Mitt Romney's Tax Plan

William Gale and colleagues look at a tax plan with Romney characteristics -- they can't score the actual plan precisely, because it's too vague -- and are decidedly unimpressed.

Our major conclusion is that a revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed - including reducing marginal tax rates substantially, eliminating the individual alternative minimum tax (AMT) and maintaining all tax breaks for saving and investment - would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers. This is true even when we bias our assumptions about which and whose tax expenditures are reduced to make the resulting tax system as progressive as possible. For instance, even when we assume that tax breaks - like the charitable deduction, mortgage interest deduction, and the exclusion for health insurance - are completely eliminated for higher-income households first, and only then reduced as necessary for other households to achieve overall revenue-neutrality- the net effect of the plan would be a tax cut for high-income households coupled with a tax increase for middle-income households.

It's even worse than it looks, because Romney's plan is being measured here against a "current policy" baseline (in which the Bush tax cuts are extended). If it were measured against a "current law" baseline, it would look even more regressive--and it would also fail to be revenue neutral.

Paula Dwyer writes a nice column on the findings. I agree with her conclusion. Romney's plan looks "both politically infeasible and mathematically pie-in-the-sky."

I'd add one point, though. It'd be a pity if Gale et al's analysis taints other plans that do what Romney's plan aims to do -- namely, cut rates and broaden the base. That's still a good basic strategy, as Gale has noted. And done right, it can make the tax system more progressive.

The BPC Rivlin-Domenici plan cuts marginal rates, broadens the base and, according to the Tax Policy Center, "is more progressive than either current law or current policy". The Simpson-Bowles plan also cuts rates and broadens the base. Progressivity in that case depends more on choice of baseline and which S-B variant you go for, but the S-B options include plans that are more progressive than current policy. Both approaches, though still politically challenging, are therefore not just better than Romney's but more feasible as well.

A big difference between BPC and S-B on one side and Romney on the other is the treatment of tax preferences for investment income. Romney proposes to retain preferences for dividends and capital gains. BPC and S-B tax them as ordinary income.

In short, don't rule out "cut rates and broaden the base" on grounds of progressivity, just because Romney screwed it up. It's still the right approach.

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