Debating Tax Policy

Tax Form (401(K)2012)

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.

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9 responses to “Debating Tax Policy

  1. “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.”

    1. Any real time cases in history where this has worked? Is trickle down more than a theory?
    2. What is ‘capital income?’ Does he mean capital gains? If so, are we talking apples and oranges?

    “Also, I think we could all agree the federal government shouldn’t need as much revenue as it does. Eventually, I’d love to have lower taxes across the board rather than supporting some of these programs, and I believe this policy may force departments to make those cuts. Of course, we do have the debt problem to worry about.”

    I would not love to have a tax cut, nor do I need one. (By the way, I make far, far less than $200,000. How would the Republican tax proposals affect me? ) A. I’m willing to pay more income tax, especially if that means enabling more to gain health insurance, who presently cannot get it. B. I’m also willing to pay more, combined with significant spending cuts that hurt, to reduce the deficit. (Do I dare dream about reducing the debt?) I hope the new Congress can work out something like that, that is also bi-partisan (In spite of Republicans’ promises to Grover Norquist). C. Remember, I am old! I love what the federal government does for me, Medicare and Social Security. (Smiley face.)

    • 1. Yes, but we’ll have to debate it another time.

      2. From what I gather, capital income=capital gains, at least in general.

      3. You may not want a tax cut, but you can’t blame others for wanting one! You said, “I’m willing to pay more income tax, especially if that means enabling more to gain health insurance, who presently cannot get it.” The US Treasury’s open all year, you could mail a check anytime if you’re willing to pay more. But personally, I would rather people gave their excess income to the church or a charity… There are 3 specific organizations in Waco that help people get free health insurance, even if they don’t qualify for Medicaid!

      • 1. No debate needed, just an actual example.
        2. “Apples and oranges?” (Aren’t the proposed cuts income taxes?)
        3. Charity too often = band-aid. Government can deal with that which is systemic. Why settle for me helping a few in Waco when government can help those who need insurance through out the entire country? “U.S.Treasury” (ha ha)
        4. I’m wondering if there’s a way we can get those 40-50% who pay no income taxes to pay some. Aren’t there a significant number of that percentage that can pay some small amount of income tax and not personally suffer or in the aggregate hurt the economy? Neither side seems to appear interested in getting more people to pay their fair share.

        • 1. Kennedy, Reagan, Bush are some.
          2. He said “especially true” for capital income taxes…not “only true”.
          3. Government can help with systemic problems – but there are certainly cases where the reverse is true as well. For example, I honestly and truly believe that a poor person is better served by joining the Christian Men’s or Women’s Job Corps here and building dignity and real relationships while finding work and growing in Christ rather than receiving a Welfare check to Recipient #216091. I’m absolutely convinced that poverty is not simply a material problem that can be cured with sending a check.
          4. Mitt Romney was vilified for suggesting the same thing – now both candidates are turning to “tax the rich” claims. Why? Because the rich are a small minority in any election, so both sides blame them in order to get the votes of the rest.

          • 1. Thanks for the examples. I’d be entertained by further illustration, but no need. Please don’t take the time.
            2. I’d like to know how true? That’s pretty important to know before using it as support. How partly is partly?
            3. For insuring what the private sector has considered the uninsurable or those too poor to afford it, I suspect we need the voice of ‘we the people’ through government. As far as job training goes, I agree that poverty is more than a material problem. Maybe to multiply the success of local faith based groups that help, the government could assist private charity with public subsidy.
            4.No vilifying from me; fair share applies to both ends of the income spectrum.

  2. The real question is what does tax policy do for or to the economy, which includes the federal deficit. Most people look at the economy as a fixed pie…and if you take from one area, you shrink the remainder. But the economy is actually quite dynamic. The lowering and broadening of taxes is likely to be ultimately stimulative to the economy. Raising taxes and increasing regulations has a multiplicative effect (in a negative way) on economic growth. Hence the 23 million unemployed persons in the United States.

    The other piece to all of this is the inherent uncertainty regarding not just the economy, but massive laws passed in the past couple of years. Uncertainty makes businesses much more cautious regarding hiring employees. And that uncertainty extends to tax policy right now. If nothing is done, taxes are set to go up on January 1st by over 1 trillion dollars…the largest tax increase in U.S. history. Many of those tax increases are set to hit the middle class. That will almost certainly trigger another recession. So…tax relief is a big topic.

  3. I hope you’re not claiming we’re on the right side of the Laffer curve. Because we’re not. Mankiw would agree– notice that he says “partially self-financing.”

    Romney’s true goal is to broaden the base– that is, to increase the number of taxpayers so that everyone can pay less money. That will necessarily increase the burden on the middle class and low-income families. Whether or not that’s okay is an entirely separate question, but we do know that it will likely raise taxes on those income levels.

    https://www.princeton.edu/ceps/workingpapers/228rosen.pdf
    Rosen’s analysis was an interesting read (linked above). His conclusion, however, is less emphatic than he makes it out to be in both the introduction and the email to the Weekly Standard. His real conclusion is along the lines of “it’s not mathematically impossible to implement the plan and not raise taxes on the low and middle income households– not that it’s likely to do so.

    I suppose my argument is more along the lines of “sure, it’s possible, but unlikely.”

    Good article, as usual.

    • Agreed, I’m not saying we’re on the right side.

      However, if he cuts all taxes by 1/5, as he is claiming, I don’t think that is necessarily bad for low-income and middle-class people.

      Also, I think we could all agree the federal government shouldn’t need as much revenue as it does. Eventually, I’d love to have lower taxes across the board rather than supporting some of these programs, and I believe this policy may force departments to make those cuts. Of course, we do have the debt problem to worry about.

      As for Rosen, I agree. My point is that both Biden and Obama are saying “It’s math! It’s impossible!” Which is incorrect, according to Rosen.

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