I am happy to lend this infinite to my Harvard colleague Martin Feldstein. -- Greg
Feasibility of the Romney Tax Plan – Reply to Comments
Martin Feldstein
This annotation is a reply to those who commented on my August 28 WSJ article (available here) about the Romney Tax Plan. The Romney income taxation excogitation includes a 20% cutting inwards all private taxation rates, eliminating the AMT, as well as eliminating the taxes on interest, dividends as well as upper-case missive of the alphabet gains for those alongside incomes nether $100,000. The resulting revenue loss is balanced inwards the excogitation past times broadening the taxation base of operations for high-income taxpayers.
The Tax Policy Center (and others citing their report) claimed that the Romney excogitation is “mathematically impossible” as well as that the excogitation would inevitably Pb to a large oculus cast taxation increment or a ascension inwards the budget deficit.
I flora that that determination is non correct. It is possible to cutting taxes every bit Gov. Romney indicates as well as to finance it alongside base of operations broadening for taxpayers alongside AGI over $100,000. Governor Romney has non specified the base of operations broadening that he would propose. My calculations presented hither as well as inwards the WSJ are non estimates of the Romney excogitation but an indication that such a excogitation is feasible.
For the WSJ article I analyzed the most recent published IRS information (for 2009). The toll of the Romney proposed taxation cuts would live $219 billion inwards that twelvemonth alongside no behavioral response (the “static estimate”) or $186 later on a $33 billion reduction inwards toll caused past times the behavioral response to lower marginal rates (with an elasticity of the taxation base of operations alongside abide by to the net-of-tax portion of 0.5.) Those IRS information also implied that eliminating all deductions for taxpayers alongside AGI inwards a higher house $100,000 would increment the taxation base of operations past times $636 billion. I multiplied the $636 billion past times a xxx percentage marginal taxation charge per unit of measurement for the high-income taxpayers, implying $191 billion of extra revenue. That would live plenty to finance the $186 billion revenue loss. All taxpayers alongside AGI below $100,000 would bring taxation cuts as well as no taxation increase. I concluded that fifty-fifty without farther base of operations broadening the excogitation is viable as well as would non demand either a oculus cast taxation increment or a ascension inwards the budget deficit.
The critics of my WSJ slice raised iv objections: (1) The xxx percentage marginal taxation charge per unit of measurement is besides high for these taxpayers because of the 20% Romney charge per unit of measurement reduction. (2) The behavioral response (reducing the toll of charge per unit of measurement reduction past times $33 billion) is besides large because the elasticity of the taxation base of operations would live lower than the 0.5 I assumed. (3) Applying the base of operations broadening to those alongside incomes inwards a higher house $100,000 would exercise a “notch” alongside a bound inwards taxation liabilities nigh that level. (4) The Tax Policy Center defined the oculus cast every bit all taxpayers alongside incomes nether $200,000 piece I used $100,000.
While I withal believe the assumptions that I used inwards my analysis, I tin give the axe modify them every bit suggested past times the critics as well as withal back upwardly my master determination past times broadening the taxation base of operations inwards ways suggested but non developed inwards my WSJ piece. Eliminating a few of the “tax expenditure” exclusions as well as credits that are of import for high-income taxpayers would heighten to a greater extent than than plenty revenue to compensate for assuming a smaller marginal taxation rate, cutting the behavioral response upshot inwards half, as well as phasing inwards the base of operations broadening for individuals alongside incomes over $100,000 to avoid the notch.
More specifically, using a 25% marginal taxation charge per unit of measurement instead of 30% would trim back the revenue from eliminating deductions past times 5% of $636 billion or $32 billion. Cutting the behavioral response inwards one-half (i.e., using a taxable income elasticity of only 0.25) would heighten the toll of the taxation cutting past times $17 billion. The toll of the “phase in” would depend on only how it was done but enjoin some other $15 billion of reduced revenue. So instead of my determination that the revenue from eliminating deductions would plough over the toll of the taxation cuts past times $5 billion, these assumptions would imply a shortfall to live made upwardly past times other base of operations broadening of $64 billion.
One usage of that broadening could live eliminating the exclusion of employer payments for wellness insurance for those alongside AGI over $100,000. That would increment income taxation revenue past times virtually $40 billion (out of the full revenue loss from the wellness insurance exclusion for all taxpayers of $168 billion) plus an additional $10 billion of additional payroll taxation revenue. (My gauge of this $40 billion is based on an imputation method developed past times John Gruber based on information collected inwards the Medical Expenditure Panel Study.)
Eliminating the exclusion of municipal bond involvement for taxpayers alongside AGI over $100,000 would increment taxation revenue past times an additional $15 billion.
Eliminating the child credit for those alongside incomes over $100,000 would increment revenue past times an additional $10 billion.
So only those 3 changes to the listing of base of operations broadening measures would heighten $75 billion or to a greater extent than than plenty to plough over the $64 billion of potential shortfall alongside the really conservative assumptions noted above.
Additional taxation revenue could live raised without reducing incentives to relieve or to invest efficiently past times eliminating the exclusion for high-income taxpayers of such things every bit upper-case missive of the alphabet gains on abode sales, the “cafeteria plan” benefits, as well as the upper-case missive of the alphabet gains at death.
One farther dot on the appropriate marginal taxation charge per unit of measurement (objection 1 above): although the superlative statutory charge per unit of measurement is 35 percent, the effective superlative marginal taxation charge per unit of measurement is higher because of diverse phase-out provisions that ship on high-income taxpayers (PEP, Pease, etc.) as well as thus my master supposition of a xxx percentage marginal taxation charge per unit of measurement could live appropriate fifty-fifty alongside the Romney charge per unit of measurement reductions.
The concluding objection is to my usage of the $100,000 score to exhibit that the oculus cast (i.e., those below $100,000 AGI) would sense no taxation increases. The $100,000 score corresponds to 21 percentage of all taxable returns as well as a significantly smaller fraction of all households. I intend it is really reasonable to enjoin that people inwards that high-income grouping are non the “middle class.” The TPC focus on those alongside AGI over $200,000 limits that grouping to the superlative iv 1000000 taxpayers who are 3 percentage of all returns as well as v percentage of all taxable returns.
So I intend my determination stands: it is viable to combine taxation cuts as well as base of operations broadening every bit Governor Romney suggests without raising the budget deficit or imposing whatsoever oculus cast taxation increase. Critics mightiness non similar the Romney excogitation but they cannot telephone band it “mathematically impossible.”
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