Today on the campaign trail, Romney appears to have been a hair more candid than usual about his tax reform plans, but he still isn't making sense. Speaking to what the reporter called a "crowd of mostly middle-class onlookers," he apparently warned people "not to expect too much tax relief under his administration":
"'We have got to reform our tax system,' Romney said at a morning event here. 'Small businesses most typically pay taxes at the individual tax rate. And so our individual income taxes are the ones I want to reform. Make them simpler. I want to bring the rates down. By the way, don't be expecting a huge cut in taxes because I'm also going to lower deductions and exemptions. But by bringing rates down we will be able to let small businesses keep more of their money so they can hire more people.'"
It's good that he's admitting he won't cut middle-class voters' taxes, although this should have been obvious given that he claims to have a plan that is revenue-neutral overall and that he doesn't claim would actually raise high-earners' taxes.
But if small business owners (when unincorporated) pay tax as individuals, and if individuals aren't getting tax cuts due to the reduced deductions and exemptions, how exactly do "small businesses [get to] keep more of their money so they can hire more people"? Romney is contradicting himself.
OK, perhaps what he means to say is that they will keep more of the next marginal dollar, because the marginal tax rate is lower, and thus will have an incentive to hire more people - as distinct from having more money in their pockets with which to hire more people. Even aside from the lack of evidence that lowering middle-class (or high-end) marginal rates has significant effects on the level of hiring or of general economic activity, it is not necessarily true that this will affect incentives to increase the scale of one's business operations.
Suppose that a given small business owner would partly use the extra income from expanded operations to increase forms of consumption that are currently tax-subsidized. Examples could include getting a larger house or upgrading one's health insurance plan. A rate cut that was financed by scaling back those deductions wouldn't necessarily increase the marginal incentive to invest.
Similarly, I recall studies of the 1986 tax reform act that found overall work incentives largely unaffected. What declined was merely the distortion as between consumption or investment choices. Reducing such distortions may be a good thing, but it does not directly stimulate the economy or create more jobs.