Mitt Romney calculations

[SYEDA SABAHAT]

ECONOMIST ARTICLES

Taking from the 19%, giving to the 1%

Mitt's maths

My tax plan actually does cut the marginal rates across the economy by 20 percent. I'm going to reduce and restrict deductions and exemptions at the same time. [That] and creating more growth will mean that the policy is revenue neutral.

—Mitt Romney, March 19, 2012

As Mitt Romney tightens his lock on the nomination, his economic proposals are getting more scrutiny. This week's print edition analyzes his economic platform and how his fiscal positions have converged with Paul Ryan's; an accompanying editorial urges him to flipflop away from his current positions on China and taxes.

Mr Romney himself drew more attention to his platform this week when he was overheard telling a group of wealthy donors that he might eliminate the tax deduction on mortgage interest for second homes, and on state and local taxes. This was notable because he had studiously avoided saying what tax expenditures (as deductions, exemptions and credits are known) he would eliminate to pay for his rate cuts. Matt O'Brien at The Atlantic and Deborah Solomon at Bloomberg View leapt on him for the pathetically small amount of money this would yield relative to the humungous cost of Mr Romney's corporate and personal tax cuts.

I think this is a bit of a sideshow. Mr Romney has repeatedly said his tax plan would be revenue neutral, and knows he will have to cut more than just those two items. It's cowardly of him not to say what those other things are now, but no more cowardly than the typical candidate for office. The odds of eliminating any tax break go down the more a candidate has to discuss it before an election.

The real question is, can Mr Romney plausibly produce a revenue neutral tax plan that cuts rates as much as he does? First, dispense with his claim that the tax cuts would partly pay for themselves by spurring additional economic growth. Official watchdogs like the Joint Committee on Taxation and the Congressional Budget Office don't count such “dynamic” effects because they are too small and ambiguous. They do sometimes count behavioral changes. For example, lower income tax rates might reduce the incentive for tax avoidance, causing households to report more taxable income. But those effects, according to Howard Gleckman of the Tax Policy Center, are also trivial.

That leaves us with the more straightforward question of whether he can finance his tax cuts just by eliminating tax expenditures. Donald Marron at the Tax Policy Center looks at the latest Treasury estimates (contained in the annual budget document Analytical Perspectives) and finds tax expenditures would be worth $1.5 trillion in 2015. My table nearby lists the major tax expenditures identified by the Joint Committee on Taxation and how much they would cost in 2015.

The first thing to note is that there are clearly enough tax expenditures to finance the $900 billion cost that the Tax Policy Center reckons Mr Romney's plan will cost (relative to current law). But as you dig into the list, problems arise. First, these expenditures would be worth a lot loss once Mr Romney has cut income tax rates (see my caveat below). Second, Mr Romney has put several off limits, most notably the preferential rate on dividends and capital gains (worth $91.3 billion) and the ability of corporations to defer tax on foreign income ($19.6 billion), since under his plan corporations would not owe taxes on such income. Third, several will presumably be off limits: is he really going to tax Medicare benefits ($79.3 billion) or eliminate the earned income credit ($58.5 billion)?

But the biggest problem is one not obvious from the table: the distribution of these breaks. Yes, they disproportionately benefit the upper 20% of households because their tax rates are higher. Nonetheless, as this Tax Policy Center paper notes, roughly a third went to the bottom 80% of households (especially tax credits and above-the-line deductions). Since Mr Romney has said he would spare the middle class, most of this money would be off the table. Where it gets really interesting is inside the top 20%. Many deductions are in effect capped. As a result, their biggest beneficiaries are not the top 1% but the next 19%, with one exception: the preferential rate on capital gains and dividends, more than half of whose benefits go to the 1%. By eliminating tax expenditures for upper income families except the preferential rate on capital gains and dividends, Mr Romney's plan would be a gigantic transfer from the upper middle class to the rich. And keep in mind that the upper middle class is also the group likely to pay most under any reform to Social Security and Medicare.

Mr Romney's team defends the feasibility of his plan by noting its similarity to the Bowles-Simpson commission proposal, which like Mr Romney lowers the top rate to 28% and pays for it by closing loopholes. But the comparison does not actually help Mr Romney's case. First, unlike Mr Romney, Bowles-Simpson eliminates the preferential rate for capital gains and dividends. That is both a significant revenue-raiser and the principal reason the truly wealthy suffer most under their plan: the top 1% sees its after-tax income fall 7.8% and shoulder half the net increase in taxes. Under any plausible version of Mr Romney's, the after-tax income of this group would rise. Second, it only lowers the corporate rate to 28% instead of Mr Romney's 25% (from 35%). Third, Bowles-Simpson clearly hurts the middle class; the middle 60% of households see their after-tax income drop about 1.5% each. The reason is that the plan nukes almost all deductions, and replaces only a few with miserly tax credits that are worth less than the current deduction to most taxpayers. If Mr Romney wants to spare the middle class he will have to be much more generous than Bowles-Simpson when it comes to protecting their tax breaks. And there's the rub: Mr Romney can be revenue neutral or he can spare the middle class but I don't see how he can do both.

Both Treasury and JCT value tax expenditures on "current law," which means they assume tax rates will go up as George Bush's tax cuts expire. This raises the value of the expenditures (since a tax break is worth more to someone paying a 39.6% tax rate than a 35% tax rate) as well as the cost of Mr Romney's plan. They would be worth far less assuming Mr Bush's tax cuts are extended, and even less with the much lower tax rates Mr Romney contemplates. Second, totaling tax expenditures may not equal their actual aggregage value because of interactions: eliminating one may make others more or less valuable. Third, for reasons I can't determine, JCT and Treasury estimates differ significantly, with the latter usually larger.

SOURCE: THE ECONOMIST


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[SYEDA SABAHAT]

Electoral tactics

Romney rope-a-dope?

WE'VE been talking a lot lately about Mitt Romney's tenure at Bain Capital, but hardly at all about his tenure as the governor of Massachusetts. Why? Here's Ezra Klein's surmise:

Why have we spent approximately no time talking about Romney's governorship?

The answer, again, is that neither campaign really wants to. The Romney campaign wants to avoid it because Romney governed from the center in ways that could now alienate the right. In a Republican Party looking for a true conservative, Romney sees little but danger in his record. His signature legislative accomplishment was the forerunner to “Obamacare.” Meanwhile, his state ranked 47th in job creation during his term. (So much for the secret knowledge gleaned from Bain about how to create jobs.)

The Obama campaign doesn't want to discuss it because Romney's centrist record as governor might comfort independents, who otherwise may fear that Romney is a creature of the right. “I think people recognize that I'm not a partisan Republican, that I'm someone who is moderate, and that my views are progressive,” Romney said in 2002.

His health-care reform extended coverage to the uninsured, undercutting the image of a rapacious private-equity pirate. Although his state didn't create many jobs, unemployment nevertheless fell from 5.6 percent to 4.7 percent while he was governor. In a country that's looking for an alternative to Obama but is scared of the extremism of the modern right, the Obama camp doesn't see much upside in emphasizing Romney's moderate gubernatorial record.
This does not seem to me a stable detente. Mr Obama's reasons for neglecting Mr Romney's record in the Bay State sound to my ear like outstanding reasons for Mr Romney to trumpet it...later. Surely Mr Klein is correct that the Romney campaign has made a priority of cultivating the allegiance of those to his right. The debate over Bain, it turns out, is perfect for this purpose. Mr Obama's attempt to simultaneously attack and not attack private equity looks to me like a tepid bit of populist opportunism from a centrist Democrat who is in fact quite cozy with financial capitalism. But to stout conservatives, Mr Obama's Bain offensive looks like the revelation of his true commie colours. For example, Ronald Kessler of NewsMax asks:

Do we need to remind the president that the alternative—Soviet-style Communism—has been tried before and has failed? Apparently, we do.
Like the Soviets, Obama is for wealth redistribution. When talking about financial regulatory reform, Obama has said, “I do think at a certain point you've made enough money.”
The Soviets had good intentions. They figured that if the government ran everything and distributed wealth equally, everyone would be happy. But under their government-run economy, the Soviets had no incentive to work, to produce, or to innovate. The government paid salaries regardless.
Eventually, the system imploded.
As hilariously misconceived as this sort of thing may be, it functions to help Mr Romney with the far right. If I were Mr Romney, I'd try to keep it coming. The more Mr Obama can be made to appear a Kenyan, anti-colonial reincarnation of Lenin, the more motivated Mr Romney's right wing will be. Perhaps Mr Obama's Bain strategy has helped him equally with the left and centre, but in-fighting among Democrats over this issue is making this possibility seem unlikely.

Mr Romney's record as governor does, as Mr Klein says, belie the idea that he is "a rapacious private-equity pirate". As the race heats up in late summer, I expect we'll see Mr Romney running hard to the centre, and I expect he'll be happy to tout his moderate record as governor of Massachusetts as a counter to the inevitable charge that he's a monstrous right-wing radical long on cat food and funeral homes. No doubt Mr Romney will eventually succumb to Mr Obama's mastery at 11-dimensional chess, but for now I can see why he'd be glad to play along with Mr Obama's puzzling opening gambit.

[SYEDA SABAHAT]

The politics of taxes

MITT ROMNEY says that in each of the past ten years, he has paid at least a 13% effective income-tax rate. Is that enough? Should we take his word for it? What is he trying to hide?

My guess is that Mr Romney is telling the truth, that he's entirely copacetic with the IRS, and that his stonewalling amounts to little more than a strategically prudent refusal to fuel the Obama campaign's "Mr Moneybags v the middle class" offensive. Why volunteer to make yourself Exhibit A in the populist case against rich people with expensive tax lawyers? What would we discover were Mr Romney to open his books? That he has money squirreled away in offshore tax shelters? Maybe. Mostly we'd see what we already know: Mr Romney's income comes mostly in the form of capital gains, interest and dividends.

Matthew O'Brien of the Atlantic looks at Paul Ryan's "Roadmap for America's Future", and reckons that under that plan Mr Romney would make out like a bandit: "Romney would have paid an effective tax rate of around 0.82 percent under the Ryan plan, rather than the 13.9 percent he actually did." Mr O'Brien goes on to ask:

How would someone with more than $21 million in taxable income pay so little? Well, the vast majority of Romney's income came from capital gains, interest, and dividends. And Ryan wants to eliminate all taxes on capital gains, interest and dividends.
Now, it's not actually true that Mr Ryan's most recent proposal would cut capital-gains taxes to zip. His earlier, specific proposal has been replaced with some generalities about the wisdom of reducing rates. In any case, the substantive intellectual question is whether it is a good idea to reduce capital-gains taxes, either a little or a lot. If it's a bad idea to raise rates, then Mr Romney might not be paying too little. If it's a good idea to cut rates, then he he might be paying too much.

Now, I happen to be in broad agreement with Scott Sumner, who argued in an episode of "Economics by invitation" earlier this year that "The proper tax rate on capital income is zero". Indeed, I agree with Mr Ryan when he says:

Raising taxes on capital is another idea that purports to affect the wealthy but actually hurts all participants in the economy. Mainstream economics, not to mention common sense, teaches that raising taxes on any activity generally results in less of it. Economics and common sense also teach that the size of a nation’s capital stock — the pool of saved money available for investment and job creation — has an effect on employment, productivity, and wages. Tax reform should promote savings and investment because more savings and more investment mean a larger stock of capital available for job creation. That means more jobs, more productivity, and higher wages for all American workers.
Jeffery Miron, an economist at Harvard, maintains in a current New York Times debate that "On the basis of standard economics...Ryan is on firm ground." I think he's right. I'm also inclined to agree with Mr Miron that the distributive consequences of slashing rates aren't so clear:

The fairness objection is not convincing, however, because American taxation of capital income leads capital to countries with lower rates of taxation. The big losers are then the people who might have earned wages and salaries in the businesses using that capital. The impact of capital taxation on the distribution of wealth is thus ambiguous in theory, and it appears to be small in practice.
The upshot of all this is that maybe Mitt Romney pays too much in taxes. Maybe we'd be better off, on the whole, if he paid even less!

But isn't it just outrageous that a man so wealthy should pay so little? All I can say is that I'm not outraged. Tax policy ought not be primarily a matter of rigging things to satisfy gut judgments about fairness. Our priority in the design of tax policy ought to be to identify the most efficient way of raising the funds necessary to finance government and pay down debt. If the tax burden in a decently efficient scheme happens to flout common intuitions about equity, we always can tweak it at the margins to minimise offense. Still, we should be careful to keep our priorities straight. The tax system is in the first instance a tool for financing public spending, not a tool for maintaining a particular pattern of income and wealth.

Which is not to say the rich ought not pay more than they now do. I think they should pay more, as should the middle-class, at least until the deficit comes down a great deal. If we taxed consumption rather than income, as I think we ought to do, there's a fair chance Mr Romney would pay more than he does now. So maybe Mr Romney pays too little after all. Yes, he probably does.

Whatever the case may be, looking at Mr Romney's tax returns isn't going to tell us whether he pays too little or too much relative to the best alternative tax system. And it won't lead us to an intellectually fruitful debate about the contours of that system. Mr Obama's campaign has very generously promised Mr Romney that if he releases just five years of tax records, they won't clamour for more. I interpret this as an admission from the Obama camp that they think five years of records is more than enough material for a bit of winning rich-against-the-rest demagoguery. So I won't be surprised if Mr Romney chooses to remain cautiously opaque. Moreover, since a fog of indignation would surely rise in response to the completely unobjectionable fact that taxes on capital gains, interest and dividends aren't especially high, making public deliberation about taxation stupider than it already is, I won't be terribly disappointed if Mr Romney keeps his papers filed away.