Saturday, October 13, 2012

Josh Barro nails the Romney/Ryan campaign's most recent dishonesty about its fake tax "plan"

Romney and Ryan propose, among other things, to retain all the Bush tax cuts and then add an across-the-board 20% cut in federal taxes on top of that.  They also claim that these tax cuts will not increase the deficit, because they will offset them by eliminating various "loopholes" and deductions--which they stubbornly refuse to specify, except to promise that they will not touch the mortgage interest deduction for non-wealthy families or existing deductions for medical & retirement savings, charitable contributions, and some other widely popular features of the federal tax code.  Recently, Romney has also begun to claim, in direct contrast to his earlier statements, that his changes in the tax code will not reduce the effective tax rates for the wealthy (after all those "loopholes" have been removed).  There's more, but that's enough for the moment.  They and their propagandists claim that their tax plan (which they refuse to spell out in any detail) can magically accomplish all these goals simultaneously.

At the same time, they plan to increase military spending dramatically (the cost of which will apparently be offset by firing Big Bird and cutting back Medicaid support for poor children and other vulnerable populations).

Various analysts have pointed out that for the Romney/Ryan tax plan to accomplish all these goals at once is simply impossible, so if they do follow through on those sweeping tax cuts, then some of the other promises will have to be broken.  On the basis of past experience with Republican campaign proposals of this sort (remember George W. Bush, way back in 2000?), I am willing to predict that, if Romney & Ryan win the election and have the chance to push through their policies, then (1) they will indeed push through sweeping tax cuts, (2) these tax cuts will disproportionately favor the wealthy, and (3) the overall results will indeed increase the deficit, just as common sense might suggest.  We have been through this charade several times before, haven't we?  What's the big mystery?

In response to those analyses, Romney/Ryan and their propagandists repeatedly cite "six studies" which allegedly demonstrate that fulfilling the whole package of promises in the Romney/Ryan tax plan is not mathematically impossible.  As one might expect, on close inspection this claim turns out to be deeply dishonest—as various people have shown after taking the trouble to examine these supposed "six studies."

=> One clear, concise, and definitive debunking of this malarkey was provided by Josh Barro—who is not a left-liberal firebrand, but a moderate Republican—in two pieces for Bloomberg View.  The second piece, "The Final Word on Mitt Romney’s Tax Plan," is below, and I recommend reading the whole thing.  But here are some highlights:
Mitt Romney's campaign says I'm full of it. I said Romney's tax plan is mathematically impossible:  he can't simultaneously keep his pledges to cut tax rates 20 percent and repeal the estate tax and alternative minimum tax; broaden the tax base enough to avoid growing the deficit; and not raise taxes on the middle class. They say they have six independent studies -- six! -- that "have confirmed the soundness of the Governor’s tax plan," and so I should stop whining. Let's take a tour of those studies and see how they measure up.

The Romney campaign sent over a list of the studies, but they are perhaps more accurately described as "analyses," since four of them are blog posts or op-eds. I'm not hating -- I blog for a living -- but I don't generally describe my posts as "studies."

None of the analyses do what Romney's campaign says: show that his tax plan is sound. [....]
Let's skip over the first two blog posts, which come from the right-wing American Enterprise Institute.
3 and 4. The Romney camp cites two analyses by Martin Feldstein: a Wall Street Journal op-ed and a blog post responding to criticism of that op-ed.

Feldstein ran the numbers and said Romney can cut tax rates by 20 percent and eliminate enough tax expenditures to balance the budget without raising taxes on the middle class. But Feldstein defines "middle class" differently than Romney does.

Feldstein allows for tax increases on people making more than $100,000. But on Sept. 14, Romney told ABC's George Stephanopoulos that he would hold people making less than $200,000 or $250,000 harmless from tax increases.

The Romney campaign, therefore, is dishonest in saying Feldstein's analyses "confirm the soundness" of Romney's tax plan. Feldstein is analyzing a different tax plan, which would allow tax increases on taxpayers making between $100,000 and $200,000. That's a large group, accounting for 24 percent of all adjusted gross income in 2009. But it's a group Romney has pledged not to touch.
OK, those are the first four out of the alleged "six studies," and not one is actually a "study" that has "confirmed the soundness of the Governor’s tax plan."

Then we get two actual papers by economists.
5. Next up is a paper by Curtis Dubay of the Heritage Foundation. Dubay raises the same issues as Brill on municipal bond interest, life insurance and economic growth. He adds another claim: Romney would likely change the rules about capital gains tax treatment on estates, raising additional revenue.
For Barro's explanation of why Dubay's argument is fallacious, which requires a little bit of technical detail, see his full piece below.
Finally we have Princeton's Harvey Rosen, who ran his own score of Romney's tax plan and finds that, even if Romney sets his tax increase threshold at $200,000, he can more than eliminate the deficit identified by TPC. But there are several problems with Rosen's analysis, as highlighted by William Gale, a co-author of the Tax Policy Center report that sparked this discussion.
Again, see the full piece below.  (Some more embarrassing details, from Harold Pollack, are here.) But the basic problem is that, in order to make the numbers add up, Gale has to rely on implausible assumptions (which might better be described as "supply-side" fantasies) about how those changes in the tax code will magically stimulate economic growth enough to offset the cuts in tax rates.  We've heard that song before, for over three decades now.  Should we really be fooled one more time?

=> In short, the Romney/Ryan claims on this score partly rely on distorting the facts and partly involve simply making things up.  What else is new?

—Jeff Weintraub

==============================
Bloomberg View
October 12, 2012
The Final Word on Mitt Romney’s Tax Plan
By Josh Barro

Mitt Romney's campaign says I'm full of it. I said Romney's tax plan is mathematically impossible: he can't simultaneously keep his pledges to cut tax rates 20 percent and repeal the estate tax and alternative minimum tax; broaden the tax base enough to avoid growing the deficit; and not raise taxes on the middle class. They say they have six independent studies -- six! -- that "have confirmed the soundness of the Governor’s tax plan," and so I should stop whining.  Let's take a tour of those studies and see how they measure up.

The Romney campaign sent over a list of the studies, but they are perhaps more accurately described as "analyses," since four of them are blog posts or op-eds. I'm not hating -- I blog for a living -- but I don't generally describe my posts as "studies."

None of the analyses do what Romney's campaign says: show that his tax plan is sound. I'm going to walk through them individually, but first I want to make a broad point.

The Tax Policy Center paper that sparked this discussion found that Romney's plan couldn't work because his tax rate cuts would provide $86 billion more in tax relief to people making over $200,000 than Romney could recoup by eliminating tax expenditures for that group. That means his plan is necessarily a tax cut for the rich, so if Romney keeps his promise not to grow the deficit, he'll have to raise taxes on the middle class.

Various analyses have adjusted TPC's assumptions in an effort to bring down that $86 billion deficit. But getting from $86 billion down to $0 is not enough to make Romney's proposal work. For Romney's math to add up, he actually needs a substantial surplus of a high-income base broadening above the cost of his high-income rate cuts.

This is for two reasons. First, TPC's thought experiment -- eliminate as many deductions as possible at the top while holding those below $200,000 harmless from tax increases -- was not only exceedingly generous in granting Romney's assumptions. It was impossibly generous.  Under the terms analyzed by the TPC study, a taxpayer earning $199,999 would face a drastically higher tax bill for earning $1 more in income. That doesn't happen in the real world.

Instead you would need to phase in restrictions in deductions on the wealthy, which would reduce the amount of revenue those restrictions generated. Harvard Professor Martin Feldstein, in one of the analyses cited by the Romney campaign, makes a rough estimate that a phase-in would cost about $15 billion. My back-of-the-envelope calculations roughly match that.

There is a second reason Romney needs a big surplus for his plan to work. When asked why he won't lay out a specific plan to eliminate tax expenditures, Romney consistently says it's because he can't dictate a plan to Congress and will work with legislators from a menu of options. As he said in last week's debate:

I'm going to work together with Congress to say, OK, what are the various ways we could bring down deductions, for instance?. . . . There are alternatives to accomplish the objective I have, which is to bring down rates, broaden the base, simplify the code and create incentives for growth.

There are only meaningful "alternatives" to discuss with Congress if Romney can pick and choose from a pool of tax preferences for the wealthy that far exceeds the $250 billion annual cost of his rate cuts for them. If the pool of available base broadeners is just large enough to finance his tax cuts, then Romney actually is dictating a plan to Congress: if they don't eliminate exactly the set of preferences he proposes, his plan will either have to raise taxes on the middle class or grow the deficit.

TPC finds that Romney's rate cuts, plus elimination of the estate tax and Alternative Minimum Tax, would cost the Treasury about $250 billion in revenue from high earners. If he could somehow find, say, $300 billion in base broadeners from the wealthy, $15 billion of which would have to go to a phaseout, that wouldn't leave a lot of "alternatives" on the table. Yet there aren't enough base broadeners for Romney to reach the $300 billion level, let alone exceed it.

Now, on to the six studies.

1. The strongest of the six analyses is actually one of the shortest: An October 1 blog post from Alex Brill at the American Enterprise Institute. Brill chips away at the $86 billion figure by raising three objections to the TPC study.

TPC included in its baseline Obamacare taxes, which Romney did not say he would offset ($29 billion), and did not account for the possibility of eliminating favorable tax treatment of municipal bonds ($25 billion) and life insurance ($20 billion).

I think these objections are correct with regard to life insurance and Obamacare taxes, but mostly wrong with regard to municipal bond interest, which should be counted at just $5 billion. This is because the CBO estimates that only about 20 percent of the tax subsidy for municipal bond interest actually accrues to bondholders; the rest goes to state and local governments because bondholders will accept low interest rates on government debt in exchange for favorable tax treatment.

If the muni bond tax preference were eliminated, high income taxpayers would pay about $25 billion more in federal income taxes. But they would be relieved of roughly $20 billion in implicit taxes they pay to state and local governments in the form of reduced interest rates on municipal debt, for only $5 billion in actual added taxes.

Depending on your assumptions, it may be that the remaining $20 billion in muni bond subsidies effectively flows back to owners of capital generally, though not to municipal bondholders specifically, by inflating the yields on non-tax advantaged investments. If the muni bond tax exemption were repealed and replaced with nothing, this would broaden the tax base.

However, it is politically unthinkable that the muni bond subsidy would be repealed without something, such as tax credit bonds, taking its place and producing similar market-wide effects. Consequently, only 20 percent of the proceeds from eliminating the muni bond subsidy should be counted as actual base broadening on high earners. Or if the muni bond subsidy were somehow repealed without offset, a key effect would be state and local governments raising taxes (mostly not on the wealthy) to pay higher interest costs.

In total, this leaves Brill about $32 billion short of closing the deficit in the TPC report. Since he also needs about $15 billion to structure a phaseout and tens of billions more to allow Romney to offer a real menu of options to Congress, Brill is well short of "confirming the soundness" of the Romney tax plan.

Finally, Brill appeals to the possibility of added economic growth, as do several of the other analyses I discuss below. Tax reform might well produce some added economic growth. But claims about growth induced by tax policy changes are often overstated -- remember, the 2001 and 2003 tax cuts were also sold on the promise of higher economic growth offsetting much of the revenue loss. It didn't happen.

2. The second analysis the Romney campaign cites is an August 9 blog post by Brill's colleague, Matt Jensen. Jensen didn't actually claim that Romney's tax plan was sound, he just raised some questions about the TPC report. He previewed the municipal bond and life insurance issues that Brill discussed at greater length. He also suggested that Romney might use a lower threshold than $200,000 for "high income," but Romney later excluded that possibility in an interview with ABC News.

As such, Jensen's post does nothing to bolster Romney's plan beyond the limited support it gets from Brill.

3 and 4. The Romney camp cites two analyses by Martin Feldstein: a Wall Street Journal op-ed and a blog post responding to criticism of that op-ed.

Feldstein ran the numbers and said Romney can cut tax rates by 20 percent and eliminate enough tax expenditures to balance the budget without raising taxes on the middle class. But Feldstein defines "middle class" differently than Romney does.

Feldstein allows for tax increases on people making more than $100,000. But on Sept. 14, Romney told ABC's George Stephanopoulos that he would hold people making less than $200,000 or $250,000 harmless from tax increases.

The Romney campaign, therefore, is dishonest in saying Feldstein's analyses "confirm the soundness" of Romney's tax plan. Feldstein is analyzing a different tax plan, which would allow tax increases on taxpayers making between $100,000 and $200,000. That's a large group, accounting for 24 percent of all adjusted gross income in 2009. But it's a group Romney has pledged not to touch.

5. Next up is a paper by Curtis Dubay of the Heritage Foundation. Dubay raises the same issues as Brill on municipal bond interest, life insurance and economic growth. He adds another claim: Romney would likely change the rules about capital gains tax treatment on estates, raising additional revenue.

Currently, when you die, your heirs receive a "step-up," with the value of your assets determined at the time of your death. Say you bought your home for $100,000, it was worth $200,000 when you died and your heir eventually sold it for $250,000. Your heir would only owe capital gains tax on a gain of $50,000; the other $100,000 of gains would go untaxed. This is often described as an offset for the estate tax.

Dubay assumes that, when repealing the estate tax, Romney would adopt "carry-over" basis, meaning your heir would assume the gains accrued during your lifetime and pay tax on the entire gain when he sells those assets. Dubay says this would raise $19 billion annually from people earning over $200,000.

But that's wrong. Dubay is citing a report from the Office of Management and Budget that compares the current step-up basis rules to a regime in which accrued capital gains are taxed immediately upon death. Though Dubay has protested that this isn't so, you can see it plainly in footnote 74 on page 272 of the OMB report.

I have not seen an estimate of the revenue impact of moving to carry-over basis at death, but it would surely be much less than the revenue impact of forcing the realization of capital gains at death.

6. Finally we have Princeton's Harvey Rosen, who ran his own score of Romney's tax plan and finds that, even if Romney sets his tax increase threshold at $200,000, he can more than eliminate the deficit identified by TPC. But there are several problems with Rosen's analysis, as highlighted by William Gale, a co-author of the Tax Policy Center report that sparked this discussion.

Rosen calculates the revenues needed to offset Romney's cuts to tax rates, but he does not include revenue loss due to repealing the estate tax and the Alternative Minimum Tax. And he makes very aggressive assumptions about dynamic effects, where taxpayers respond to lower tax rates by reporting more taxable income. Gale emails:

Rosen discusses and includes the effects of how taxpayers adjust their activities in response to lower tax rates (“micro behavioral” responses to tax rate cuts, which tend to reduce the revenue loss) but he neglects to include similar effects for how taxpayers respond to base-broadening measures. For example, he does not allow for the possibility that taxpayers with mortgages would likely choose to pay down their mortgages with taxable assets (and thus reduce taxable investment income) if the mortgage interest deduction were removed.

Rosen also depends on aggressive assumptions about macro-level dynamic effects, where taxes rise not because individual taxpayers report more taxable income but because the economy grows as a whole. In other words, he is depending on rosy -- and not necessarily warranted -- economic assumptions to make the numbers pencil.

There you have the six "studies" on which the Romney campaign has based its defense of Romney's tax plan. Individually and collectively they fail the task.

Finally, I would note one item that the Romney campaign does not cite in support of its tax plan: Any analysis actually prepared for the campaign in preparation for announcing the plan in February. You would expect that, in advance of announcing a tax plan, the campaign would commission an analysis to make sure that all of its planks can coexist. Releasing that analysis now would be to the campaign's advantage, helping them put down claims like mine that their math doesn't add up.

Why don't they release that analysis? My guess is because the analysis doesn't exist, and the 20 percent rate cut figure was plucked out of thin air for political reasons without regard to whether it was feasible.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)

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