The Romney Hood Fairy Tale

by alexvanbuskirk

The Romney Hood Fairy Tale: The false, invented analysis behind Obama’s tax claims

Review & Outlook @ WSJ (August 7, 2012)

By the way, even the Tax Policy Center admits that “we do not score Governor Romney’s plan directly as certain components of his plan are not specified in sufficient detail.” But no matter, the study plows ahead to analyze features of the Romney plan that aren’t even in it.

The heart of Mr. Romney’s actual proposal is a 20% rate cut for anyone who pays income taxes. This means, for example, that the 10% rate would fall to 8%, the 35% rate would fall to 28% and all the brackets in between would fall as well. The corporate tax would fall to 25% from 35%.

The plan says these cuts would be financed in a revenue-neutral way. First, by “broadening the tax base,” which means reducing or eliminating tax deductions and loopholes as in the tax reform of 1986. The Romney campaign doesn’t specify which deductions—no campaign ever does—but it has been explicit in saying that the burden would fall most on higher tax brackets. So in return for paying lower rates, the wealthy get fewer deductions.

Second, the Romney campaign says it expects to increase revenues by increasing the rate of economic growth to 4%, up from less than 2% this year and in 2011. (Separately from tax reform, but clearly relevant to budget deficits, Mr. Romney says he’d gradually reduce spending to 20% of the economy from the Obama heights of 24%-25%.)

The class warriors at the Tax Policy Center add all of this up and issue the headline-grabbing opinion that it is “mathematically impossible” to reduce tax rates and close loopholes in a way that raises the same amount of revenue. They do so in part by arbitrarily claiming that Mr. Romney would never eliminate certain loopholes (such as for municipal bond interest), though the candidate has said no such thing.

Based on this invention, they then postulate that Mr. Romney would have to do something he also doesn’t propose—which is raise taxes on those earning less than $200,000. In the Obama campaign’s political alchemy, this becomes “Romney Hood” and a $2,000 tax increase.

The Tax Policy Center also ignores the history of tax cutting. Every major marginal rate income tax cut of the last 50 years—1964, 1981, 1986 and 2003—was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code—i.e., the share of taxes paid by the richest 1% rose.

So on four separate occasions what TPC says is “mathematically impossible”—cutting tax rates and making the tax system more progressive—actually happened. Hats off to the scholars at TPC: Their study manages to claim that what happens in real life can’t happen in theory.

The TPC analysis also fails to acknowledge how highly dependent the current tax system is on the very rich. As the Tax Foundation explains in a recent report based on CBO data: “The top 20 percent of households pay 94 percent of federal income taxes. The bottom 40 percent have a negative income tax rate, and the middle quintile pays close to zero.”

This reality is treated as a state secret in Washington because it refutes Mr. Obama’s campaign theme that the rich are undertaxed. The same crowd that has been howling that the rich don’t pay their fair share of taxes now touts a study concluding that cutting taxes will only benefit the rich. Well, which is it?

Harvard economist Dale Jorgenson recently testified before the Senate Finance Committee that “a tax reform similar to the Reagan effort of 1986” would raise economic output over the long term “by $7 trillion in 2011 dollars.”

The Tax Policy Center’s claim that it’s impossible to make the numbers add up is also refuted by President Obama’s own Simpson-Bowles deficit commission report. The Romney plan of cutting the top tax rate to 28% and closing loopholes to pay for it is conceptually very close to what Simpson-Bowles recommended.

And here’s the kicker: Simpson-Bowles assumed that the top rate could be cut to 28%, loopholes could be closed, revenues as a share of GDP would rise to 20% and the deficit could be cut by close to $1.5 trillion. The difference is that the Romney plan caps tax revenues at about 18% of GDP so that taxes don’t have to rise on the middle class. If Mr. Romney’s numbers don’t add up, then neither do those in the bipartisan Simpson-Bowles plan that the media treat as the Holy Grail of deficit reduction.

The great irony is that the candidate most likely to raise taxes on the middle class is Mr. Obama. He could raise every tax on the rich he proposes and still not come up with enough revenue to finance the increases in spending he wants in a second term. Where do you think he’ll turn then?