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Archive for October 8th, 2012

In its much-discussed analysis of the revenue effects of Mitt Romney’s proposed 20% across-the-board tax cut, the Tax Policy Center concluded that the cuts would cost the government $360 billion in tax revenue in 2015 alone, and in order to offset that lost revenue and make the proposal revenue neutral, nearly all above-the-line and itemized deductions would have to be eliminated.

The TPC’s conclusion was so pessimistic, in part, because the study refused to account for the fact that Romney’s proposed tax rate cuts might actually stimulate the economy.  This newfound growth would partially offset the tax rate cuts simply by getting more people working again, which would lead to more people paying tax, which would result in more offsetting tax revenue to the IRS. In other words, tax cuts can, in effect, “pay for themselves” and generate additional tax revenue even without the offsetting effect of the elimination of deductions.

Last week, in response to the TPC report, the Tax Foundation similarly sought to determine the “cost” of Romney’s tax plan— which for the Foundaiton, entails cutting the rates, eliminating the AMT and estate tax, and reducing the corporate tax rate from 35% to 25%, collectively, the “tax cuts” — by analyzing the extent to which the tax cuts would pay for themselves by growing the economy and increasing GDP. The Tax Foundation explained its reasoning as follows:

Economists recognize that there is more to a tax cut than the immediate increase in wealth of the recipient. There is a change in incentives because there is a change in the law. If investment taxes are lowered, investment increases, because investors expect to keep more of their after-tax returns, and more people become investors. If taxes on wages are lowered, more people work and more people work harder. The benefits from these things spill over beyond the immediate actors. Businesses invest in equipment and new hires, leading to more productive workers, higher wages, and ultimately satisfied customers. If this is “trickle down” economics, as the president contends, this is also economics according to every major textbook and treatise since Adam Smith.

In its model, the Tax Foundation considered the following items, which mirrors Mitt Romney’s proposals to date:

  1. A 20 percent reduction in individual marginal income tax rates in all brackets.
  2. Elimination of tax on capital gains and dividends for lower and middle income tax taxpayers.
  3. Elimination of the AMT.
  4. Reduction of the corporate income tax rate from 35 percent to 25 percent.
  5. Elimination of the federal estate tax.

As you will note, the model did NOT consider the impact of any base broadening, because the Tax Foundation was unconcerned with the revenue it would generate; instead, the Foundation’s study sought to isolate the additional tax revenue that would be generated by kickstarting the economy though the tax cuts.

Based on its analysis, the Tax Foundation concluded that the economic growth stimulated by Mitt Romney’s tax proposal would have a tremendous offsetting effect on the static revenue lost to the tax cuts. In fact, the study determined that 60% of the lost tax revenue would be offset simply by the growth to the economy, which would yield higher wages and employment and, in turn, higher tax collection.

This would leave only 40% of the revenue reduction to be made up through base broadening and the elimination of deductions and preferences, a far more achievable result than the TPC study would indicate. Relevant portions of the conclusion are reflected in the following chart:

Table 1: Effects of the   Romney Tax Plan on the Economy and Budget

All   Tax Provisions

Corporate   Income Tax Cut

Individual   Income Tax Cut

End   AMT

Capital   Gains and Dividends Tax Cut

End   Estate Tax

GDP

7.4%

2.3%

1.8%

0.1%

1.6%

0.9%

Federal   revenue

-$136.0

$19.1

-$113.7

-$18.1

$15.3

$1.9

Federal   deficit

-$170.0

$6.9

-$119.6

-$18.6

$6.8

-$2.9

Static   revenue

-$336.5

-$51.6

-$168.0

-$22.4

-$33.6

-$25.4

Dynamic   revenue

-$136.0

$19.1

-$113.7

-$18.1

$15.3

$1.9

%   Revenue Reflow

59.6%

136.9%

32.3%

19.4%

145.6%

107.4%

Note: All dollar figures are in billions. The   simulation was run separately for each provision, and because of interactions   the separate effects do not necessarily add up to the total effect of all   provisions.

As you will see, the Tax Foundation concludes that the rate cuts would have a profound effect on the economy at large, growing GDP by 7.4% over a five to ten-year period. Most notably, the 10% reduction in the corporate tax rate — and the ancillary impact it has on the taxation of investments, as it softens the blow of double taxation — would completely pay for itself, increasing corporate revenue by $19.1 billion despite the 10% reduction in the tax rate. This is largely attributable to the fact that a lower corporate rate tends to encourage the creation and use of a larger amount of plants and equipment, which in turn boosts productivity and wages and employment, which in turn adds significant tax revenue to the government coffers.

To the contrary, the growth spurred by the personal income tax cuts and elimination of the AMT would offset only 32.3% and 19.4%, respectively, of the revenue lost from those provisions. Even with that fact, if you believe these growth numbers, then achieving the remaining revenue offset becomes much easier than if you anticipate no boost to the economy and are forced to try to recover — in the case of the TPC study — the full $360 billion of lost revenue through base broadening.

So, with 60% of Romney’s tax cuts presumably paid for through revenue growth, how would the Tax Foundation recommend Romney raise the additional 40% — approximately $136 billion — in order to make his proposal revenue neutral? The study proposes a multi-step approach:

1. Capping the exclusion for employer-provided health coverage to upper income taxpayers would raise an additional $36 billion;

2. Eliminating the tax-free nature of interest earned on state and local bonds would raise $27 billion in additional revenue;

3. Capping the benefit of the mortgage interest deduction, property taxes, and sales taxes on upper income taxpayers would raise an additional $26 billion; and

4. Repealing the Section 199 deduction for domestic manufacturing would raise an additional $14 billion.

While these revenue raisers would generate only $103 billion of the $136 billion needed to fully offset the tax cuts, the Tax Foundation argues that the remainder should be made up through reduced spending on corporate welfare.

The overall conclusion, and what you should take away from this study, is that the Tax Foundation vehemently disagrees with the TPC’s conclusion that the Romney proposals represent a mathematical impossibility. While the TPC concluded that the Romney tax cuts could be paid for, but only by eliminating every major deduction and, even then, would require a shift in the tax burden of $86 billion from the upper class to the middle class, the Tax Foundation has a different take. Because the Foundation believes that the economic growth caused by Romney’s tax proposals would generate additional tax revenue that would offset nearly 60% of the lost revenue resulting from the tax cuts, the remaining 40% could be made up in a variety of ways without attacking middle class tax expenditures and consequently raising the tax burden on those taxpayers.

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The Obama administration addresses the math behind Mitt Romney’s $1 trillion $5 trillion tax cut. Wait…what?

Nation’s pastors agree to take a Sunday off from decrying same-sex marriage; taunt IRS instead.

From the WSJ: Be advised, the last chance to undo a Roth IRC conversion is October 15, 2012.

Xzibit — of “Pimp My Ride” fame — owes the IRS $130,000 for 2011. Weird, I would have thought that a guy who installs custom fish tanks into Honda Civics would understand the need for conservative spending and sound investment.

Could the U.S. really do away with corporate interest deductions?

Often ignored in the presidential campaigning is the growing problem of violence in the suburbs:

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