海角大神

Last week the Tax Policy Center (TPC) released thisdistributiona of the Romney tax plan, exploring how the plan could be made revenue neutral as Romney has claimed it would be. The TPC analysis found that it is impossible to pay for Romney鈥檚 proposed additional tax cuts (which are skewed heavily toward the rich) with base-broadening revenue offsets (which according to the Romney plan cannot include increasing the taxation of capital income) without increasing tax burdens on net for most Americans. (I quickly summarized what I took as the main findings of the TPC analysis in my previous.)

By later the same day the Obama campaign had seized the moment by building the TPC calculations into an where any household can plug in their own income level, marital status, and number of children, and compare what their tax burdens would be under Obama versus under Romney.

The Obama campaign鈥檚 tax calculator produces honest numbers based on TPC distributional tables, but its presentation is confusing. It makes Obama tax policy look like it gives tax cuts for everyone, even the rich (which is indeed true relative to current law) and to make Romney tax policy look like it raises tax burdens on the middle class (which is indeed true relative to Obama policy, a different baseline). It seems to purposefully switch the baseline鈥搊r march from one to another鈥搕o come up with the most politically effective punch line that Romney wants to raise taxes on most Americans. The truth is that both Romney and Obama want to cut taxes by a lot relative to current law; it鈥檚 just that on net, Romney will cut taxes relatively more for the rich and less for everyone else (and more on average). The Bush tax cuts that Obama鈥檚 calculator touts as the benefits of Obama鈥檚 first-term tax cuts are relative to the current-law (no Bush tax cuts) baseline. The Obama tax cuts that would happen in 2013 are also relative to the current-law (no Bush tax cuts) starting point. But the 鈥淩omney tax plan鈥� numbers are relative to an Obama policy baseline, accurately labeled in the Obama tax calculator as 鈥渃ompared to President Obama鈥檚 plan.鈥� For the vast majority of Americans (the 95 percent or so with incomes below $250,000), the number for 鈥渦nder Romney鈥� will show a tax increase for them. Relative to current law, however, Romney鈥檚 tax proposal would cut taxes for the middle class鈥搄ust not by as much as Obama would. And both Romney and Obama plan to cut taxes for the rich; it鈥檚 just that Obama would cut them less than Romney would.

This strikes me as like shopping for a new car and comparing two cars in the dealer鈥檚 lot. One car has a sign on it that says it gets 25 miles per gallon (mpg). The car next to it has a sign that says 鈥�10 mpg鈥�relative to the first car. 鈥� Maybe for some reason the dealer wants to get rid of the first car more than the second, and that鈥檚 why he chooses to emphasize the relative, plus 鈥�10 mpg鈥� of the second rather than the absolute 35 mpg that the second car actually gets. Most buyers wouldn鈥檛 catch the 鈥渞elative to鈥� comparison鈥攁nd would reasonably expect the measures to be based on the same absolute scale (no matter the fine print)鈥攁nd would thus incorrectly conclude that the second car had (absolutely) poor fuel efficiency when in fact it has relatively better fuel efficiency.

I admit this is not a perfect analogy to the Obama tax calculator, however, because there鈥檚 no such thing as negative miles per gallon, and a middle-class family鈥檚 tax burden under Romney would be higher than under Obama (so higher relative to Obama policy), but would still go down compared with current law. Conversely, a rich household鈥檚 tax burden under Obama policy would be relatively higher than under Romney policy, but would still go down compared with current law. The Obama tax calculator (conveniently) emphasizes how Obama policy in 2013 would compare with current law, because that suggests tax cuts for everyone鈥攅ven the rich. By switching to the Obama-policy baseline only in the last step of comparing Romney policy to Obama policy, the calculator emphasizes that Romney raises taxes on the middle class (relative to Obama policy), while avoiding calling attention to the fact that Obama raises taxes on the rich (relative to Romney and relative to current policy extended).

For example, the Obama tax calculator highlights these three figures about the tax burdens facing a married, two-child household with $100,000 in annual income鈥攅mphasis added:

鈥淵our Tax Savings during President Obama鈥檚 First Term, 2009-2012鈥�: $5,600
听鈥淭ax Savings Under Obama, 2013鈥�: $3,999
听鈥淭ax Increase Under Romney, 2013鈥�Compared to President Obama鈥檚 plan鈥︹��: $1,339

鈥�but this really means that under Romney this family would still get a tax cut in 2013, compared to current law, of $3,999 - $1,339 = $2,660. In other words, an 鈥渁pples to apples鈥� comparison of tax cuts measured against the same yardstick (baseline) would compare a $3,999 tax cut under Obama with a $2,660 tax cut under Romney. The smaller tax cut under Romney is because reduced tax preferences (those 鈥渂ase broadeners鈥� aside from those affecting capital income taxation) would be used to pay for further tax rate reductions at the top of the income distribution.

For a household with $500,000 in annual income, the Romney tax change is in the opposite direction, because Romney would cut high-income households鈥� taxes even further than under President Obama鈥檚 plan (which extends the Bush tax cuts except for the highest brackets). The Obama calculator returns these three figures (again, emphasis added):

鈥淵our Tax Savings during President Obama鈥檚 First Term, 2009-2012鈥�: $8,676
听鈥淭ax Savings Under Obama, 2013鈥�: $8,295
听鈥淭ax Savings Under Romney, 2013鈥�Compared to President Obama鈥檚 plan鈥︹��: $36,319

鈥�and this means that the $500K family would get a $8,295 tax cut under Obama in 2013, compared with current law, but a much larger tax cut under Romney, of $8,295 + $36,319 = $44,614, also compared with current law. A different 鈥渁pples to apples鈥� comparison could have compared tax changes under both candidates to the policy-extended baseline, in which case there would not be any tax savings under Obama for this $500K household but instead a large tax increase. (This is why the choice of the baseline matters and was not likely random in this campaign material; even President Obama would prefer to avoid showing tax increases, and even on the rich.)

My bigger criticism about the Obama tax calculator is that it ignores the distribution of the burden of deficit financing鈥攁s Bill Gale and Peter Orszag way back during the Bush Administration about the Bush tax cuts. (The lesson from that analysis was that if deficits at least eventually have to be offset by future tax increases or spending cuts, then the distribution of the burden of those future fiscal policy changes should be considered, not ignored, in the policy choice to deficit-finance a current tax cut.) By ignoring the cost of deficit financing any tax cuts (even those 鈥渇iscally irresponsible鈥� Bush tax cuts!), the Obama calculator implicitly suggests that there is no cost of tax cuts if you deficit finance them. Instead, the calculator scores a monetary cost if the tax cuts are paid for, but no monetary cost if they are not paid for. This is not the message that encourages politicians to say 鈥渙k then, I鈥檒l propose fiscally-responsible tax cuts from now on.鈥�

The Obama tax calculator calculates the benefits of the extended Bush tax cuts without the burden of deficit financing and claims those (ironically) as the good of Obama tax policy. They then use the net burdens of the Romney plan as estimated in the TPC analysis (which average to zero across all households but burden middle income families on net) to claim Romney鈥檚 supposedly-paid-for plan raises taxes while the Obama (Bush-extended, deficit-financed) plan reduces taxes.

This gets back to my even broader concern about the Obama campaign鈥檚 emphasis in their touting of the TPC analysis. (To be clear, I mean no criticism of the TPC analysis itself here.) The Obama campaign has jumped at the chance to highlight the burden of the implicit Romney revenue offset鈥搘hich should be criticized because of its adverse distributional effect, but not because it is an offset, nor because it is a base-broadening offset. In my view, the most important and very objective, basic-math lessons of the TPC analysis are (i) we can鈥檛 afford the Romney tax cuts, and (ii) it鈥檚 not possible to offset the cost of those tax cuts while taking capital income tax expenditures off the table without creating a very regressive tax reform on net. In an ideal world this TPC analysis would lead policymakers on both sides of the aisle to scale back their tax cutting plans and/or restructure the offsets to make for a more progressive package. Unfortunately, the Obama campaign鈥檚 political capitalizing on the TPC analysis has probably resulted in the Romney campaign saying to themselves now: 鈥済ee, we shouldn鈥檛 have proposed a fiscally responsible version of our huge tax cuts for the rich; we should have just said we would deficit finance it.鈥�

In this PBS Newshourwhere Judy Woodruff speaks with one of the authors of the TPC analysis, Bill Gale, and the Tax Foundation鈥檚 Scott Hodge, at one point Hodge actually suggests it may be wrong to assume Romney would pay for his proposed tax cuts at all (emphasis added):

听

SCOTT HODGE: 鈥�There are many ways in which Romney could fill out the details of his plan. They of course are not forthcoming with that, because they would like to keep to a big-picture approach. So we have to be very careful about reading too much into this, because it really is not the Romney plan.

(CROSSTALK)

JUDY WOODRUFF: All right, so filling in a lot of assumptions, what about that?

BILL GALE: Let me respond to that.
听It鈥檚 correct that Governor Romney has not specified all the details of his tax reform plan. He has specified the goodies, the tax cuts, but he鈥檚 not specified how he will pay for them. If he would do so鈥�

(CROSSTALK)

SCOTT HODGE: He may not even pay for them. He may decide that we are going to scrap revenue neutrality.

听

Indeed, why should any politician propose a fiscally-responsible, as opposed to deficit-financed, tax cut then? By offsetting the cost of one鈥檚 tax cuts, whether with specific policy or not, your opponent will attack you on the burden of the offset on whichever households would bear that burden. In contrast, if you don鈥檛 offset the cost, you can claim all households win.

It鈥檚 a shame that Romney鈥檚 particular version of base-broadening tax reform might be a bad-enough version such that the more general (and wise) strategy of tax base broadening for deficit reduction鈥攖hat emphasized by all of the bipartisan deficit-reduction groups鈥攈as now been tainted. Both the President鈥檚 commission (Bowles-Simpson) and the Bipartisan Policy Center鈥檚 task force (Domenici-Rivlin) showed that we can broaden the tax base, lower tax rates, and raise revenue鈥攁nd yet still maintain or improve the progressivity of the overall tax system. But the TPC analysis of the Romney plan makes clear that going further with tax rate cuts, even beyond extension of the Bush tax cuts, is not feasible in any practical sense if we are not willing to pay for it by giving up the major tax expenditures that currently benefit all taxpayers very broadly, and is not palatable from a distributional perspective if we鈥檙e not willing to increase, not decrease, the taxation of capital income.

The TPC analysis of the Romney tax plan should be taken as a good teaching moment to help policymakers on both sides start constructing better tax policy. But both campaigns have just used it to ramp up their political posturing and sharpen their blame games. Let鈥檚 hope that this blow to the idea of fiscally-responsible, progressive tax reform is purely superficial and temporary and does not prove deadly.