The Tax Plan Could But Probably Will Not

Martin Feldstein has an article published in the August 29, 2012 edition of the Wall Street Journal written under the title: “Romney's Tax Plan Can Raise Revenue” and the subtitle: “IRS data show that limiting deductions for high earners would more than cover the dollars lost by reducing income-tax rates 20% across the board.” The thing to say about this piece is that even if the assumptions in it are correct, why go through so much trouble only to reap so little in return? But there is more than that.

The first that Feldstein does is point to the criticism leveled against the Romney plan by the people whose judgment is based on calculations done by the Tax Policy Center about which he says this: “Such forecasts are inevitably speculative.” And he goes on to say that the careful analysis which he conducted proves otherwise. The point being that a reduction of all individual income-tax by 20 percent is preferable to keeping in place the Alternative Minimum Tax, the estate tax, the tax deductions and loopholes that allow high-income taxpayers to reduce their tax payments – he sets out to provide the proof.

To this end, he uses “the most recent IRS data, which is based on tax returns for 2009.” Applying the 20 percent reduction to the $904 billion of tax credits (which excludes dividends and capital gains,) he arrives at the figure of $181 billion. This would be the “static” cost to the IRS of the Romney reduction.

But having called the calculations of the Tax Policy Center speculative, he now does a little speculation of his own, and continues with the analysis to make a comparison. He says this: “past experience shows that taxpayers do respond to lower marginal tax rates by acting in ways that increase their taxable incomes … More specifically, history shows that a tax cut that raises the after-tax share of earnings an individual keeps by 10 % raises taxable income by about 5%.” From this, he deduces that the actual tax loss to the IRS will only be $148 billion, not the 181 billion mentioned earlier.

Well, I'm sorry Mr. Feldstein, but if you don't accept the speculation of someone else, you cannot ask someone else to accept your speculation. Still, he goes on with the argument by adding 38 billion dollars to the loss of revenue due to the elimination of the Alternative Minimum Tax and the tax on interest, dividends and capital gains. This brings the total loss to the IRS back to the $186 billion level.

This done, he asks if enough revenue can be raised to offset this loss. And he answers the question starting with a caveat: “It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn't specified what he would do.” And so, Feldstein goes on to calculate the value of that offset because “refuting the Tax Policy Center's assertions doesn't require that.” But refuting the assertions of the Center is not the essence here. What is important is that without knowing what the future reforms will be “it is impossible to calculate the exact effect” as he says himself.

No matter. He does the calculations anyway based on the gross income of taxpayers who earn between $100,000 and $200,000 (the middles class) as well as the taxpayers who earn an income higher than $200,000 (the upper class.) If everybody paid 30 percent, he says, instead of the first group paying between 25 percent and 35 percent, and the second group paying between 33 percent and 35 percent -- which is now the case -- the revenue to the IRS will be an extra $191 billion dollars. That is, the upper class will contribute nothing while the middle class will pay the total cost. And this $191 billion gain will more than offset the $186 billion loss to the IRS.

Thus, with all the caveats and the assumptions, the Romney plan proves to be revenue neutral, says Feldstein, but even then, such will not be his personal preference because he believes that: “This does not mean eliminating all deductions.” Instead, what he wants to see done is “retain all deductions but limit their total tax benefit to a moderate percentage of each taxpayer's adjusted gross income.” And he gives examples.

The man has a heart, after all – more or less. But why go through so much for so little when what is needed is a complete overhaul of the entire system?