We should be all skeptical of the appeal to non-partisan authority; to the argument that some "Center" or "Institute" or "Foundation" - or even college professor - has done a study that has come to a conclusion that we all should accept on its face because the people who did it are smart.
case in point is the study by the Tax Policy Center purporting to show that
Mitt Romney's across the board reduction in tax rates "must" result
in tax increases on the middle class. The claim is being trumpeted by the Obama
campaign in speeches by the President and Vice President and ads running in
Wisconsin and elsewhere.
study is interesting but this claim - which to its discredit, the Tax Policy
Center encouraged – is, at best highly misleading and, at worst, an outright
what the Tax Policy Center did. It calculated the revenue that would be lost by
an across the board rate increase by using "static scoring," i.e.,
the reduction in rates is assumed to have no impact on economic growth. That is
generally a bad assumption. One might be able to make a stronger case for it here
because Romney wants his plan to be revenue neutral, i.e., it should not result
in a loss of tax revenue. But reducing rates and eliminating so called tax
expenditures is likely to result in a more efficient allocation of capital and,
it is reasonable to suppose, result in some increase in economic growth and tax
addition, in calculating the “baseline” from which the "shortfall" in
revenue is calculated, the Tax Policy Center takes into account revenue that
would be raised by the various taxes imposed by ObamaCare. Romney proposes to
repeal these along with much of the spending proposed by the health care plan.
These ought to be considered separately.
the revenue shortfall – the money to be lost by Romney’s proposed across the
board rate reduction – is overstated.
even Romney admits that these cuts will still have to be "paid for,"
i.e, revenue from additional growth will not completely "pay for" the
reductions. So he proposes eliminating deductions and credits. The weakness of
his position is that he hasn't said which ones these will be.
that left him open for what seems like a bit of hackery by the generally
respectable Tax Policy Center. It looked at the various deductions, credits and
exclusions of income and unilaterally decided which ones were "off the
table." In other words, it made up a Romney plan and then proceeded to
deductions, credits and exclusions that it "took off the table" were
presumably selected because Romney has
said that he does not want to raise taxes on savings and investments. There are
two problems with this. First, if you to hold Romney to his promise not to
raise taxes on savings and investment such that you assume he will never depart
from it, you must also hold him to his promise to raise taxes on the middle
class such that you assume he will never depart from it. That would make the
criticism of the plan focus on its claim to be revenue neutral – which is not
the criticism that the Tax Policy Center and Obama campaign have advanced.
fundamentally, saying that one will not raise taxes on savings and investment, does
not remove from the table all of the deductions, credits and exclusions that
the Tax Policy Center assumed. As
economists at the American Enterprise Institute have pointed out, one could
eliminate the shortfall by eliminating the exclusion of interest on government
bonds and interest earned by life insurance policies – preferences for one kind
of “investment” or “saving” over others. One could eliminate more by repealing
the "stepped up basis" for capital gains taxes imposed on the sale of
inherited assets – something that makes no sense if we repeal the estate tax –
as Romney proposes to do. All of these predominately benefit wealthier
points out – and the Tax Policy Center does not say otherwise – that when you make
these adjustments and put these exclusions, deductions and credits back on the
table, the supposed "need" for a middle class tax increase is
eliminated by a very small increase in the rate of growth. In other words, what
the Tax Policy Center initially said “must happen” need not happen at all.
point is not that the Tax Policy Center got the math wrong - it doesn't
appear that there is much disagreement about the math. It's that it
approached the issue in a tendentious way - making assumptions that
advanced its preferred narrative and that played into the hands of one
of the campaigns. It would have done a better study had it played it
be fair to ask Romney to be more specific about his plan - a question
that might also be asked of the President about his. It's fair to say
that its tough to design an across the board rate decrease that would be
revenue neutral without raising rates on capital gains and dividends -
although neither would raise much more money. But saying that Romney
a middle class tax increase is wrong. So wrong, I think, as to be
close to a lie.
Cross posted at Purple Wisconsin.