On August 1st, the Tax Pol­icy Cen­ter released a study of the Rom­ney tax plan titled “On The Dis­tri­b­u­tional Effects Of Base-​​Broadening Income Tax Reform”. Fol­low­ing is its conclusion:

In this paper we exam­ine the trade­offs between rates, tax expen­di­tures, and the pro­gres­siv­ity of the tax sched­ules that are inher­ent in revenue-​​neutral tax returns. We show that plans that advance steeply lower mar­ginal tax rate struc­tures would require deep cuts in tax expen­di­tures to off­set the rev­enue losses aris­ing from low rates. Because many of the largest tax expen­di­tures ben­e­fit mid­dle– and lower-​​income house­holds, deep reduc­tions tax expen­di­tures can alter the dis­tri­b­u­tion of the tax bur­den. To illus­trate these trade­offs, we exam­ine as an exam­ple a set of tax rate reduc­tions spec­i­fied in Gov­er­nor Romney’s tax plan. We show that given the pro­posed tax rates and pro­scrip­tion against reduc­ing tax expen­di­tures aimed at sav­ing and invest­ment, cut­ting tax expen­di­tures will result in a net tax cut for high-​​income tax­pay­ers and a net tax increase for lower– and/​or middle-​​income taxpayers—even if indi­vid­ual income tax expen­di­tures could be elim­i­nated in a way designed to make the result­ing tax sys­tem as pro­gres­sive as possible.

The Rom­ney cam­paign has dis­puted this con­clu­sion; both Rom­ney and Ryan have pointed to “six stud­ies” which sup­port the Rom­ney tax plan. A blog post­ing on the Rom­ney web­site states that “six inde­pen­dent stud­ies have proven there are suf­fi­cient upper-​​income expen­di­tures to lower indi­vid­ual tax rates, pro­tect the mid­dle class, and make the tax code more pro-​​growth”. 

There has also been a great deal writ­ten out­side the Rom­ney cam­paign on these six stud­ies. Two exam­ples are a Poli­ti­Fact arti­cle titled “Ryan says six stud­ies say the math works in Rom­ney tax plan” and an arti­cle titled “Wonkblog’s com­pre­hen­sive guide to the debate over Romney’s tax plan”.

Because of the large num­ber of con­flict­ing arti­cles on the Tax Pol­icy Cen­ter study and the six stud­ies that coun­tered it, it seems that a first step was to orga­nize those arti­cles in one place. I’ve posted links to the stud­ies and related arti­cles at this web page. It con­tains the following:

  1. The orig­i­nal Tax Pol­icy Cen­ter arti­cle and some follow-​​up and ear­lier articles.
  2. The “six inde­pen­dent stud­ies” cri­tiquing the Tax Pol­icy Cen­ter arti­cle, along with arti­cles cri­tiquing spe­cific studies.
  3. Other arti­cles favor­able of Rom­ney Tax Plan.
  4. Arti­cles cri­tiquing the “six inde­pen­dent studies”.
  5. Other arti­cles crit­i­cal of Rom­ney Tax Plan.
  6. IRS Tax Data.

The IRS Tax Data is included because the Poli­ti­Fact arti­cle states that the Feld­stein and Rosen stud­ies used 2009 tax data. More pre­cisely, the ini­tial Feld­stein study states that it is “using the most recent IRS data, which is based on tax returns for 2009 and pub­lished in the cur­rent issue of the IRS quar­terly pub­li­ca­tion” and the Rosen study states that it relies on “sum­mary data from the IRS’s Sta­tis­tics of Income (SOI) for tax year 2009, the lat­est year for which such pub­lished data are avail­able”. Nei­ther give the pre­cise sources, links to it on the web, or the work by which some of their fig­ures were derived from this data. This makes it dif­fi­cult to ver­ify the data since there is a great deal of IRS data out there (as can be seen by the sources that I pro­vide). Poorly sourced arti­cles have long been a pet peeve of mine. I can’t help but think that they are poorly sourced so as to make them more dif­fi­cult to ver­ify and critique.

In any case, I was able to ver­ify most of Feldstein’s num­bers. The fol­low­ing table shows those numbers:

Pro­jected Rev­enue Gain/​Loss from Rom­ney Tax Plan
(bil­lions of dollars)

2009 IRS Data Feld­stein
Adjusted Gross Income All 100K+ 200K+ All 100K+
Income tax before credits 976 682 449 953
Div­i­dends & cap­i­tal gains *49 *49
Tax affected by rate cut 927 904
Rev­enue loss of 20% cut 185 181
Alter­na­tive min­i­mum tax 23 23
Invest­ing tax cut *15 *15
Sta­tic rev­enue loss 223 219
Dynamic rev­enue loss *190 *186
Home mort­gage interest 421 199 67
State and local taxes 252 184 113
Real estate taxes 168 88 36
Con­tri­bu­tions deduction 158 99 59
Other item­ized deductions 206 67 30
Total item­ized deductions 1,204 637 305 636
Rev­enue gain at 30% 191 91 191
Rev­enue gain at 25%|27% 159 82 159
Note: fol­low­ing are esti­mates of rev­enue loss not included above:
Estate tax elimination *21
Phase in of deduc­tion loss *15

*esti­mated by Feld­stein (else 2009 IRS data)

Sources:

In Feldstein’s Wall Street Jour­nal arti­cle, he states the following:

The key ques­tion raised by the Rom­ney plan’s crit­ics is whether this rev­enue loss can be off­set by broad­en­ing the tax base of high-​​income indi­vid­u­als. It is impos­si­ble to cal­cu­late the exact effects of the future reforms since Gov. Rom­ney hasn’t spec­i­fied what he would do. But refut­ing the Tax Pol­icy Center’s asser­tions doesn’t require that. It only requires know­ing if enough rev­enue could be raised from high-​​income tax­pay­ers to cover the $186 bil­lion cost.

A lit­tle later on, he states:

And what do we get when we apply a 30% mar­ginal tax rate to the $636 bil­lion in item­ized deduc­tions? Extra rev­enue of $191 billion—more than enough to off­set the rev­enue losses from the indi­vid­ual income tax cuts pro­posed by Gov. Romney.

So Feldstein’s basic argu­ment is that the rev­enue loss of $186 bil­lion shown in the sec­ond to the right­most col­umn above is more than off­set by the $191 bil­lion rev­enue gain shown in the right­most col­umn. The first step in test­ing this con­tention is to ver­ify Feldstein’s num­bers. I could not ver­ify the num­bers fol­lowed by aster­isks in the IRS data. How­ever, those num­bers have a rel­a­tively small effect on the final numbers.

Accord­ing the Feld­stein, the “$49 bil­lion was from tax­ing div­i­dends and cap­i­tal gains at reduced rates that would not be sub­ject to fur­ther reduc­tions”. This reduces the esti­mated rev­enue loss by $10 bil­lion. The $15 bil­lion is from “elim­i­nat­ing the tax on inter­est, div­i­dends and cap­i­tal gains for mar­ried cou­ples with incomes below $200,000, and for sin­gle tax­pay­ers with incomes below $100,000″ and increases the esti­mated rev­enue loss by that amount. Finally, the $33 bil­lion reduc­tion in the esti­mated rev­enue loss from $219 bil­lion to $186 bil­lion is due to Feldstein’s asser­tion that “past expe­ri­ence shows that tax­pay­ers do respond to lower mar­ginal tax rates by act­ing in ways that increase their tax­able incomes”. Regard­ing this asser­tion Wash­ing­ton Post colum­nist Ezra Klein says the following:

Feld­stein assumes fairly large, and very pos­i­tive, growth and behav­ioral effects from the tax cuts. But he doesn’t assume neg­a­tive effects. Most mod­els — includ­ing, as I under­stand it, TPC’s — assume that as you cut deduc­tions, tax­pay­ers who were man­ag­ing their finances to take advan­tage of those deduc­tions stop doing that. That makes the deduc­tions effec­tively worth less money, and makes it harder to pay for tax cuts.

In any case, Feldstein’s other num­bers closely match the IRS num­bers except for one. He gives the “income-​​tax rev­enue in 2009 before all tax cred­its” as $953 bil­lion. The IRS data gives this as $976 bil­lion for all returns and $950 bil­lion for all tax­able returns. How­ever, this only has an effect of $4 bil­lion on the pro­jected rev­enue loss. Even with this, the pro­jected rev­enue loss of $190 bil­lion is just cov­ered by the pro­jected rev­enue gain from base-​​broadening of $191 billion.

There are some issues with this pro­jected rev­enue gain of $191 bil­lion, how­ever. First of all, Feld­stein men­tions in his follow-​​up blog post that crit­ics have pointed out that the “30 per­cent mar­ginal tax rate is too high for these tax­pay­ers because of the 20 per­cent Rom­ney rate reduc­tion”. He then states that “using a 25% mar­ginal tax rate instead of 30% would reduce the rev­enue from elim­i­nat­ing deduc­tions by 5% of $636 bil­lion or $32 bil­lion”. This cuts the pro­jected rev­enue gain to $159 billion.

Next, Feldstein’s fig­ures are based on the idea of elim­i­nat­ing all deduc­tions for tax­pay­ers whose adjusted gross income (AGI) is $100,000 or more. But when asked about the $100,000 limit in a Sep­tem­ber 14 inter­view with George Stephanopou­los, Rom­ney said the following:

No, mid­dle income is $200,000 to $250,000 and less. So num­ber one, don’t reduce—or excuse me, don’t raise taxes on middle-​​income peo­ple, lower them.

Hence, it’s unlikely that Rom­ney would agree to elim­i­nate all deduc­tions for some­one mak­ing between $100,000 and $200,000 per year. The table shows that elim­i­nat­ing all deduc­tions for just those with incomes over $200,000 only pro­vides about $82 bil­lion in increased rev­enue. This is just 43 per­cent of the pro­jected rev­enue loss of $190 bil­lion. Hence, it would seem nec­es­sary that deduc­tions would need to be reduced severely for work­ers mak­ing between $100,000 and $200,000 per year. In addi­tion, the table above shows the key deduc­tions that would need to be severely lim­ited. They would be chiefly be the deduc­tions for home mort­gage inter­est, state and local taxes, real estate taxes, and char­i­ta­ble contributions.

Fol­low­ing are five points for Romney’s tax plan as given on his web­site:

  • Make per­ma­nent, across-​​the-​​board 20 per­cent cut in mar­ginal rates
  • Main­tain cur­rent tax rates on inter­est, div­i­dends, and cap­i­tal gains
  • Elim­i­nate taxes for tax­pay­ers with AGI below $200,000 on inter­est, div­i­dends, and cap­i­tal gains
  • Elim­i­nate the Death Tax
  • Repeal the Alter­na­tive Min­i­mum Tax (AMT)

I think that the above table strongly sug­gests that these goals can­not be achieved with­out increas­ing the deficit, even if deduc­tions are severely cut for those with incomes above $100,000. Of course, this analy­sis is not intended to be the final word on this sub­ject. Its chief inten­tion is to pro­vide links to the key analy­ses and the IRS data that is being used in some of those analy­ses so that oth­ers can judge the issues for themselves.

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