海角大神

Today the Tax Policy Center (TPC) released this聽analysis of the distributional effects of Mitt Romney鈥檚 proposed tax reform plan, and it got so much (deserved) attention that both President Obama and presidential candidate Romney talked about it.聽 Too bad both candidates were speaking entirely as candidates and not as policy analysts or even as the supreme policymaker that we will elect one of them to be.

President Obama decided that the report was sufficiently unfavorable to the Romney plan as to make it great campaign speech fodder.聽 As reported in Politico:

Romney鈥檚 response?聽 As reported by Lori Montgomery in the Washington Post:

But what does the TPC analysis actually tell us鈥搈eaning us people who aren鈥檛 campaigning to be president鈥揳bout the Romney tax plan?聽 It鈥檚 well summarized by Figure 2 from the paper, above, which decomposes the bottom line conclusion that a revenue-neutral Romney plan would give generous tax cuts to the rich paid for with net tax increases on everyone else, into two parts:聽 (i) how much the tax cuts from the tax rate reductions are skewed toward the rich; and (ii) how much the revenue offsets from (Romney-limited) base broadening are skewed toward lower- and middle-income households.聽 Combined, we would end up with a revenue-neutral (relative to a business-as-usual, policy-extended baseline) and highly 鈥渞egressive鈥� tax reform, with relative and absolute tax burdens falling for 鈥渢he rich鈥� (defined here as households with incomes above $200,000鈥揳bout the top 5%) and increasing for everyone else.

This makes the Romney proposal, specifically, a bad idea, but this should not be taken as a blanket indictment of any kind of tax reform proposal that tries to pay for low (or even lower) marginal tax rates by broadening the tax base.聽聽 From a purely mechanical standpoint (leaving aside politics, I mean), both parts of the reform could be modified fairly easily to come up with a revenue-neutral but much more progressive (with average tax burdens rising more steeply with income) tax reform package.聽 On part (i)鈥搕he rate cuts鈥搄ust don鈥檛 cut rates so much (or at all) at the top.聽 On part (ii)鈥搕he base broadeners鈥搄ust make sure you reduce some of the tax expenditures that currently benefit capital income (which is highly skewed toward the rich) and ideally additionally limit other tax expenditures such that higher-bracket households don鈥檛 receive聽 higher percentage subsidies.聽 (The President鈥檚 proposal to limit itemized deductions to the 28 percent rate is an example of this latter strategy.)聽 Romney goes wrong on both parts because he chooses to cut tax rates the most for the rich and at the same time refuses to reduce current tax subsidies that produce very low effective tax rates on capital income (and hence the rich).聽 The TPC analysis explains that taking tax preferences on capital income completely off the base-broadening table (as Romney would do) means that the revenue-raising potential from base broadening is cut by about one third.聽 So from my perspective, this particular version of a base-broadening tax reform scores poorly on fiscal responsibility grounds and not just distributional grounds.

But it seems that President Obama鈥檚 emphasis on the TPC analysis was to underscore that the offsets would imply higher taxes for most of us, even more than to complain about the proposed rate cuts lowering tax burdens on the rich.聽 So I鈥檇 hate for the message heard from the President to be 鈥渨e shouldn鈥檛 pay for tax cuts with base broadeners鈥濃�揳s the shorthand for a more accurate characterization of TPC鈥檚 conclusion that 鈥渨e shouldn鈥檛 pay for large tax rate cuts on the rich with base broadeners that fall disproportionately on the non-rich.鈥�

And by the way, the main lesson from the TPC analysis is also not what Romney suggests鈥搕hat the Tax Policy Center is (suddenly) 鈥渓iberal鈥� and biased.聽