Thursday, August 30, 2012

Martin Feldstein, Harvard Economist Extraordinaire Is Able to Discern that the Romney Tax Cut Would Raise Revenues

Despite, as Mr. Feldstein Puts Says, “It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn't specified what he would do”

Yep, Conservative Economists Can Do the Impossible

One of the biggest criticisms of Mitt Romney’s tax policy is not a criticism of the tax policy.  In fact for the most part there is little valid criticism of the tax policy since Mr. Romney has not provided any details of his tax policy.  Instead he has adopted a “policy by assertion” rationale, that is, his tax plan of huge tax cuts for the wealthy will be revenue neutral because he says it will be revenue neutral.

Now this bogus claim has been exposed by a few analyses, most importantly the non-partisan Tax Policy Center which took assumptions most favorable to Mr. Romney’s plan and still were unable to conclude anything else but the fact that in order to be revenue neutral the plan had to raise taxes on low and middle income tax payers. 

But reality is not an answer for Conservatives, so Martin Feldstein, former Reagan economic adviser and economist at Harvard has presented an analysis in the Wall Street Journal that shows indeed that Mr. Romney’s plan will work.

Since broadening the tax base would produce enough revenue to pay for cutting everyone's tax rates, it is clear that the proposed Romney cuts wouldn't require any middle-class tax increase, nor would they produce a net windfall for high-income taxpayers. The Tax Policy Center and others are wrong to claim otherwise.

Wow, being a Harvard economist his analysis must be pretty rigorous.  Like this example at how eliminating the Estate Tax won’t reduce revenues.

More importantly, eliminating the estate tax could be a revenue gainer in the longer term. That's because its current high rates induce high-wealth individuals to bequeath most of their money to foundations, universities and other tax-exempt institutions where the future investment earnings are untaxed. If the estate tax were abolished, more of those funds would go to children and grandchildren, who in turn would generate higher income taxes for generations.

Okay everyone, stop laughing and consider this gem from Mr. Feldstein

But past experience shows that taxpayers do respond to lower marginal tax rates by acting in ways that increase their taxable incomes: increasing work effort, receiving more of their compensation in the form of taxable cash rather than untaxed fringe benefits, and spending less of their income on tax-favored forms of consumption that are deducted or excluded in calculating taxable income. More specifically, history shows that a tax cut that raises the after-tax share of earnings that an individual keeps by 10% raises taxable income by about 5%. This implies that the revenue loss from the 20% tax cut would be $148 billion, not $181 billion.

Hm, lets see what past experience really says.  Well in 1993 President Clinton raised marginal tax rates for wealthy individuals.  By the end of his term there was huge job creation and the budget was balanced.  The most recent experience, the Bush tax cuts took that budget surplus and turned it into a trillion dollar deficit which Mr. Bush deftly handed over to Mr. Obama.

And Mr. Feldstein’s impeccable math works this way.

The IRS data show that taxpayers with adjusted gross incomes over $100,000 (the top 21% of all taxpayers) made itemized deductions totaling $636 billion in 2009. Those high-income taxpayers paid marginal tax rates of 25% to 35%, with most $200,000-plus earners paying marginal rates of 33% or 35%.

And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.

Except of course he doesn’t want to eliminate all the itemized deductions.

This does not mean eliminating all deductions. My preference would be to retain all deductions but to limit their total tax benefit to a moderate percentage of each taxpayer's adjusted gross income.

Meaning of course that low and middle income taxpayers would be footing a part of the bill, exactly what the TPC study concluded.

Boy, Harvard must be really embarrassed.

And finally, if anybody is wondering, yes the TPC study is from an independent group.  Mr. Feldstein, not so much.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors. He advises the Romney campaign.

Martin Feldstein, brought to you by the Wall Street Journal, a wholly owned subsidiary of the Mitt Romney campaign. 

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