3Qs: ‘Bad math’ or ‘bold leadership’?

Mitt Romney, the Repub­lican pres­i­den­tial nom­inee, has pledged to cut all income tax rates by 20 per­cent, a plan that would cost the gov­ern­ment some $4 tril­lion in for­gone rev­enue over the next decade. But he has also vowed to offset the lost rev­enue by reducing tax deduc­tions and exemp­tions for high-​​income earners without raising taxes on middle-​​class fam­i­lies. Pres­i­dent Obama, on the other hand, has pledged to extend the Pres­i­dent Bush-​​era tax cuts for house­holds making less than $250,000 and require indi­vid­uals making more than $1 mil­lion to pay at least a 30 per­cent tax rate regard­less of their income source.

We asked Peter Enrich, a pro­fessor of law in the School of Law at North­eastern Uni­ver­sity who pre­vi­ously was gen­eral counsel to the Mass­a­chu­setts Exec­u­tive Office for Admin­is­tra­tion and Finance, to ana­lyze the tax plans put forth by Romney and Pres­i­dent Obama.

Law professor Peter Enrich examines the tax policies of President Obama and Republican challenger Mitt Romney, both of whom say their plans will help put Americans back to work. Photo by istockphoto.

President Obama has called Romney’s tax plan “bad math” rather than “bold leadership,” noting that it cannot possibly close the budget deficit without raising taxes on middle-class families. Simply put, is President Obama correct in his assertion? Why or why not?

To be fair, Romney has never suggested that his tax plan would reduce the budget deficit. He has been clear that he doesn’t see this as a time to raise taxes, even on the wealthy, and has insisted that reducing the deficit needs to be accomplished entirely by spending cuts, not tax increases.

But Romney does claim that his tax plan, despite its sharp cuts in tax rates for wealthy taxpayers, would not reduce their taxes, because of offsetting reductions in their tax breaks. He has refused, however, to identify which tax breaks he would propose to eliminate, and has apparently taken off the table the items that could amount to real money, most notably the preferential tax rates for capital gains and dividend income (the vast preponderance of which go to the wealthiest taxpayers).

As a result, most analysts agree that the Romney plan would either significantly increase the deficit or would need to rely on substantial tax increases for middle-class taxpayers even to keep the deficit at present levels.

Romney has been reticent to discuss the tax expenditures that he would eliminate in order to pay for his proposed tax cuts, making it difficult for economists to analyze the plan’s impact on families and businesses. If you were Romney, which tax breaks would you eliminate — and how would they affect the economy?

By far, the most glaring and unjustified tax expenditure for individuals is the preferential treatment of capital gains and dividends, which are taxed at a maximum rate of 15 percent. This is the rule that allows Warren Buffett and Mitt Romney to pay far less in taxes than middle-income workers. Some 75 percent of capital gains are earned by the top 1 percent, so the benefits of preferential taxation go almost entirely to the very rich. Reagan eliminated preferential treatment of investment income in his 1986 tax reform. And there is no serious evidence that higher taxation of investment income leads people to invest less or harms the economy.

With regard to business taxes, while it’s true that the U.S. has among the highest nominal corporate tax rates, a vast array of tax breaks allow typical large businesses to pay only half that rate, and many large and profitable companies can avoid federal taxes altogether. Closing a wide range of these loopholes, and using a portion of the resulting revenue to reduce corporate rates, would make the tax system fairer and more efficient, while helping to reduce the deficits.

A study commissioned by pro-business advocacy groups has found that President Obama’s plan to eliminate the Bush-era tax cuts for high earners would force small businesses to cut wages and cost the United States approximately $200 billion in economic output and 710,000 jobs. Whose tax plan is more business-friendly: Romney’s or President Obama’s?

Figuring out the long-term impacts of tax policy on the economy is tough. While taxes surely have some impact on economic activity, government spending is at least as significant an influence on the economy, both by providing needed supports for productivity (such as education and infrastructure) and by its stimulative effect on purchasing power. And there is also reason for concern that excessive government debt, caused by an imbalance between taxes and spending, may ultimately stall the economy. Where the optimal trade-offs lie between spending, taxes and deficits is highly uncertain.

What seems reasonably clear, however, is that restoring taxes on the wealthy to pre-Bush era levels is unlikely to cause economic harm. After all, the economy was thriving in the Clinton years, when taxes on the wealthy were at the higher rates.  And it defies common sense and economic logic to fear that business owners would choose to reduce investment in their businesses simply because taxes were going to take a larger fraction of their profits, at least not if profits from alternate uses of their resources would be taxed at comparable rates.

1 comment

  1. Obvi­ously there is a clear slant to the left in every single response, notably capped off by the com­ment: “What seems rea­son­ably clear, how­ever, is that restoring taxes on the wealthy to pre-​​​​Bush era levels is unlikely to cause eco­nomic harm. After all, the economy was thriving in the Clinton years, when taxes on the wealthy were at the higher rates.” This is a problem not just here, but in the main­stream media as well. You get these one-​​sided responses to issues that have fac­tual sup­port on both sides. Here, we only have sup­port from someone who obvi­ously believes that increasing taxes on wealthy Amer­i­cans will be better for our country.

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