Harvard economist debunks critics of Romney’s tax plan

Republican presidential candidate, former Massachusetts Gov. Mitt Romney speaks during a campaign event at Flagler college, Monday, Aug. 13, 2012, in St. Augustine, Fla. (AP Photo/Mary Altaffer)

Critics of presidential candidate Mitt Romney say his plan to lower or eliminate taxes and deductions is “mathematically impossible.”

But Martin Feldstein, a professor of economics at Harvard University, doesn’t agree.

Critics base their claims on a study from the Tax Policy Center, a part of the Brookings Institution, according to Feldstein’s article in the Wall Street Journal. The study analyzed personal tax revenues and liabilities incurred by eliminating the alternative minimum tax for each income level in 2015.

“Careful analysis shows this is not the case,” Feldstein said in his article. “Such forecasts are inevitably speculative.”

Critics claim the 20 percent cut in tax rate would cause a $181 billion revenue loss if the new rates didn’t change taxpayer behavior.

Feldstein put Romney’s plan to the test with 2009 IRS data. He found that because the plan would raise taxable income by about 5 percent, it would only cause a $148 billion drop, not $181 billion.

Romney’s plan to eliminate tax on interest, dividends and capital gains for married couples earning below $200,000 would cause an additional $15 billion loss, according to the article.

“It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn’t specified what he would do,” Feldstein said in the Wall Street Journal column. “But refuting the Tax Policy Center’s assertions doesn’t require that. It only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost.”

If a 30 percent tax rate is applied to deductions from taxpayers earning more than $100,000 in 2009, which totaled $636 billion, there would be $191 billion in extra revenue, according to Feldstein’s article.

EMAIL: jferguson@desnews.com
TWITTER: @joeyferguson

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  1. Karen Lyons

    One problem with the figuring – Romney has stated that he wants to lower tax rates on the wealthy 20% – not 20% of 35%, but actually 20% less in taxes. The “rich” would have a tax rate closer to 25% (maybe even 20%) than 30%.

    Romney has also stated he wants to lower the corporate tax rate to 25%.

    How do the numbers play out if you use 25% instead of 30%? Well, instead of $191 Billion in extra revenue, you end up with $159 Billion in extra revenue – which is less than Mr. Feldstein’s adjusted calculation of $163 Billion loss of tax revenue. Even without worrying about the lost revenue from the lowered corporate rate, we still end up in the hole.

    • Don W

      Your figure is based on a stagnant economy. Lowered taxes increase business activity, job creation, revenue creation and bringing in more tax revenue. In addition, other areas need to be calculated into the increase in revenue such as the natural stimulus of 2 trillion dollars being reinvested into the United States economy, that is on the sideline right now. There are about 17 other tax variations that would occur that would increase revenue as well.

      In addition, regulation sensibility especially with regard to the energy industry would increase taxes through royalties, taxes, new job creation, supply economics of this industry developing ect…

      • Karen Lyons

        I used the exact same calculations he used – I just inserted the more correct tax rate of 25% instead of 30%.

        If his numbers are correct and he calculated everything the way he should have – it still comes up short if the tax-rate is below 30%.

    • Steve

      Assuming you mean – per Romney’s plan – its because corporate loopholes will be closed – I couldn’t agree more. As a small business owner I’m aware of a lot of tax loop holes, most of which I can’t even hope to take advantage of (don’t have the scale or infrastructure required to manage them)….so I’m all for lowering the stated corporate tax rate without decreasing total corporate tax revenue by increasing the effective rate paid by many big companies (e.g. GM). I think some incentives to invest (such as capital gains tax incentives) should remain in place, but most of the loopholes, even in my business friendly opinion, don’t actually do anything to uniquely encourage reinvestment and should be closed.

  2. DanO

    Really? You took the time to put this in writing? “He found that because the plan would raise taxable income by about 5 percent, it would only cause a $148 billion drop, not $181 billion.” It’s still a pretty big drop in revenue and as we’ve seen over and over again, tax cuts for the wealthy don’t produce jobs.

    • Don W

      That is not the case. Kennedy tax cuts created jobs. Reagan tax cuts produced 16 million jobs. Tax cuts during the Clinton/Gingrich terms created jobs as well.

      • Karen Lyons

        Any economist will tell you about the law of diminishing returns.

        While it may be true that lowering the tax rate from 75% to 50% or 40% or 35% creates additional jobs and encourages spending, there comes a time where the return has diminished to the point that any additional tax cuts cost more than they generate.

        The G.W. Bush tax cuts are still in effect – and there has been no net job creation. The majority of jobs that were lost and led to the recession, were lost under G.W.

        There is no evidence to support the idea that cutting taxes even further will lead to a job increase – especially when a job increase did not occur last time taxes were lowered.

        (By you own comment you admit there were no jobs created by the last tax cuts.)

      • Pete S

        Yes, the Kennedy tax cuts created jobs. But they were cut from 90%. Yes, the Reagan tax cuts created jobs. But they were cut from 70%.

        Lesson to learn. When tax rates are historically high, cutting them is good.

        Today, they are at a 60 year low. Same principle does not apply

  3. Jeff

    You obviously didn’t read to the bottom of the article, or read the full one at WSJ.com, DanO – If a 30 percent tax rate is applied to deductions from taxpayers earning more than $100,000 in 2009, which totaled $636 billion, there would be $191 billion in extra revenue, according to Feldstein’s article.

  4. Eric

    I’m not arguing for or against the comments made by Feldstein, but an important consideration to his analysis is the fact that he is Romney’s economic adviser, a point that the article failed to include.

  5. Lamonte

    The Tax Policy Center responded immediately to Feldstein by saying, “Although Feldstein uses a different methodology than we did, his analysis reinforces our central finding about the distributional impact of Romney’s tax proposals: the net effect would be cutting taxes on households above $200,000 and thus requiring net tax increases on households with less income. More broadly, both our analysis and Feldstein’s show that Romney’s tax plan cannot accomplish all of his stated goals. Either taxes must rise on those with income below $200,000, or tax preferences for saving and investment will have to be reduced, or revenues will be cut, or promised tax cuts for high-income households will have to be reduced.”

    And blogger Len Burman of Syracuse University adds, “The GOP’s continuing preoccupation with tax rate cuts is worrisome. We really can’t afford a repeat of the Bush II experience of large tax cuts offered with the promise of spending cuts that never materialized (and, indeed, an explosion of new spending). If Messrs. Romney and Ryan really want to plot a new course, they might promise to push spending cuts first and then tax cuts after the deficit is under control.”

    • GB

      Isn’t it true that the tax cuts being discussed are really just continuation of the status quo. Also, isn’t it true that if the present tax rates are allowed to expire, taxes are set to increase on almost everyone (who still pays taxes) at the end of the year? By the way, How much do each of you bloggers pay? Are some of you arguing for tax increases because they won’t apply to you?
      It’s obvious that the economy is not a zero sum game. Lowering taxes will not, by itself, make the economy grow unless the federal government removes some of the bans on development and the huge threat (to business) of government controlled healthcare too. But raising tax rates will also not, by itself, solve the deficit problem without effective spending controls, and will further dampen economic growth at a time when we can’t afford that. We also tend to assume that giving the government more money means that congress and the president will reduce the deficit with it when recent history shows they will not.

    • supercool11

      It’s true that spending is the real issue. The government simply cannot raise the revenue to keep spending at current levels. The credit card is maxed out. Raising taxes will stifle growth and lead to diminishing returns, not more revenue.

      Since when is the question “how can government maximize revenue.” Are corporations and people made to serve the government, or was the government made to serve the people. The question should be, how can we help businesses succeed? How can we encourage investment by individuals? Instead politicians ask who can we squeeze for more money and still get re-elected. There’s fewer rich people than middle income people, that’s why their tax rates are the highest.

  6. ljc

    Why is everyone so anxious to give their money to federal government with taxes? Isn’t the real answer here to cut government spending. Everyone is assuming that the government needs to bring in more and more revenue. What we should be more concerned about is how that money spent and how much waste there is. If the government would stop spending money they don’t have and actually reduce spending, like I have had to do in this economy, then we wouldn’t have to worry about the government getting more revenue.

  7. surfcitysocal

    Don W. is right. Lower taxes on everyone will stimulate the economy and create jobs. Thomas Sowell noted in a recent article that liberals commonly try to push the notion that tax rates and tax revenue move together. They do not. But in the liberal’s mind it is their duty to dictate and control taxes and they will never relinquish that control unless they are voted out of office.

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