Wednesday, September 12, 2012

Washington Post Editor's Skeptical About Romney's Tax Plan

Mitt Romney's has proposed a 20% cut in taxes to stimulate the economy.  He claims that the tax cut would be "revenue neutral".  That is, cutting the tax rates will not result in a loss of tax revenue to the government.  This editorial raises questions about the mechanisms in his plan that will compensate for the revenue lost by cutting the tax rates.  The editors, and many economists do not believe that it will be revenue neutral.  It raises questions about the two mechanisms that are assumed to compensate for the rate cuts.

One mechanism in Romney's plan is the broadening of the tax base.  He broadens the tax base by eliminating deductions from gross income that shrink taxable income.  He is not specific, however, about which deductions that he will eliminate.  Many of the deductions, such as deducting the interest paid on mortgages, are very popular.  In a sense, Romney wins by telling the public that he wants to cut the tax rates, and he also wins by not telling the public which popular deductions that he will eliminate. The editors are properly skeptical about the willingness of Congress to eliminate popular tax breaks.

Another problem with broadening the tax base is that the deductions under consideration would shift the tax burden from wealthy tax payers to the middle class.  That is because the gain from eliminating deductions for the wealthy not compensate for the loss of income by cutting their tax rates.  Romney points to a study by a conservative economist, Martin Feldstein, who did an analysis which argues that it does not shift the tax burden.  Feldstein is a prominent economist from Harvard who has been a reliable source of disinformation in support of conservative policies.  His analysis has been rebutted by numerous economists who claim that his math is faulty.  The Post editors are similarly skeptical about Feldstein's supportive analysis.

The other mechanism that Romney's plan uses to support his claim for revenue neutrality, is that the tax cuts will stimulate the economy.  His plan assumes that growth in the economy will provide a second source of tax revenue to pay for his tax cuts.  Romney found another economist from an ivy league college (Princeton),  who proclaimed that economic growth from the tax cuts would overcome the revenue lost from cutting tax rates.  That argument was used to justify tax cuts by Reagan and by Bush that turned out to be wrong.  The Congressional Budget Office is also skeptical of the use of "dynamic scoring" which makes questionable assumptions about future growth in the economy.

The Post concludes that Romney plan does not pass its "smell test".  They will not give him a good grade on his tax plan unless he is more clear about the specific deductions that he will eliminate, and they are rightly skeptical about his use of dynamic scoring to pay for tax rate cuts.  Most economists agree with the Post editorial.  It is unfortunate, however, that Republican's have a ready of source of prominent economists from ivy league colleges that can be relied upon to justify conservative policy proposals.  Martin Feldstein is chief among them.  He recruited conservative economists to Harvard and he headed the National Bureau Of Economic Research.  He is highly skilled at his job.  He knows how to manipulate data to reach any conclusion that he wants to make.  He has been doing this successfully for his entire career.

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