OK, on to the Romney tax plan. It claims – as of course it would claim – that “[i]ncreasing economic growth, employment, and incomes is a cornerstone of Mitt Romney’s policy agenda.” The pure hokum part of this is that, because of where we are economically, he has to pretend that it is aimed at our current stage in the economic cycle. But we know perfectly well that he would propose pretty much the same plan if we were enjoying a boom economy. The sincere part of it, insofar as one can apply such a word to a Romney plan, is an intellectual commitment to lower rates and lesser tax revenues as a key design feature for long-term economic growth. And here, of course, there is disagreement between more conservative economists, such as Hubbard, and more liberal ones, such as Emmanuel Saez, regarding the magnitude of these long-term growth effects.
Romney’s first proposal is to enact a “permanent, across-the-board 20 percent cut in marginal rates.” There has been some discussion in a tax professors’ group regarding whether this is actually an accurate description of the plan, but he’d explicitly cut the top individual rate, currently 35%, to 28%.
Needless to say, as a standalone, this would have staggeringly adverse budgetary effects. The plan partly relies on unidentified spending cuts to make the plan budget-neutral as a whole. (Good luck with that.) But it also states that “higher-income Americans in particular will see limits placed on deductions, exemptions, and credits that are currently available. The result will be a pro-growth tax code that still raises the necessary revenue, retains the existing progressivity, and ensure that middle-income Americans see real tax relief.”
Three comments on this. First, the plan could still be losing trillions of dollars in long-term revenue, consistently with this language, since the phrase “raises the necessary revenue” has plenty of weasel room built into it. But it makes a much stronger claim by saying that the plan “retains the existing progressivity” – which obviously is very different from just saying that it would be progressive enough.
Second, just as we don’t learn much about the spending cuts, so there is nothing specific about the limits on deductions, exemptions, and credits that will be placed on higher-income Americans. This is no surprise – could you possibly imagine, not just Romney, but any candidate with hopes of winning the nomination and November election ‘fessing up here to what he is targeting? The items they must have in mind are obvious enough – for example, home mortgage interest deductions, the employer-provided health insurance exclusion, perhaps charitable contributions, etcetera. But the problem is, even if the proponents believe they would do this stuff (and I am willing to accept that they would like to do it), why would anyone imagine for even a second that they will actually end up trying, much less succeeding? It’s not going to happen (unlike the tax rate cuts, which no doubt will happen if the Republicans do well enough in November), and unless they are drinking a lot of spiked kool-aid they ought to know this.
Third, suppose they did manage to retain existing progressivity by limiting upper-income individuals’ deductions, exemptions, and credits. Point one, this implies higher marginal rates in the ranges where the limits are being phased in with rising income, if that is the methodology. (Using flat percentage credits, as proposed by the Obama Administration, could avoid this effect, but it would also limit how much they were taking away, in a way that seems in tension with the strong claim about the bottom line that is being made.) Point two, insofar as high-income people’s average tax liability fails to fall as much as their marginal tax rates, due to the offsets, the already-extravagant claims about the rate cuts’ economic growth effects are undermined. Suppose I’m that mythical savior of the American economy, the super-rich entrepreneurial “job creator,” and my taxes are going down less than my statutory rate would seem to imply. Depending upon my choice parameters, this may greatly dampen the hoped-for incentive effects. For example, if my statutory rate is cut from 35% to 28%, but the actual effective rate on the extra $X that I am considering earning remains the same, goodbye incentive effects at the “earn $X versus don’t bother” margin. All we have left is the admitted efficiency gain of my not needing to use my income in inefficient ways in order to get tax breaks. This is good, so far as it goes, but it isn’t really a “job creators” story.
Romney’s second proposal is to “ensur[e] that families with an annual income below $200,000 will pay no taxes on income from capital gains, interest, and qualified dividends.”
First question: what about effective marginal rates as the exclusion is phased out with rising income?
Second question: what about people who have less than $200,000 of income (as measured by the tax system) due to tax planning, such as the use of shelters? An example might be a super-rich guy who gets all of his labor income as capital gains from the favorable tax treatment of carried interests, and then uses loss harvesting from his stock portfolio to push towards zero on that. (Note that Romney himself apparently did this to a degree in 2009, though he still had a seven-figure taxable income, and that his 2010 tax return suggests that, at least via blind trusts, he was engaging in transactions that the IRS had listed as tax shelters.)
Third question: What about the tax planning bonanzas that this implies, especially for people who are below $200,000 by reason of their other tax planning?
Romney also wants to repeal what he calls the "death tax" (this is actually the estate tax, falsely relabeled by reason of a 1990s Republican rebranding exercise), and the alternative minimum tax. Lots of revenue at stake here (although the AMT otherwise has next to no defenders), not to mention lots of progressivity from the estate tax.
Romney's third proposal is to cut the corporate rate to 25%, with the revenue loss to be partly offset by corporate base-broadening. This is conceptually similar to the Administration proposal (although that would only cut the rate to 28%), and it (laudably) lacks the ridiculous special rules for domestic manufacturing in the Administration's proposal, but we aren't told what any of the base-broadeners would be. Plus, the claim that financing would also come from "greater revenue from increased economic activity," no doubt to be estimated quite optimistically, makes one wonder about the claim that it would be revenue-neutral.
No acknowledgement whatsoever - though this is a big problem under the Obama Administration's plan as well - that the use of corporations may become a tax shelter (such as, for self-underpaid employee-owners) if the corporate rate is less than the individual rate. True, in the Romney plan the gap is seemingly only 3 percentage points, since he'd cut the top individual rate to 28%. But what about all the bubble rates that would inevitably result from restricting all kinds of tax benefits to people with less than $200,000 of income? I would not be surprised if that ended up putting a lot of juice back into the game of "stuffing" both labor and capital income into corporate entities.
Romney's fourth proposal is to "strengthen and make permanent the R & D Tax Credit." OK, granted, in theory there may be positive externalities to innovation that support offering subsidies to research and development activity. But it is unclear to what extent the R & D tax credit actually goes in practice to the sorts of activity that we should actually want to subsidize. Lots of it, I gather, is for stuff like changing the seeds on hamburger buns or developing new iPad game apps.
Romney's fifth proposal is to "switch to a territorial tax system." But there is no related discussion of strengthening the source rules, which I would call a needed concomitant unless we want to make a total joke out of the capacity of the corporate tax to back up the individual tax, by taxing tomorrow's new start-up billionaires at the entity level even if they are able to avoid tax (as is trivially easy for an incorporate owner-employee) at the individual level.
Finally, Romney's sixth proposal is to "repeal the corporate alternative minimum tax (AMT)." This is not a huge deal any more, but the short ensuing discussion confirms that the proponents want to make sure that businesses get both low rates and favorable cost recovery. OK, fine, that's the philosophy here, but it does have revenue and (possibly) distributional effects that may undermine the plan's underlying claims.
Final words, from the Tax Policy Center (albeit predating this Romney campaign pronouncement):
"The Romney plan would reduce federal tax revenues substantially. TPC estimates that on a static basis, the Romney plan would lower federal tax liability by $600 billion in calendar year 2015 compared with current law, roughly a 16 percent cut in total projected revenue. Relative to a current policy baseline, the reduction in liability would be roughly $180 billion in calendar year 2015."
The TPC also estimates (based on earlier Romney campaign pronouncements) that the result would be a huge increase in after-tax high-end income concentration in the U.S. This generally doesn't credit Romney with the undisclosed tax increases that ostensibly are planned for high-income individuals via their use of various tax benefits, but until they put more on the table there is really no good reason to credit them with this.