Our guest blogger is Seth Hanlon, Director of Fiscal Reform at the Center for American Progress Action Fund.
A recent study by the nonpartisan Tax Policy Center found that Mitt Romney’s tax plan, which purports to be “revenue neutral,” would require households with incomes under $200,000 to pay higher taxes, on average, in order to finance tax cuts for the rich. In response, Romney economic advisor Martin Feldstein penned an op-ed in today’s Wall Street Journal claiming that Romney’s plan does not require such a tax increase.
Though Feldstein uses at least three sleights of hand to obscure the point, his analysis actually confirms TPC’s central finding. Here’s why:
1) Feldstein ignores Romney’s $1 trillion corporate tax cut, which is paid for by individual income tax increases.
Feldstein purports to show how reductions in tax breaks for high-income households could pay for a handful of Romney’s tax policies, including cuts in tax rates for individuals. But Feldstein conveniently ignores Romney’s tax cuts for corporations.
Romney’s plan would give corporations an “immediate” tax cut, cutting their rates from 35 percent to 25 percent. This tax cut would cost $96 billion in 2015 according to the Tax Policy Center (TPC) and more than $1 trillion over ten years. The TPC report did not even factor this massive corporate tax cut in their analysis of Romney’s plan under the very generous assumption that it would be fully paid for by eliminating business tax breaks.
But the Romney campaign has since made clear that the $1 trillion in corporate tax cuts aren’t paid for by any reductions in corporate tax breaks. Therefore, as the TPC researchers have noted, Romney’s corporate tax cuts would require “even larger cuts to tax expenditures [i.e. tax breaks], and correspondingly larger increases in taxes on middle- and/or lower-income taxpayers,” than their original study found. Feldstein simply ignores all of this.
2) Feldstein redefines the “middle class.”
In crunching numbers to try to make Romney’s tax plan add up, Feldstein counts only those households with incomes under $100,000 as “middle class.” He purports to demonstrate that Romney’s plan can add up if deductions are eliminated for households over $100,000. But this simply confirms the Tax Policy Center’s conclusion that Romney’s plan does not add up without a tax increase on households with incomes under $200,000. (This table from TPC shows that households in the $100,000-$200,000 range stand to lose much more from the elimination of tax breaks than they would gain from Romney’s tax rate cut.)
3) Feldstein cherry-picks his numbers to overstate savings.
Finally, Feldstein uses selective and static numbers that overstate the possible savings from tax expenditure reductions. Feldstein seems to belittle the Tax Policy Center study as being based on “inevitably speculative” forecasts from a computer model. But TPC’s model is highly regarded and the same type regularly used by the Congressional Budget Office, Joint Tax Committee, the Treasury Department — and Feldstein himself — to analyze tax policies. There’s a reason everyone uses such models — it’s the only way to capture the complex interactions between tax rates and tax expenditures such as deductions and exemptions.
For his op-ed, Feldstein simply looks at numbers from tax returns from a single year, 2009. Then he makes some selective adjustments: For example, he inflates income levels on the assumption that lower tax rates would lead to higher levels of taxable income and therefore offset some of the revenue loss. Yet he fails to make corresponding adjustments to deductions to reflect behavioral responses, which means that he is probably vastly overstating the potential revenue from eliminating those deductions. Feldstein also fails to adjust for the fact that under Romney’s plan, where tax rates are reduced by 20 percent, the potential revenue gain from eliminating tax exclusions or deductions is automatically 20 percent less.
All of these choices by Feldstein have the effect of overstating how much tax revenue can be gained by cutting upper-income tax breaks. Feldstein’s rough and selective calculations are nowhere near as credible as TPC’s analysis.
Feldstein makes other highly questionable leaps and assumptions. He asserts that eliminating the estate tax would be a “revenue gainer in the long term” (because fewer inheritances would go to tax-exempt charities and more would go to wealthy heirs!). Eliminating the estate tax would cost hundreds of billions in revenue according to CBO.
In all, Feldstein’s op-ed serves only to confirm what TPC and others have found: Mitt Romney would pay for his tax cuts for the rich by raising middle-class taxes.