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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