海角大神

The Tax Policy Center鈥檚 latest research聽聽went viral last week, drawing attention in the presidential campaign and sparking a constructive discussion of the practical challenges of tax reform. Unfortunately, the response has also included some unwarranted inferences from one side and unwarranted vitriol from the other, distracting from the fundamental message of the study: tax reform is hard.

The paper, authored by Sam Brown, Bill Gale, and Adam Looney, examines聽. The paper illustrates the importance of the tradeoffs among revenue, tax rates, and progressivity for the tax policies put forward by presidential candidate Mitt Romney. It found, subject to certain assumptions I discuss below, that any revenue-neutral plan along the lines Governor Romney has outlined would reduce taxes for high-income households, requiring higher taxes on middle- or low-income households. I doubt that鈥檚 his intent, but it is an implication of what we can tell about his plan so far. (We look forward to updating our analysis, of course, if and when Governor Romney provides more details.)

The paper is the latest in a series of TPC studies that have documented both the promise and the difficulty of base-broadening, rate-lowering tax reform. Last month, for example, Hang Nguyen, Jim Nunns, Eric Toder, and Roberton Williams documented just聽. An earlier paper by Dan Baneman and Eric Toder documented the聽.

The new study applies those insights to Governor Romney鈥檚 tax proposal. To do so, the authors had to confront a fundamental challenge: Governor Romney has not offered a fully-specified plan. He has been explicit about the tax cuts he has in mind, including a one-fifth reduction in marginal tax rates from today鈥檚 level, which would drop the top rate from 35 percent to 28 percent and a cut in capital gains and dividend taxes for families with incomes below $200,000. He and聽聽have also said that reform should be revenue-neutral and not increase taxes on capital gains and dividends. But they have not provided any detail about what tax preferences they would cut to make up lost revenue.

As a political matter, such reticence is understandable. To sell yourself and your policy, it鈥檚 natural to emphasize the things that people like, such as tax cuts, while downplaying the specifics of who will bear the accompanying costs. Last February, President Obama did the same thing when he rolled out his business tax proposal. The president was very clear about lowering the corporate rate from 35 percent to 28 percent, but he provided few examples of the tax breaks he would cut to pay for it. Such is聽.

For those of us in the business of policy analysis, however, this poses a challenge. TPC鈥檚 goal is to inform the tax policy debate as best we can. While we strongly prefer to analyze complete plans, that sometimes isn鈥檛 possible. So we provide what information we can with the resources available. Earlier this year, for example,聽聽the specified parts of Governor Romney鈥檚 proposal and documented how much revenue he would have to make up by unspecified base broadening (or, possibly, macroeconomic growth) and how the rate cuts would affect households at different income levels.

The latest study asked a different question: Could Romney鈥檚 plan maintain current progressivity given revenue neutrality and reasonable assumptions about what types of base broadening he鈥檇 propose? There are聽聽in tax expenditures out there, but not all will be on Governor Romney鈥檚 list. He has said, for example, that raising capital gains and dividend taxes isn鈥檛 an option and has generally spoken about lowering taxes on saving and investment. Based on those statements, the authors considered what would happen if Romney kept all the tax breaks associated with saving and investment, including not only the lower rates on capital gains and dividends, but also the special treatment for municipal bonds, IRA and 401ks, and certain life-insurance plans, as well as the ability to avoid capital gains taxes at death (known as step-up basis). The authors also recognized that touching some tax breaks is beyond the realm of political possibility, such as taxing the implicit rent people get from owning their own home.

Given those factors, the study then examined the聽most progressive聽way of reducing the other tax breaks that remain on the table鈥攊.e. it rolls them back first for high-income people. But there aren鈥檛 enough of those preferences to offset the benefits that high-income households get from the rate reductions. As a result, a revenue-neutral reform within these constraints would cut taxes at the high-end while raising them in the middle and perhaps bottom.

What should we infer from this result? Like聽, I don鈥檛 interpret this as evidence that Governor Romney wants to increase taxes on the middle class in order to cut taxes for the rich, as an Obama campaign ad claimed. Instead, I view it as showing that his plan can鈥檛 accomplish all his stated objectives. One can charitably view his plan as a combination of political signaling and the opening offer in what would, if he gets elected, become a negotiation.

To get a sense of where such negotiation might lead, keep in mind that Romney鈥檚 plan is not the first to propose a 28 percent top rate. The Tax Reform Act of 1986 did, as did the Bowles-Simpson proposal and the similar Domenici-Rivlin effort (on which I served). Unlike Governor Romney鈥檚 proposal, all three of those tax reforms reflect political compromise. And in all three cases, part of that compromise was eliminating some tax preferences for saving and investment, which tend to be especially important for high-income taxpayers. In particular, all three reforms resulted in capital gains and dividends being taxed at ordinary income tax rates.

TPC鈥檚 latest study highlights the realities that lead to such compromises.