The Obama and Romney tax plans: more background

As shown by my previous post “The Romney and Obama tax plans: West Chester 8/3/12,” taxes have risen to the top of campaign issues, thanks in part to the recent report by Tax Policy Center

Another reason Romney is on the defensive about taxes, at least among the 99%, is his reluctance to release his own tax returns, as he actually has been challenged to do since his rivals for the Republican nomination raised the theme half a year back. 

Furthermore,  for the one year he did release a final tax return (2010), he paid a markedly lower tax rate, 13.9% of taxable income, than most of us.  I’m going to look at that in a separate post.

It is easy to see why Romney would rather not talk in any detail about taxes, whether his own or everyone else’s. 

The underlying points of the debate which Romney would rather not have seem, to me at least, pretty clear:

1) Romney and the rest of the top .01% (as dramatized by Warren Buffett) have their ways to pay a lower tax % than most of us.

2) Obama and the Democratic leadership plan to preserve the Bush tax cuts except that on incomes over $250,000 tax would revert to the historically modest pre-Bush Clinton-era rate.  (Personally, I don’t see why they don’t propose more tax brackets, beginning at, say, $250,000, $500,000, and $750,000, to put in more gradations for people who really are not millionaires.) I say “historically modest because here are the top marginal tax rates, 1913-2011, from “Income Tax in the United States,” Wikipedia:


3) Romney and Republican leadership want to maintain tax cuts on the wealthy (which of course are worth a lot more dollars to them, as a percentage of much higher incomes than everyone else) and in fact want to expand those cuts through measures like even lower capital gains taxes and estate taxes (they mostly don’t dare say that publicly now, but just wait and see if they win).

4) As when Ronald Reagan launched the current surge in income disparities in the 1980’s, Romney points to supposedly resulting economic growth, known as supply-side economics (or, less neutrally, “trickle-down” or, in George H. W. Bush’s memorable 1980 term, “voodoo economics”) to justify further widening income and tax rate disparities.

5) If the government collects less from the wealthy, it either needs to collect more from everyone else or lower expenses.

On the last point, which is the real bottom line, the DLN article mentions the Romney argument:

“Lanhee Chen, policy director of Romney For America… said the study only analyzed half of Romney’s proposed plan while ignoring reforms that would make American corporations more competitive by lowering the corporate tax rate. Chen asserted the study ignores the potential economic benefits that would result from growth promoted by the Romney plan.

In that scenario, the government collects more because collecting less from corporations (and the wealthy individuals who, like Romney, derive their income largely from the corporations) expands the economy and everyone will have more income and pay more total taxes painlessly and no one will mind.

As quoted in Pat Garafolo, “Romney’s Economic Plan Would Kill 360,000 Jobs In 2013 Alone,” ThinkProgress, 8/3/12:

“Yesterday, I launched my Plan for a Stronger Middle-Class that will bring more jobs and more take home pay. My plan will turn things around and bring the economy roaring back, with twelve millions new jobs created by the end of my first term,” Romney said.

Those of us old enough to remember will be reminded of Richard Nixon’s “secret plan” to end the war in VietNam.

Like the article just quoted, Pat Garafolo, “FLASHBACK: Romney Economic Advisers Predicted Bush Tax Cuts Would Lead To Huge Job Growth” at Alternet, 8/4/12, shows that Romney’s claims that making the rich richer will rapidly boost the economy is a rerun of the same fallacious claim made by George W. Bush.

The underlying report, Adam Hersh and Sarah Ayres, “Assessing the Romney Economic Plan: Do You Believe in Miracles? History Says You Shouldn’t,” Center for American Progress Action Fund, 8/3/12, shows that the same economic advisers who gave Romney his number — including Greg Mankiw and Glenn Hubbard — estimated that the Bush tax cuts would lead to massive job growth:

Back in 2001, as chairman of President Bush’s Council of Economic Advisers, Hubbard predicted that tax cuts slanted disproportionately to Americans in the topmost tier of income and wealth distribution would “quickly deliver a boost to move the economy back toward its long-run growth path,” starting with adding 300,000 more jobs and half a percentage point to the 2002 growth rate….

The accompanying chart shows it graphically:

That turned out well, didn’t it, with deficits, deregulation, and the Great Recession beginning in December of 2007?

On the charge that Romney’s plan would cost PA middle class families (those with children, to be precise) $2,000 a year, see the Obama-Biden site. The same site also shows $3,549 as “The tax savings of a typical family during President Obama’s first term” (to be divided, presumably, by 4 years, so about $900 a year).

See also the short video on YouTube dramatizing “The New Tax Calculator: President Obama’s Plan vs. Mitt Romney’s.” You can enter your own income and number of dependents in the “tax calculator“. Of course, it has to be based on rough averages. It’s rather entertaining to keep upping your income to see where Romney’s plan gives you a bigger advantage (hint: if you are reading this, that will not be your real income).

Since Romney has been very guarded about tax policy details, I’d assume that the Obama “tax calculator” has to use assumptions like those that underlie the much-cited Tax Policy Center report, impetus for the current round of tax plan rancor.  Here is the summary from the Tax Policy Center (where you can download the full report, which is rather good reading):

On the Distributional Effects of Base-Broadening Income Tax Reform

Samuel Brown, William G. Gale, Adam Looney
Published: August 01, 2012

This paper examines the tradeoffs among three competing goals that are inherent in a revenue-neutral income tax reform—maintaining tax revenues, ensuring a progressive tax system, and lowering marginal tax rates—drawing on the example of the tax policies advanced in presidential candidate Mitt Romney’s tax plan. Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.

The authors adopt the “share-of-the-pie” theory (if the rich pay less, the non-rich pay more) rather than the “ever-increasing pie” theory (if the rich pay less, everyone gets richer).

As the authors state right at the beginning, with regard to achieving revenue neutrality (i.e., neither increasing nor decreasing income tax revenue to the feds: “We do not score Governor Romney’s plan directly, as certain components of his plan are not specified in sufficient detail, nor do we make assumptions regarding what those components might be.”  So, back to Gov. Markell: If a proposal isn’t specific, how can we evaluate it and why should anyone pay any attention to it?

How about the “ever-increasing pie” theory?  The authors “show that even with implausibly large growth effects, revenue neutrality would still require large reductions in tax expenditures and would likely result in a net tax increase for lower- and middle-income households and tax cuts for high-income households.”

Naturally, the proposed tax cuts would reduce federal revenue:

In this exercise, we estimate by how much tax expenditures would need to be reduced to maintain current revenues given the tax rates specified in presidential candidate Mitt Romney’s tax plan as described on his campaign website. would extend the 2001-03 tax cuts, reduce individual income tax rates by 20 percent, eliminate taxation of investment income of most taxpayers (including individuals earning less than $100,000, and married couples earning less than $200,000), eliminate the estate tax, reduce the corporate income tax rate, and repeal the alternative minimum tax (AMT) and the high-income taxes enacted in 2010’s health-reform legislation. We estimate that these components would reduce revenues by $456 billion in 2015 relative to a current policy baseline.

The devil is in the assumptions–which the authors have to make because Romney does not reveal his.  Trying to fill in what Romney really intends, based on evidence to date, the authorize summarize their argument as:

… the proposed reductions in individual and estate taxes specified in Governor Romney’s plan would decrease federal tax revenues by $360 billion in 2015. These tax cuts predominantly favor upper-income taxpayers: Taxpayers with incomes over $1 million would see their after-tax income increased by 8.3 percent (an average tax cut of about $175,000), taxpayers with incomes between $75,000 and $100,000 would see somewhat smaller increases of about 2.4 percent (an average tax cut of $1,800), while the after-tax income of taxpayers earning less than $30,000 would actually decrease by about 0.9 percent (an average tax increase of about $130) due to the expiration of the temporary tax cuts enacted in 2009 and extended at the end of 2010.

As the report details, making up for the lost revenue would entail really far-reaching changes, like cutting out tax deductions and credits for home mortgage interest, charitable donations (first for the wealthy), dependent children, and the American Opportunity tax credit for higher education (the one Karen Wilson-Lynch was praising).  I hate to think of the screams from parents, home-owners, and non-profit institutions!  As the report notes, such changes may not be “politically realistic.”

Without “base broadening” (i.e., without taking away deductions and credits), here is what the authors’ estimates look like:

How about cutting government services? There’s the rub. I’d cut military expenses, which are almost equal to those of the rest of the world put together, but politicians wouldn’t. Some would cut social programs, but that will be embarrassing at a time when US poverty is about to rise to the highest since the 1930s. Cut Social Security, Medicare, and Medicaid? That will be popular! Really, because of extreme partisanship, rampant distrust, and legislative gridlock, Congress and the Senate won’t agree on anything unless the November election produces one-party domination, such as we have
in Harrisburg (and see how well that is working out).

The whole tax debate reminds me of the cartoon of two down-at-the-heel looking guys in a bar.  One says: “I’m for lowering taxes on the rich, because I plan on winning the lottery.”

In the current situation, that guy in the bar should be saying: “…because I plan to become head of a major hedge fund and run for president.”  The other would say: “Wouldn’t you need to plan to be son of the head of General Motors first?”

Well, it’s too late for that, for most of us, isn’t it?

Sometimes I think that all we have left, in the current political impasse, is our sense of humor.

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About politicswestchesterview

Nathaniel regards himself as a progressive Democrat who sees a serious need to involve more Americans in the political process if we are to rise to Ben Franklin's challenge "A republic, madam, if you can keep it," after a passerby asked him what form of government the founders had chosen. This blog gives my views and background information on the local, state, and national political scenes. My career in higher education was mainly in the areas of international studies, foreign languages, and student advising, most recently at Franklin & Marshall College in Lancaster, from which I retired in 2006. I have lived in West Chester since 1986.
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One Response to The Obama and Romney tax plans: more background

  1. Pingback: The Obama and Romney tax plans: more background | tahir61

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