Tax policy has been a focal point in this election, with both candidates claiming their proposals “strengthen the middle class”. Much of the debate last Wednesday involved criticisms of the opponent’s tax policy.
Who is telling the truth? Well, like most issues in politics, it depends on how you define the terms.
Let’s look at President Obama first. Although claiming in the Wednesday debate that he reduced taxes on the middle class by $3,600, the reality is that those cuts were temporary. The “Making Work Pay” tax credit saved the average family $800 a year, but it expired in 2011 and Obama did not renew it. The other tax cut Obama refers to, the payroll tax cut, expires at the end of this year as well.
We can’t forget the impact of “ObamaCare”. According to the Associated Press, nearly 6 million people will see a tax increase due to the new health insurance law. Most of these 6 million are in the “middle class” and will see their taxes rise by an average of $1,200 per year.
Mitt Romney’s plan relies on lowering tax rates and closing loopholes to make up for the difference in revenue. His plan has been criticized as “impossible” by the Obama campaign, citing a study from a Princeton economist, Harvey Rosen.
Unfortunately for the President, Rosen soon spoke to the press claiming Obama had misrepresented his study, saying:
“I can’t tell exactly how the Obama campaign reached that characterization of my work… The main conclusion of my study is that under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on taxpayers with incomes above $200,000 about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.”
How is this possible? How can tax rates be reduced without slashing revenue? It all depends on economic growth. Cutting tax rates often spurs economic growth, as consumers have more money to spend and invest. As the economy grows, more people become wealthier and end up offsetting some of the revenue lost from lower rates.
Professor Mankiw of Harvard University calculated the effects that tax cuts pay for themselves in a paper written back in 2005,
“In all of the models considered here, the dynamic response of the economy to tax changes is too large to be ignored. In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes.”
Although Obama criticizes Romney’s plan because it “might” burden the middle class at some point, he ignores the fact that his own plans have not been particularly helpful, to say the least. Even if Romney did need to eventually close some loopholes that currently benefit the middle-class, the tax cuts would first and foremost give relief to middle-class Americans.