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On Taxes. I’m So Sick of Writing About Mitt Romney’s Tax Plan

October 16, 2012 Leave a comment

I think I’ve finally made sense out of the rhetoric about Governor Romney’s tax plan; of the independent reports and of the “6 reports” that disputed the first report. I think I know what’s going on. It was hidden in Romney’s answers tonight, of all places. Listening to President Obama and Romney discuss Romney’s tax proposals reminded me of the old Highlights Magazines in doctors’ office waiting rooms. There are two pictures side by side, and you have to pick out the differences. They’re subtle, but they’re there. Did you hear it? Were you listening?

Here it is. Obama talks about the tax rates for the top 2% (generally couples above $250,000; individuals above $200,000). If you cut those tax rates by 20%, as Romney proposes, then there don’t appear to be enough deductions to eliminate to make up for the lost revenue just from that bracket.

However, Romney talked about the top 5%, and maintaining the same share of the tax burden as they currently pay (about 60% of income taxes). Now, first of all, maintaining the same share of the tax burden does not rule out a tax cut if everyone else is also getting a tax cut. But that aside, the 5% versus the 2% is how they make the numbers work. If the top 5% are getting deductions eliminated, then revenue neutrality can be achieved even if the top 2% are getting a cut, paid for by reduced deductions for the 95th-97th percentiles (the next 3%).

I don’t know the general income numbers for those percentiles, but I have a hunch that it lines up fairly well with Martin Feldstein’s defense of Romney’s plan which called for eliminating deductions for all those making over $100,000 a year. And thus, if you make between $100,000 and $200,000 as an individual or the equivalent tax bracket as a couple, Mitt Romney’s tax plan is likely to hurt you. And that’s what we learned in tonight’s debate. Obama’s plan hurts the top 2%. Romney’s plan will probably help the top 2% on the backs of the next 3%. And hopefully, I’ll never write about Mitt Romney’s tax plan again.

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On How the First Segment of the Debate Should Have Gone

October 4, 2012 Leave a comment

If you watched the debate tonight, you’ll know that for what seemed like forever, Mitt Romney and Barack Obama talked in circles mostly about Romney’s tax plan and what it would or wouldn’t do to various groups of people. It started out with Barack Obama mentioning some numbers that various independent analyses have estimated based on the general premises put forward by Mitt Romney. It went on into what looked like Obama endlessly harping on numbers and facts that Romney had already shot down quickly and with acuity. Without regard as to who was right and who was wrong, the segment (and many others) clearly looked to be “won” by Romney. But before we dig into what happened/should have happened tonight, a little background is in order.

Background

The general premises of Romney’s tax plan as it has been previously outlined are as follows: he will cut rates 20% across the board (that is lower each bracket to 4/5s of its current rate); he will close loopholes and eliminate/limit deductions in order to make up for lost revenue; he will promote growth through benefits to job creators; he will not raise taxes on the middle class.

The primary independent analysis of this generalized plan found the following: that the plan would cost $5 trillion in revenue over the next ten years; that you could not eliminate enough deductions to prevent this from resulting in a tax cut for the upper class; and that the plan would either result in increases in taxes to the middle class (through deduction eliminations that exceed their rate cuts) or abandon the goal of revenue neutrality, thus expanding the deficit.

A refute of that analysis stated that the math could be made to work… if you define upper income as $100,000 or more, then those below it will see no tax increase, and those above it will be revenue neutral; of course that would be accomplished by increases for many of those making between $100,000 and $200,000 and decreases beyond that point.

It’s all complicated and full of assumptions and guesses, mostly because the plan has not been made specific enough to be accurately scored.

The Debates

Again, Barack Obama referenced the numbers from the analysis, especially the $5 trillion in lost revenue going mainly to the rich and the potential for an increase on middle class taxes. Then, Mitt Romney claimed that he would do no such thing. Romney claimed that he would not create a net reduction for upper income tax payers, and he would not enact any plan that would lose revenue once accounting for growth (I have a feeling that his growth assumptions are likely a bit fudged, but everyone gets to make assumptions). What followed was a mercilessly long back-and-forth during which Obama said “$5 trillion” at least three more times, and Romney cleverly and repeatedly made the case that no one can say what his tax plan will or will not do because it’s his plan and he will only enact a plan that does none of those things. It was difficult to watch and it should have exposed some gigantic holes through which Obama could have jumped, but didn’t.

What Should Have Happened

Let’s pick up after Romney said that any tax plan he enacted would not reduce taxes on the wealthy, would not increase taxes on the middle class and would remain revenue neutral (not cost any money). Here’s a potential Obama response:

“Ah, this is one of those etch-a-sketch moments. Look, it’s easy to look good in a debate when you argue for a plan that is completely different than the one you’ve been proposing all along. For months, we have heard you talk about helping the wealthy–you call them ‘job creators,’ and many of them are. But we know what you mean: you mean the wealthy, and you have always touted that your plan would give back to them. For months, you have stated that your plan was to cut tax rates across the board by twenty percent and make up for the lost revenue through undisclosed loophole and deduction elimination. Well, that math didn’t work out very well–it couldn’t be done. Now, you are telling us that whatever plan you enact will be one in which the math works. So let’s hear it. You’ve had more than enough time, Governor, to come up with a plan that adds up and to share it with the American people. If you want to change your plan now, for this debate, on national television, why not give us the details, and I’ll debate them.”

Romney’s response likely would have involved several of the things that he actually did say during the circular clusterfudge of dialogue. They probably would have included that many papers came out to dispute those studies, that the math did work, and that he isn’t changing his tune. In the name of specifics, he likely would have trotted out exactly what he said in the real-world debate: “one way, for instance, would be to have a single number. Make up a number — 25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people. That’s one way one could do it. One could follow Bowles-Simpson as a model and take deduction by deduction and make differences that way.”

And then Obama could respond: “I understand that there are various reports that say various different things about Governor Romney’s tax plan and the numbers. I’ve read them, too. The ones that make Governor Romney’s math work do so by declaring those who make over $100,000 as part of the upper class, not the middle class. Now I don’t know about you, but I think that a lot of Americans making $100,000 would still consider themselves part of the middle class. A lot of them are stretched a little thin.

“I also want to point something out, and it’s important. I’ve noticed that Governor Romney talks a lot about the things that he will do or he won’t do. He says unequivocally that he will not raise taxes on the middle class. That he will repeal Obamacare ‘on day one.’ However, whenever he is asked for specifics, he doesn’t talk about himself anymore, and he doesn’t talk in absolutes. On taxes, he says ‘one could create a cap on deductions,’ and ‘one could follow Simpson-Bowles.’ He never commits himself to doing anything. He never reveals his true intentions. He doesn’t state that something should happen or will happen, but just that it could happen. Again, Governor Romney, you’ve had more than enough time to come clean with the American people on your tax plan. Do you keep the details of your plans secret because they’re too good? Is — is it because that somehow middle-class families are going to benefit too much from them?”

That last piece of sarcasm was actually an Obama quote, but I felt like when he used it nearly two-thirds of the way through the debate and mired in a rambling health care answer, it lost some of its punch. If it was a closing line in the opening segment, maybe it carries a little more weight. But what do I know?

Anyway, I was frustrated with this exchange. I thought Romney basically equivocated his way around the tax discussion and turned it into a debate about whose numbers you believe. I think that Obama should have made it about the lack of specifics and played on the tendency of Romney to say different things about his plan to different people, making him seem wishy-washy at best, pandering and dishonest at worst. That wasn’t the only part of the debate that went poorly for Barack Obama. Hopefully soon, I’ll discuss what a failure his answer about the role of government was, and lay out my own.

On Taxes and Theories

April 16, 2012 1 comment

There’s a popular theory about taxes and economic policy that has been so effectively espoused (primarily by Republicans) since the early 1980s that it has been accepted as fact to many in America. It’s a pretty simple theory: lower taxes equal higher growth; higher taxes equal slower growth.  It’s a pretty common sense theory.  It’s based on sound mathematics.  I’m an economics major, myself. I’ve personally done multiple calculus problems that indicate that higher taxes are bad and lower taxes are good.

However, those math problems are extremely limited, and their results are theory, not fact.  You see, in basic economics, incomplete models are used. Models that are based on a lot of assumptions about reality that rarely hold true. I’m not saying that economists are hacks. Heck, I’m spending thousands of dollars in order to become a bit of one, myself.  What I am saying, however, is that math problems give you models and theory. Observations give you evidence and facts.  And it doesn’t take a very thorough examination of the evidence to see that this theory is not even close to a universal truth.

Take a look at this chart for instance.


I’m sorry if you have to click on it or zoom in for clarity, but it’s pretty simple. The top line is the top tax rate at the time.  The bottom line is the economic growth in terms of GDP adjusted for inflation. The GDP data comes from the World Bank and the historic tax rates come from the Tax Policy Center.

What you’re looking for here is how changes in the tax rate–the top line–affect changes in the growth rate–the bottom line. Anything above zero on the lower line represents economic growth. You’ll see that in the 1960s, the tax rate was anywhere between 70 and 91%. That’s astromonically high, and yet throughout the 1960s, there was positive economic growth.  The 1970s are a bit trickier, as the energy crisis hit in the middle of the decade.  But aside from that, you’ll see that on either side of the energy crisis downturn, growth was positive and high, despite high tax rates.  The 1980s are interesting. The first round of massive tax cuts under President Ronald Reagan did indeed fuel a jump in economic growth.  The second round, in 1986, however, seemed to have the opposite impact, as they were followed almost immediately by an economic slowdown.  In the 1990s, the tax rate went up, and so did economic growth. And finally, in the 2000’s, tax rates were again lowered, and the economy did not experience growth.

Here’s a quick and easy breakdown by decade. Notice that despite MUCH higher taxes, the average annual growth rate was higher in the 1950s and 1960s than it has been since.

Of course, there are other factors at play than just tax rate. But it’s pretty clear that the cut-and-dry relationship of “high taxes: bad, low taxes: good” simply does not exist. My own theory is that the idea of lower taxes and higher growth applies at some levels and then reaches a point of diminishing returns (economists love diminishing returns). This just means that when the tax rate was very high, a drop in taxes did, in fact, spur growth.  However, as the rate was lower, you could achieve less growth via a cut–and it possibly could get to the point at which lowering taxes actually inhibits growth (this is because it leads to higher deficits, but I won’t get into all of that). This might explain why, in the 1960s and 1970s, tax cuts and tax hikes do indeed appear to match up with growth spikes or growth slow-downs, but after the 1980s, when the tax rate had already been lowered beyond its useful level, the correlation between tax rate and growth rate seems to evaporate.

I don’t want this to get too wonky or bore readers with charts and numbers like an old Ross Perot campaign video. But I do want to present this simple economic history as a counter to the prevailing belief in the aforementioned economic tax theory. While my data does not conclusively prove any specific relationship between tax rate and growth rate, it does conclusively disprove the rhetoric that economic growth will be slow or negative if tax rates are high and that lowering tax rates will automatically lead to greater economic growth.

I’m not suggesting that the tax rates should go back up to 70% or anything. But when a country is experiencing this amount of debt and deficit while collecting a historically low amount of tax revenue (as a percentage of GDP), I think it is worth putting out there that the benefits of lower taxes are not as advertised, and the detriments of higher taxes may be incorrect or exaggerated, as well.

So the next time you hear a Republican tell you that evolution is “just a theory,” make sure he or she knows that their party’s tax policy is just a theory, as well–and unlike evolution, the tax policy theory is defied by the facts rather than supported by them.

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