maria Cancian and Sheldon Danziger.  They address this issue at the outset:
It is not surprising that the severe economic downturn that began in late 2007 reduced employment and earnings and raised the official poverty rate. What many readers may find surprising, however, is that even during the long economic expansions of the 1980s and 1990s the official poverty rate remained higher than it was in 1973. … Even though gross domestic product (GDP) per capita has grown substantially since the early 1970s, the antipoverty effects of of this growth were substantially lower than they were in the quarter-century that followed the end of World War II.  Economic growth is now necessary, but not sufficient, to significantly reduce poverty. [p. 1, emphasis added]
In other words, governor, growth by itself is not an anti-poverty program.
There are smart thoughtful conservatives who are concerned about the very poor and have written volumes on the subject. You might ask them to help you craft a policy proposal, or at least a set of principles (which is what theWhite House website offers). My students will be debating different approaches.  You and President Obama should too.
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Wednesday, August 22, 2012

Paul Ryan's Tax Philosophy Explained

In a new paper, USC law professor, Ed Kleinbard, has pored through Paul Ryan’s “Roadmap for America’s Future,” including  100 pages of legislative language, to gain insights into the VP candidate’s tax philosophy.  The Roadmap would represent a radical change in our tax system–massively cutting taxes on people like Governor Romney because capital gains and dividends would be entirely exempt from tax, and raising taxes on middle-income households because there’s a new cash flow tax on businesses (basically, a VAT) that would translate into higher prices or lower wages.
Despite all the detail in the Ryan plan, it shares one feature with the Romney campaign proposal in that it doesn’t explain how it would offset the cost of the large tax cuts specified.  When Ryan made the proposal, he instructed the CBO to assume that the plan would keep tax revenues at 19 percent of GDP (slightly higher than the historical average) even though the pieces specified would fall far short.  Also, as Kleinbard notes, Ryan proposed the plan when he was a member of the minority and it had no chance at all of getting a hearing, much less being enacted.  It didn’t matter back then that it was politically impossible.
Nonetheless, I found Kleinbard’s analysis fascinating and worth a read.  Here is his summary:
The purest articulation of Paul Ryan’s fiscal belief system is his 2010 Roadmap for America’s Future. The tax provisions of this extensive proposal would convert the current personal and corporate income taxes into two consumption taxes, and repeal the gift and estate tax.
This report explains how the Roadmap, like Herman Cain’s 9-9-9 Plan, would operate in practice like a large new payroll tax. The Roadmap would directly immunize the highest labor income earners from this tax through a large reduction in the top rate of the Roadmap’s labor earnings tax, compared with current law or policy. Unlike the 9-9-9 Plan the Roadmap further would largely immunize “old” capital from the efficient (if arguably unfair) imposition of consumption tax when that capital was consumed, by providing a write-off of existing depreciable basis. And finally the Roadmap would reduce the tax burdens on the most affluent capital owners further by eliminating the gift and estate tax.
For these reasons, it is not surprising that the Roadmap contemplates an extraordinarily large redistribution of tax burdens from the affluent to middle-class and lower income Americans. For middle-class families, tax burdens would increase on the order of 50 percent. At the same time, the Roadmap’s reprioritization of government spending also would be regressive in its impact. Proponents of the Roadmap or plans like it must explain how any projected increase in economic growth will compensate the majority of Americans for shouldering more tax burdens while receiving smaller government benefits.
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Tuesday, August 21, 2012

Conservatives Suggest we Should Emulate Canada

At least some conservatives have been suggesting that we should look north of the border for a model of fiscal down-sizing.  This is fascinating given that Canada’s spending has always been greater than ours as a share of GDP and they offer a much more expansive social safety net–most notably, “socialized medicine” available to all Canadians with no out-of-pocket payment responsibilities by patients.
For example, the American Enterprise Institute is sponsoring an event on September 18 titled “Fiscal sanity and political success: Canada proves you can have it all.” Here is their summary:
In the 1990s, Canada suffered from the same economic malaise that plagues the U.S. today: slow economic growth, heavy government spending and a rising national debt. Canada’s remarkable turnaround relied relatively little on raising taxes; instead, federal program spending was cut by nearly 10 percent over a two-year period to restore its budget to balance. Its federal government also devolved greater responsibility to provincial governments, leading to a decade of strong growth in employment, gross domestic product and investments. Despite the political challenges of reform, the governments responsible were consistently re-elected both federally and provincially.
To say that the causes of Canada’s debt problems in the 1990s and ours now have similar origins is at best disingenuous.  In the mid-1990s, the world economy was booming, whereas the recent run-up in debt has come during a massive economic recession.  Canada’s deficits reflected simple political failure to face fiscal constraints whereas our current deficits are largely the consequence of what most economists would view as a necessary response to the recession.  Indeed, we were reducing deficits in the 1990s –through a mixture of spending cuts, higher taxes, and the economic boom–at the same time that Canada was adopting their vaunted fiscal adjustments.
And Canada’s spending at all levels of government in the early 1990s was around 50 percent of GDP.  Ours was around 36 percent before the Great Recession.  (I’m citing OECD numbers, which are somewhat higher than the official US statistics, so as to allow comparison between the two countries. Kathy Ruffing of Center on Budget and Policy Priorities cogently explicates the differences here.)
You may be surprised to know that Canada’s spending, which some conservatives are now citing as a model of government efficiency, is still higher than spending in the US (measured as a share of GDP) and likely to remain so for the foreseeable future. This raises the question of whether conservatives would be happier with the size of our public sector if we’d only started with a much higher base level of spending.
The idea that devolving spending to lower levels of government (provinces in Canada, state and local governments in the US) represents fiscal constraint also strikes me as very odd, although it is clearly part of the US conservatives’ plan to fix our budget problems. Paul Ryan’s budget would shift a large and growing share of government spending onto the states over time–by block-granting Medicaid, for example. There are arguments for and against devolution (the main argument for is that lower levels of government may be more responsive to constituents; the main argument against is that states can’t support an adequate social safety net because high-income taxpayers will flee to lower-tax/lower-service jurisdictions), but the mere act of shifting spending from federal to lower levels of government does not make government smaller.
One way that Canada does appear to be the model of efficiency is in the provision of healthcare.  Canada spends about 11 percent of GDP on healthcare whereas US spending is about 18 percent for far less than universal coverage. (Source: Worldbank)  Although I’m not aware of conservative endorsement for the Canadian version of socialized medicine as a cure for our fiscal woes, GOP presidential candidate Mitt Romney did seem to endorse the Israeli model during his recent visit there.
When our health care costs are completely out of control. Do you realize what health care spending is as a percentage of the GDP in Israel? 8 percent. You spend 8 percent of GDP on health care. And you’re a pretty healthy nation. We spend 18 percent of our GDP on health care. 10 percentage points more. That gap, that 10 percent cost, let me compare that with the size of our military. Our military budget is 4 percent. Our gap with Israel is 10 points of GDP. We have to find ways, not just to provide health care to more people, but to find ways to finally manage our health care costs.
Maybe the divide between conservatives and liberals is smaller than we imagine.
(I know this isn’t true, but sometimes there are these tantalizing hints of reasonableness before the orthodoxy vigilantes intervene.)
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Wednesday, August 8, 2012

GOP Establishment's Shameless Attack on Nonpartisan Think Tank

The GOP establishment is in full attack mode after a Tax Policy Center report concluded that Mitt Romney couldn’t offset the effect of his proposed tax cuts by simply closing loopholes benefiting the rich. Either he would have to raise taxes on middle- and/or lower-income households, or his proposal will increase the deficit.
The Obama campaign ran with the first possibility and started saying that Mr. Romney was proposing a giant tax increase on the middle class. The Romney campaign attacked the study–perhaps not surprisingly (TPC was attacked from both sides for their analysis of the 2008 campaign proposals) and then its various surrogates started attacking the credibility of the TPC.
I’ll admit that I am certainly not unbiased on this issue as I was a co-founder of the TPC and served as its director until 2009, when I moved to Syracuse University. I’m enormously proud of TPC and think it has done a great deal to shed light on the tax policy debate, which had previously been incomprehensible to all but a few Washington insiders and academics. I’m still on TPC’s advisory board and occasionally write for its blog,, but I have nothing to do with its day to day operations. Obviously, I’m only speaking for myself here.
First, some background. Here’s how the TPC’s Howard Gleckman summarized their analysis:
[T]he study highlights … [t]he deep contradictions embedded in Romney’s tax platform. Like most candidates, the former Massachusetts governor has made many promises. And like most, he cannot keep them all.
In this case, Romney has promised at least five big things. They are:
  • To start, he’d make all of the 2001 and 2003 tax cuts permanent but repeal the 2009 Obama tax cuts and the tax increases included in the 2010 health reform law.
  • After that, he’d cut tax rates by 20 percent across the board and eliminate both the Alternative Minimum Tax and the estate tax.
  • He’d eliminate taxes on investment income for couples making $200,000 or less (individuals making $100,000 or less) and keep current low rates for those with high incomes.
  • He’d do this without increasing the budget deficit (beyond the cost of extending the 2001-2003 tax cuts) by curbing some tax preferences.
  • He’d do it in a way that retains the progressivity of today’s tax system.
Romney’s problem is he cannot possibly achieve all of these goals. He is doomed by both political reality and simple mathematics.
Romney himself never says how he will make all this happen. Indeed, his tax platform includes a gaping hole. He says he’d finance these rate cuts by broadening the tax base–that is, by reducing some of the tax preferences that litter the Revenue Code. But he never says which of these deductions, credits, or exclusions he’d scale back—or how.
Thus, the real question is not whether Romney is proposing a huge middle-class tax increase (he isn’t). It is which of his ambitious campaign promises he will fail to keep.
As I noted a few days ago, the nonpartisan Tax Policy Center did what it’s always done, which is try to pierce the smoke of campaign rhetoric to reveal logical inconsistencies in Governor Romney’s proposal.  TPC often tries to answer the question: What does all this mean?  In this endeavor, TPC has been an equal-opportunity gadfly.
TPC’s critics had no problem when a couple of years ago, a TPC analysis pointed out that President Obama couldn’t possibly get the deficit under control by simply raising taxes on the rich.  Right-wingers’ favorite tax talking point is that nearly half of households pay no federal income tax.  They rarely note that this fact was first reported by the “liberal” Tax Policy Center.  Urban Institute Fellow, Rudy Penner, a former CBO director appointed by Republicans, wrote a pointed critique of the value and usefulness of the kind of distributional analyses that TPC produces and redistributive tax policies. It was TPC discussion paper number 13.
Conservatives seem to think the TPC epitomizes objectivity when its analysis comports with their biases, but is a liberal shill when the other side finds TPC’s conclusions useful.
For example, the McCain presidential campaign was not always happy with the TPC, but they were happy to cite “a report from the nonpartisan Tax Policy Center as evidence that Obama’s tax plan would amount to more government giveaways. The Tax Policy Center analyzed Obama’s tax proposals (as described by his economic advisers) and concluded that in 2009, his plan would, in fact, result in $100-billion in government outlays to people who have no income tax liability.”
As many have noted, Mitt Romney viewed TPC as nonpartisan and credible when he used TPC’s analysis to attack primary opponents.
I should also point out that there has never ever been a political litmus test for employment at TPC, although there is a very high bar for competence.  Several top TPC affiliates, including director Donald Marron, have held high level  Republican appointments in the executive branch and CBO. Several have held positions in Democratic Administrations.

What about the specific complaints about TPC’s study.  One is that TPC made up details that Romney never specified.  Yes, that’s true. TPC did the same thing to Obama and McCain in 2008.  Both campaigns found it annoying, but we didn’t think that political campaigns should be able to hide behind magical unspecified details to make their plans sound implausibly rosy. Tax and budget policy involves trade-offs and the public should be in a position to weigh in on which difficult choices they most favor (or least object to).  The public can’t evaluate those trade-offs unless the numbers add up and if the politicians won’t produce fully specified plans, it’s perfectly appropriate in my view for TPC to try to fill in the blanks as best they can given what the candidates have said–and make clear what their assumptions are.
But one line of attack is that tax policy doesn’t involve difficult trade-offs: cutting tax rates produces a surge of economic growth and more tax revenues. I wish that were true, but it’s not supported by evidence. TPC explained why revenue-neutral tax reform is not likely to produce a large macro response.  But they also gave the Romney campaign the benefit of the doubt by doing a simulation assuming the comparatively large macro response predicted by prominent Republican economist (and Harvard Professor) Greg Mankiw.  It did not change the qualitative conclusions.
Romney’s economic advisers are apparently predicting that GDP growth will surge to 4% per year, which over time would produce a massive increase in GDP due to the power of compounding.  (Historical GDP growth has averaged about 3 percent per year.) A scathing Wall Street Journal editorial said this was completely reasonable given that Obama’s OMB was projecting 4% growth in 2014 and 2015.  The Journal is probably right that such short-term growth is unlikely, but it’s not implausible.  The economy is far below capacity right now and it is normal for growth to exceed trend levels as the economy recovers from a recession.  Sustained growth of 4%, however, is completely outside the range of historical experience.  It is pure wishful thinking, or ”voodoo economics” in President George H.W. Bush memorable phrase.
The critics argue that the Tax Reform Act of 1986 was able to achieve a top tax rate of 28% without sacrificing revenues or shifting tax burdens onto the middle class.  The Bowles-Simpson commission and the Bipartisan Policy Center proposals would have accomplished something similar.  But all of those plans taxed capital gains and dividends at the same rate as other income (currently, the top rate on such investment income is 15%) and cut back on subsidies for retirement and other savings. TPC assumed, I think correctly, that Mr. Romney would not support such changes based on statements made by the candidate and campaign staffers.
If Mr. Romney is willing to tax capital gains and dividends at the same rate as other income, that would be big news (and a huge tax hike on the GOP candidate). In that case, by all means, TPC should update its analysis (and applaud the candidate for proposing something no Republican since Ronald Reagan has had the courage to support).
If not, maybe we should talk about whether Mr. Romney’s or Mr. Obama’s plan would be best for the economy.  The TPC analysis makes that assessment more feasible.
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Friday, August 3, 2012

TPC Removes the Veil from Romney Tax Plan: The Governor is not Amused

The Tax Policy Center (TPC) caused a kerfuffle on Wednesday when they released a studythat showed that the mostly unspecified parts of Mitt Romney’s tax cut proposals would amount to a giant tax increase on low- and middle-income households. The problem is that Romney has promised large tax cuts that would mostly accrue to the well off and also that the plan would close enough unspecified loopholes so that it doesn’t increase the deficit. However, the only tax breaks and loopholes large enough to offset the cost of the high-end tax cuts disproportionately benefit the middle class. Thus, their taxes would go up on balance.
The Romney campaign responded by calling the TPC “biased” and the study “a joke.”
As Yogi Berra would say, it’s déjà vu all over again. In 2008 (when I directed the TPC), we published a study which, among other things, concluded that Senator McCain’s proposal to allow taxpayers to opt for an alternative flat-rate tax system would add trillions to the deficit and convey a huge tax cut to millionaires. The McCain campaign insisted that the optional alternative tax would be revenue neutral, which could only be true if millions of people would opt for the alternative even though they would pay more tax. That defies logic, but logic has never been a hallmark of political campaigns.
In 2008, both candidates complained that TPC had made up stuff to fill in the giant gaps in their tax plans—all clearly labeled as our assumptions, but still not the actual plans. (Both campaigns, however, were also willing to fill in many, although not all, of the missing pieces when we pointed them out). The critique was that we made assumptions that were not part of the campaign proposals, but the campaigns would not tell us what assumptions we should have made. It’s kind of a Catch-22. Both sides criticized us for making unwarranted assumptions, but the campaigns would not tell us what the actual policies were beyond the unrevealing sound bites.
It is happening again. Governor Romney has done what politicians like to do, which is talk about how he plans to cut our taxes. His plan would cut tax rates by 20 percent across the board (the top rate would fall from 35 to 28 percent and the bottom bracket from 10 to 8 percent); he’d repeal both the AMT and the estate tax; and he’d exempt investment income from tax for couples making under $200,000 (singles under $100,000).
So far, it just sounds like President Bush’s tax plan on steroids, but unlike President Bush, Mr. Romney promises that his plan would not increase the deficit or make the tax system less progressive. He says that he would close unspecified loopholes to make up the lost revenue. He also proposes to eliminate the Obama tax cuts, which disproportionately help those with low incomes, but insists that low-income people won’t see an increase in tax burdens.
The Tax Policy Center on Wednesday basically said that the plan doesn’t add up. TPC tried hard to find loophole closers that could make up the revenue lost from Romney’s plan while preserving the current distribution of tax burdens. They assumed that tax breaks such as the deductions for mortgage interest, charitable contributions, and state and local taxes, and the tax exclusion for employer sponsored health insurance would be entirely eliminated for high-income people. This would be difficult or impossible to implement, but the study’s authors were trying to craft the best possible scenario for the Romney plan. Nonetheless, high-income taxpayers still got a substantial net tax cut under the plan, meaning that tax breaks would also have to be trimmed for those with lower incomes. TPC also gave Romney the benefit of the doubt by assuming (unrealistically) that the plan would significantly boost economic growth and thus produce more tax revenues, but, still, there were not enough high-end loophole closers to offset the super-sized tax cuts the plan would bestow on the rich. Thus, revenue neutrality would require tax increases on the middle- and lower-income groups. And, some really popular tax breaks—such as the mortgage interest deduction and the tax break on employer-sponsored health insurance—would have to be curtailed or eliminated. There are good policy reasons to cut those tax breaks, but those cuts are politically impossible.
There is, in fact, one giant tax break that could be curtailed to offset the effect of the rate cuts: the lower tax rates on capital gains and dividends. (They are the main reason Mr. Romney was able to pay an average tax rate of 13.9 percent in 2010.) Taxing gains and dividends the same as ordinary income, which Ronald Reagan’s Tax Reform Act of 1986 did and two bipartisan debt reduction plans proposed, might have provided the magic bullet to pay for the rate cuts without cutting overall taxes on the rich, but Romney has ruled that out. Indeed, his plan would set the tax rate on investment income to zero for those with modest incomes.
Aside from listing some tax breaks he would not touch, Mr. Romney is mum on which large tax expenditures he would like to eliminate to make his plan work. An advisor said that “it would be up to Congress to help fill in the blanks.”
Well, TPC has given them a head start on the job, and it’s just not possible to do it in a way that meets all of Mr. Romney’s promises. Either the plan will raise taxes substantially on low- and middle-income households or it would balloon the deficit.
TPC’s blogger Howard Gleckman explains that TPC’s analysis really just shows something not too surprising—that Mr. Romney will not keep all of his campaign promises.
Thus, the right question to ask Romney is not whether he wants to raise taxes on the middle-class. The right question to ask is which of his campaign promises he will abandon.
Romney won’t, of course, answer that question.
But his campaign’s attack on the TPC’s credibility is unlikely to stick either. Doug Holtz-Eakin (John McCain’s policy director in 2008) chose Donald Marron, TPC’s director, as his deputy at the CBO and George W. Bush appointed him to the Council of Economic Advisers. Donald is also off-the-charts smart and scrupulously honest, characteristics he shares with the study’s authors and the other TPC scholars.
As David Firestone of the New York Times pointed out:
The Tax Policy Center, if anything, comprises a gang of raging moderates from both parties who have infuriated ideologues for years by simply telling the truth about the tax system.
Good work, TPC.
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