Before last week’s Presidential debate, I thought that Romney’s tax plan didn’t make sense. He said that he wanted to cut tax rates across the board by 20% and yet he also claimed that it would be revenue neutral because he would eliminate deductions and close loopholes that would make up for the lost revenue caused by the rate cut. Now I am well aware that several studies have suggested that this cannot be done; that is, that you can’t cut rates by that much and make up the lost revenue by eliminating deductions and loopholes because there just isn’t enough money to be saved even if all deductions and loopholes were eliminated. This is a sound criticism. However, I had a different concern and that is that this whole plan didn’t make sense. That is, I didn’t see the logic of it. Presumably, I thought, the reason you cut tax rates is to let people keep more of the money that they acquire. And there might be various reasons for this: claiming that doing so is fairer, that it will stimulate the economy, that it will reduce the size of government. But Romney’s plan, if it is revenue neutral, won’t put more money in the hands of American consumers. Sure, some people might end up paying less in taxes, but, if the plan is revenue neutral, this would require that other people end up paying more. But after Romney’s plan is implemented, it seems that, overall, the government will still be taking the same amount of money from American consumers as before. If the government is still taking the same amount of money, how would that stimulate the economy? How would that be fairer? How would that reduce the size of government? For example, I don’t know why we should think that any stimulative effect would occur unless we thought that, overall, American consumers would keep more money. But if the plan is revenue neutral, how does this happen?
I think that the only answer to my concern is to agree that the rate cut will reduce the amount paid in federal taxes (and thus reduce the income of the federal government) but that this reduction will only be temporary because this very reduction in the amount of money paid to the government will stimulate the economy to the extent that the government will ultimate end up with more tax income (because more people will be employed, e.g.). I suppose this is fine, except for the fact that the studies that I mentioned earlier have also suggested that even if you assume a large stimulative effect, you still can’t make the plan revenue neutral.
In the debate, Romney said that he rejects those studies and that he will not support a plan that is not revenue neutral. But he also said that he wants to cut the tax rates across the board. He has been criticized for not offering specifics about how he would accomplish this, and he deserves that criticism. But notice that, regardless of the details of his plan to stimulate the economy via tax cuts, the plan requires that some people pay less money to the federal government in taxes than they previously had and that, in aggregate, the government takes less money in taxes than it previously had (at least at the outset). This is the only way to put more money in the pockets of consumers and job-creators who could stimulate the economy.
So the perhaps somewhat simple-minded concern that I had last week before the debate was why would you want to pass a tax-cut that is revenue neutral? Why cut all these rates if, at the end of the day, people are still going to be paying the same amount in taxes (since their deductions will have been eliminated or lowered) and the government will still be taking the same amount of money from American consumers and job-creators? What is the point of shuffling things around like this?
In the debate, Romney answered my question directly:
And number three, I will not, under any circumstances, raise taxes on middle-income families. I will lower taxes on middle-income families. Now, you cite a study. There are six other studies that looked at the study you describe and say it’s completely wrong. I saw a study that came out today that said you’re going to raise taxes by 3(,000 dollars) to $4,000 on — on middle-income families. There are all these studies out there.
But let’s get to the bottom line. That is, I want to bring down rates. I want to bring down the rates down, at the same time lower deductions and exemptions and credits and so forth so we keep getting the revenue we need.
And you think, well, then why lower the rates? And the reason is because small business pays that individual rate. Fifty-four percent of America’s workers work in businesses that are taxed not at the corporate tax rate but at the individual tax rate. And if we lower that rate, they will be able to hire more people.
So the answer to my concern is that Romney wants to lower the rates across the board because that will lower the amount of money paid in taxes by small businesses. So, great! We have an answer and it is the one I sketched above: cutting the rates will stimulate the economy by putting more money in the hands of small businesses. Initially I thought this was a decent answer even though it still requires the assumption that the rate-cut will reduce the amount paid by taxpayers and that the revenue lost thereby will be made up for via the stimulative effect. But then as I thought more about it, it still didn’t make sense. Why, I thought, if what we want to do is to lower the taxes on small businesses do we not just lower the tax rates paid by small businesses (or add deductions to lower their taxes)? Why the across the board rate cut?
Romney was adamant in the debate that he did not want to lower the taxes on the wealthy. He said, for example “I will not reduce the share paid by high-income individuals.” Now part of the problem is that this is ambiguous or else highly misleading language (in addition to being vague). Is Romney saying that he doesn’t want to reduce the amount of taxes paid by the wealthy or is he saying that he doesn’t want to reduce the portion of the American tax burden paid by the wealthy. The latter is consistent with the wealthy getting a significant tax break since they can pay less in taxes and still pay the same portion of the tax burden if that burden goes down. But he also said, “I will not reduce the taxes paid by high-income Americans.” This makes it sounds as if he wants high income Americans to pay the same amount in taxes as they pay now, regardless of whether that affects the percent of the tax burden that they pay in aggregate. So it is not obvious what he wants to do, especially when he insists that he will not pass a tax plan that adds to the deficit (which would seem to require that the tax burden not go down, or at least not significantly).
In any event, if Romney’s only concern was to reduce the amount of taxes paid by small business, then he wouldn’t need an across the board rate cut to accomplish this. He could suggest that we reduce the rates only on small businesses. Unless I am widely wrong about tax laws, there is no reason that we could not treat individual rates differently than rates paid by businesses. So, if Romney’s concern really is with small business, then why does he not propose tax cuts targeted at small business? Why the across the board rate cuts? In short, his answer does not justify his plan.