Neither President Obama nor Mitt Romney is a polished orator in the vein of Frank “the Tank” Ricard, but that’s not to say they didn’t put on a rather spirited debate tonight. I’ll limit my comments to the tax discussions, because quite frankly, you don’t need to hear my opinions on health care or the role of government. I’ll also refrain from anointing a winner; because, you know…it’s talking. They didn’t arm wrestle out there.
First, a few quick thoughts:
- It took all of three minutes for tax law to make its first appearance. Somehow, this helps to validate my career choice.
- In an episode of The Simpson’s that is set in the future, President Lisa comes to the realization that she needs to enact a “crippling tax hike.” To assuage the public, however, she simply presents it as a “temporary refund adjustment.” I’m starting to think President Obama is similarly playing wordsmith when he refers to his desire to raise taxes on the wealthy as “economic patriotism.”
- There are few things more annoying than listening to either candidate drone on with their stories of “real American” hardship that all sound the same: “An old lady came up to me during my campaign stop in Dayton, Ohio and said, ‘Good sir, in order to pay for my groceries, I had to sell both my eyes. Will you help me get my eyes back?’ Times are tough. We get it. Don’t tell me about it; go fix it.
- I am absolutely shocked — shocked!! — that we got through an entire debate without Obama referencing Romney’s 13.9% and 14.1% effective tax rates in 2010 and 2011, respectively, or attacking Romney’s unwillingness to make public his tax returns from prior to 2010. I have long thought that the President would establish these items early in the debate process in an attempt to paint his opponent as an out-of-touch-rich-guy and portraying him as the enemy of the 99%.
- I’m equally surprised that President Obama neglected to boast about the death of Bin Laden under his watch. Considering it’s probably the most notable success of his initial term, I would have thought it would have been trumpeted long and hard.
From a tax policy perspective, I think the debate was largely fruitless, as there was no new light shed on either candidate’s proposal. Allow me to explain:
Romney’s Plan: The Numbers
On the Romney side, both parties got caught up in semantics. President Obama continuously accused Romney of pushing a $5 trillion tax cut, while Romney responded time and time again by denying that this was the case, without ever quantifying exactly how much revenue his tax cut would cost the U.S. Here’s the reason for the disconnect:
According to Romney, his 20% across-the-board reduction in individual tax rates won’t cost the U.S. anything, as he has repeatedly promised to keep his tax cuts revenue neutral by broadening the base and eliminating deductions and preferences. That’s why he continuously argued that he was not pushing for a $5 trillion tax cut, but he should have made that more clear to viewers.
Now, where did the $5 trillion number come from? Many news agencies covering the debate credited the number to the hotly debated analysis of Romney’s plan conducted by the Tax Policy Center, but that’s not accurate. In fact, the $5 trillion estimate was plucked from this column authored by Josh Barro on Forbes, who ball parked the lost revenue from Romney’s rate reduction at $1 trillion on the corporate side (where Romney wants to lower the 35% rate to 25%), $3 trillion related to the reduction in individual tax rates, and another $1 trillion from abolishing the AMT and eliminating the tax on long-term capital gains, dividends and interest for those earning less than $250,000.
Even if Romney’s tax cuts would generate $5 trillion in lost revenue, since he has consistently promised to pay for the tax cuts by eliminating deductions, why did President Obama insist on calling it a $5 trillion tax cut? My guess is that the President was not-so-subtly reminding viewers that Romney has never articulated what deductions would be cut and how he would go about paying for the tax cuts. As a result, I believe President Obama simply refused to acknowledge the base broadening component of Romney’s plan in a spiteful, “if you’re not going to provide details, I’m not going to pretend they exist” sort of way.
Of course, I had to give this a lot of thought, and I spend more time reading and analyzing tax policy than any healthy person should. For the rest of Americans who only deal with tax law every four years, I can only imagine that this entire portion of the debate was a frustrating and painful lesson in political gamesmanship.
Romney’s Plan: The Progressivity
President Obama did eventually turn to the Tax Policy Center study again, challenging Romney’s ability to fully pay for his $5 trillion in tax cuts without shifting the tax burden to the middle class.
As a reminder, the TPC study concluded that in order to offset the $360 billion in annual lost tax revenue resulting from the 20% tax rate reductions, Romney would have to eliminate nearly all current itemized and above-the-line deductions. But according to the Tax Policy Center, even if Romney did so in a top-down manner — eliminating the deductions for those earning more than $250,000 first — because wealthy taxpayers would benefit more from the rate cut than they would suffer from the lost deductions, a revenue neutral plan would shift $86 billion in tax burden from those earning in excess of $250,000 to those earning less than this threshold.
When Obama broached the subject of the study, Romney, as he has time and time again since the study was published, challenged its validity, citing half a dozen other independent studies that proved revenue neutral tax rate reductions were possible without losing the progressivity of the Code. Unfortunately, however, Romney again neglected to provide any details of how it could be done, instead repeating promises not to cut taxes for the rich or raise them on the middle class.
This, of course, begs the same question Romney’s tax plan has always raised: is it mathematically possible? The Tax Policy Center says no, Romney says yes. To support his contention, he set forth a couple of broad options, saying you could “pick a number, $25,000…$50,000, and cap deductions at that amount…and pick a smaller number for the wealthy.” This would appear to be a nod to the $17,000 figure we discussed earlier today, though his refusal to cite that $17,000 figure when it had recently received so much publicity strikes me as odd.
As a second option, Romney argued that Congress could embrace the Bowles-Simpson approach and start hacking away at specific deductions, but as I’ve mentioned in the past, this posts political hurdles that a cap on deductions could avoid.
Long story short, we don’t know any more about Romney’s tax plan tonight than we did this morning. And that’s a shame.
President Obama’s Tax Plan
For a reason I can’t seem to figure out, Obama continues to be the Teflon President with regards to his tax plan. It never seems to come under criticism, though it certainly warrants some. It is at least reasonable to question if now is the time — with 8% unemployment and stagnant growth — to raise taxes on anyone, even if it is the rich, no? And why didn’t Romney challenge the rather obvious fact that Obama’s push to raise taxes on those earning more than $250,000 is largely a red herring, as it won’t generate nearly enough revenue to make a material dent in our rapidly growing deficit?
With regards to Obama’s corporate plan, Romney should have jumped on the fact that the President is in favor of cutting the corporate rate from 35% to 28% (25% for manufactures), but has only highlighted removing tax breaks for oil and gas and corporate jets, two preferences that — while symbols of greed and excess — would do little to offset the reduction in the tax rate, thus further increasing our deficit.
And lastly, why didn’t Mitt Romney pounce on Obama’s approach to international taxation? I had longed believe that international tax policy would be a talking point that would dominate the tax portion of the debate because the two men’s policies are so different, but it remained in the background tonight.
President Obama wants to shift to a worldwide system, where U.S. corporations would pay a minimum tax on revenue earned around the globe, even in foreign subsidiaries. It’s a rather startling approach in a climate where most developed countries are shifting to the opposite tax structure: a territorial approach in which a U.S. corporation would only pay tax on the income it earns in the U.S., with foreign countries — and only foreign countries — taxing the income earned by a U.S. corporation’s foreign affiliate. I would have thought Romney would have made this a point of emphasis, as his push towards a worldwide tax regime is largely supported by tax experts and economists.
That’s not to say international issues didn’t make an appearance, however, as President Obama maintained his desire to encourage domestic growth by making it harder for companies to move businesses overseas. One of the major steps he’s posited towards accomplishing this goal is to eliminate the tax deduction associated with physically moving a business away from the U.S.
In one of the more strange moments of the night, Romney responded by saying that in all his years in business, he had never heard of a deduction related to moving jobs overseas. I imagine he was just playing coy, and was inferring that because the U.S. taxes foreign income when it is repatriated, there is no “tax break” enjoyed when a company heads to foreign soil.
President Obama wasn’t getting nearly that detailed, however, and was simply referencing the Section 162 deduction a company gets for its moving expenses whenever it moves; whether it’s to Des Moines or Dubai.
The point is, once again the candidates refused to speak in plain terms, and it’s the voting public that suffered. Where both President Obama and Mitt Romney could have taken great steps forward tonight in letting voters know what they stand for from a tax perspective and what the future would hold should they be elected, they were content to simply dodge and parry without ever really saying anything. For example, President Obama could have explained that he would also give a tax credit for moving overseas operations back to the U.S., a move that would show that he is serious about encouraging growth through tax incentives. And Romney could have expanded on his publicized support for the territorial system, and how it brings the U.S. in line with other developed nations and levels the playing field of international business.
Oh well. Here’s to hoping Debate #2 gets better.