Monday, February 27, 2012

Mitt Romney’s Fallacious Tax Plan Gets No Media Scrutiny – The Numbers Don’t Add Up, The Concepts are Erroneous

But It Please One Target Audience, The Editorial Writers of the Wall Street Journal

The old Mitt Romney tax plan  the one that is really not that old, in fact the one that isn’t even 6 months old is now largely gone.  It’s death was Mr. Romney's need to appeal to the radical economic Conservatives in general and the editorial writers of the Wall Street Journal in particular.  As such, with that target audience it really didn’t matter that the plan does not make much sense, because that audience really doesn’t care about what makes sense.

The key element of the plan is the proposal to reduce tax rates by 20% for each bracket.  But if this sounds like a hug tax cut for the wealthy, Mr. Romney says no.  He says his plan is revenue neutral meaning it will raise just as much revenue as the old system, and that it will be “distributional neutral” meaning income groups will pay the same under the Romney plan as they do under the existing plan.  This of course is patently ridiculous.

Mr. Romney will accomplish this alchemy by changing deductions and other provisions of the tax code that will increase taxable income by supposedly an amount that will offset the lower tax rates.  Of course, since Mr. Romney has not detailed what these will be or how much or who will be impacted, it is impossible to render an objective measurement of his plan.  So he can say it is revenue and distributional neutral and only logic and intelligence can demonstrate that he is wrong, which of course they do.

The plan also brings back what must now be called “zombie economics”, zombie economics being a false idea that just will not die.  In this case it is what is called “dynamic scoring”  This discredited idea states that the higher growth generated by the lower tax rates will generated enough new revenue to offset some (if not all) of the revenue lost by the lower rates.  No serious non-ideological economist believes this, but Conservatives love the concept since it allows them to claim that cutting rates will reduce the deficit.

If the plan were truly revenue neutral, then its only possible benefit would come from the idea that lower marginal rates will stimulate the economy.  At some level this is true, but at current levels this is stupid beyond belief.  The idea that lower marginal rates will stimulate investment goes against Econ 101, which as everyone knows states that investment is driven by demand.  Remember what happened when marginal rates on the wealthy increased during the Clinton administration?  The economy boomed.

There is another problem with lower marginal rates.  They weaken what Economists called automatic stabilizers.  When marginal rates are high, they result in a disproportionate increase in taxes and revenues as the economy recovers.  This acts to reduce the deficit and to slow the economy and fight inflation.  Similarly, when the economy is slowing taxes are reduced by a greater rate than the slowdown, and this helps the economy have a shorter and less severe recession.

So if Mr. Romney’s plan is implemented the deficit will increase, possibly to the level of $2 trillion and the natural decline in the deficit as the economy increases will not happen.  If you need to see details on the Romney plan, look in the economic cookbook under “recipes for fiscal disaster”.

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