Tuesday, September 4, 2012

Romney Economics Adviser Martin Feldstein Details How the Romney Tax Cuts Would be Revenue Neutral

Can’t Wait for Mr. Romney and Mr. Ryan to Campaign on This Plan

Even the supporters of Mitt Romney and Paul Ryan are upset that their plans do not have any details.  Foremost amongst this is their tax proposals.  The Romney plan would cut tax rates by 20% across the board (okay that a detail that we do know, but only because it is a good detail, not a detraction).  But Mr. Romney claims that the plan would be revenue neutral because of some unspecified other changes.  The Tax Policy Center ran the numbers and declared this hogwash.

So Martin Feldstein, a Reagan era economist now ensconced at Harvard produced a piece for the WSJ that purported to show this was not true.  Mr. Feldstein’s article was widely ridiculed by this Forum and even more by others who pointed out some basic math and analytical errors by Mr. Feldstein.  To his credit, Mr. Feldstein has now acknowledged those errors.

More specifically, using a 25% marginal tax rate instead of 30% would reduce the revenue from eliminating deductions by 5% of $636 billion or $32 billion.  Cutting the behavioral response in half (i.e., using a taxable income elasticity of just 0.25) would raise the cost of the tax cut by $17 billion.  The cost of the “phase in” would depend on just how it was done but say another $15 billion of reduced revenue.  So instead of my conclusion that the revenue from eliminating deductions would exceed the cost of the tax cuts by $5 billion, these assumptions would imply a shortfall to be made up by other base broadening of $64 billion.

But he refuses to give in on his main point, that the Romney plan can be revenue neutral. 

To do that here is what according to Mr. Feldstein the policy would have to do.

  1. Eliminate all itemized deductions for people making over $100,000.
  2. Cause the employer paid portion of health care insurance to be taxable income to everyone making over $100,000.
  3. Making municipal bond interest taxable for people making over $100,000.
  4. Eliminating the child credit for parents making over $100,000.

Mr. Feldstein still makes some basic errors, for example

although the top statutory rate is 35 percent, the effective top marginal tax rate is higher because of various phase-out provisions that affect high-income taxpayers (PEP, Pease, etc.) so my original assumption of a 30 percent marginal tax rate could be appropriate even with the Romney rate reductions.

where he apparently doesn’t realize that those phase outs are already out of the tax process.  And he fails to take into account the revenue loss that would occur when those losing all their deductions would create when they took the Standard Deduction.

But everyone should remember that facts, data and analysis are not relevant here.  Conservative economics is economics by assertion.  The Romney plan will be revenue neutral because they say it will be revenue neutral.  So if one does the analysis to determine if it is revenue neutral by starting with the assumption that it is revenue neutral, guess what, the conclusion is that it is revenue neutral.

But one good thing could come out of all of this.  Mr. Romney could embrace the Feldstein analysis and now give the public the details.  Let’s hope he does, because everyone is just hugely anxious to see the reaction when Mr. Romney announces he will do the four points described above.  Really, we can’t wait.

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