Let us abide by the Constitution as it is written or amend it in the constitutional mode if it is found defective. — President Andrew Jackson, Farewell Speech, March 4, 1837

Taxes and the Economy: Games People Play

October 9, 2012   ·   By   ·   0 Comments

taxes“The average middle-class family with children would pay about $2,000 more. Now, that’s not my analysis; that’s the analysis of economists who have looked at this.”

That was how Barack Obama described Mitt Romney’s tax plan to millions of potential voters at the Oct. 3 presidential debate, leaning on a study from the Tax Policy Center that accused the former Mass. governor of secretly planning to increase taxes on the middle class.

The report assumes that Romney would resort to increasing taxes on middle-income families to meet his pledge not to add to the deficit rather than cut spending or through some other means in executing his plan to cut taxes — something Romney flatly contested at the debate.

“I will not, under any circumstances, raise taxes on middle-income families. I will lower taxes on middle-income families,” Romney said at the debate.

To be certain, as even the Tax Policy Center notes, Romney’s plan would lower everyone’s tax rate by 20 percent: 10 percent bracket would be reduced to 8 percent, 15 to 12 percent, 25 to 20 percent, 28 to 22.4 percent, 33 to 26.4 percent and 35 to 28 percent.

So, where does the claim come from? How can a plan to lower rates result in net tax increases on those with middle incomes?

Said the study, “In order to form a revenue neutral plan, the proposed revenue reductions from lower rates must be financed with an equal-value elimination or reduction in available tax preferences.” Because, well, just because.

Here, the Center is claiming there are not enough loopholes and deductions on those with upper incomes that can be eliminated to offset revenue lost from lowering rates on everyone. But even if that were so, that might result in higher deficits before other considerations were made, not higher taxes.

Which might mean that Romney would have to work harder to find offsetting spending cuts or other tax reforms to keep his proposal deficit-neutral. But it hardly triggers some sort of automatic tax hike on the middle class.

The Center is also assuming that eliminating certain tax “expenditures,” a Washingtonian euphemism for welfare transfer payments that result in 64.7 million Americans receiving more in tax refunds than they pay in income taxes, would somehow be a tax increase. It isn’t, it would be a spending cut.

The Center and in extension Obama also discount the effects that more economic growth and higher employment would have in boosting federal revenues: “even with implausibly large growth effects, revenue neutrality would still require large reductions in tax expenditures.”

This assumes a somewhat static situation where the economy does not change very much as a result of Romney’s lower rates. No economic recovery. No jobs recovery. And therefore, no recovery in revenues based on unemployment dropping and more people paying taxes.

But for every job created earning, say, an unadjusted $50,000, deficit-affecting federal income and payroll tax revenues could increase by about $7,500. If the policy resulted in 10 million new jobs created, that could bolster federal revenues by $75 billion a year.

Now, would that offset the revenue effect of Romney’s lower rates? Probably not. Romney wants to cut individual income tax rates — which took in $1.091 trillion last year — by 20 percent. If that resulted in 20 percent less revenue from existing taxpayers, the offset needed from new taxpayers or spending cuts would total $218 billion.

Using the math above, that means the answer lies somewhere in between 29 million new jobs being created and $218 billion of spending cuts to keep Romney’s deficit-neutrality promise for his tax plan.

Romney will have a lot less control over how many jobs the economy produces if he is elected anyway. So, a simple principle could be adopted: assume no jobs growth and just cut the $218 billion out of the budget. We’re spending too much anyway.

But to take all of the above and assume that Romney would meet a funding shortfall by increasing taxes on some of those hurting the most in this economy is simply a willful lie and purposeful distortion of his plan.

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Robert Romano is the Senior Editor of Americans for Limited Government (ALG) News Bureau. Americans for Limited Government is a non- partisan, nationwide network committed to advancing free market reforms,private property rights and core American liberties.
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