Jumat, 05 Oktober 2012

More on Romney's tax plan

In the heat of last Wednesday's debate, there was little opportunity for Romney to explain the key features of his tax plan. It was clear that Obama was totally unfamiliar with the details of Romney's plan, which is why he kept repeating that it equated to a $5 trillion tax cut for the rich. Since this is such a key issue—on which Obama's and Romney's plans differ tremendously—I want to point readers to John Cochrane's excellent discussion of "Dynamic Tax Scoring." In it he offers critical insights that are not too difficult for the layman to follow (unlike some economists' discussions):

Gov. Romney has proposed, at heart, a reduction in marginal rates, together with tightening of deductions. He hopes to make the latter large enough so that the program is revenue neutral, or at least deficit neutral when some spending cuts are included, and as close to neutral across the income distribution as possible.
... the point of a revenue-neutral, income-neutral tax reform is to permanently and predictably lower marginal rates, giving rise to incentives to work, save, invest, and increase economic growth over the long run.
[According to the Tax Foundation study] ... The Romney plan would raise actual and potential GDP by about 7.4 percent over a five to ten year adjustment period.
The Romney tax plan would recover nearly 60 percent of the static projected revenue cost due to economic growth, higher wages and employment, and higher tax collections on the higher incomes. To keep the reform revenue neutral, the government would only need base-broadeners equal to about 40 percent of the static cost.
... the original Tax Policy analysis of Romney's plan [the one Obama referred to] concluded that, since in their static analysis there weren't enough base broadeners, that Romney must have a secret plan to raise middle-income taxes. OK, but Obama's budget numbers don't even pretend to reduce deficits. So what sense does it make to say, Romney has a secret plan to raise taxes because we forecast a deficit, but Obama's plan has... a deficit? If we're going to hold plans to a deficit path and make up taxes to do it, shouldn't we see how both plans stack up on the same deficit path?

UPDATE: Here is a good article in the WSJ which discusses why Romney's proposal to cap deductions could be a brilliant idea.

By limiting the amount of deductions that any individual tax filer can take, Mr. Romney is avoiding this lobby-by-lobby warfare. He'd let individual taxpayers decide which deductions they want to take up to the limit. In effect, the deductions would compete with one another as taxpayers decided which one was most important to them.

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