{"id":762,"date":"2012-08-01T20:56:48","date_gmt":"2012-08-02T01:56:48","guid":{"rendered":"http:\/\/www.nathanhunstad.com\/blog\/?p=762"},"modified":"2012-08-01T21:00:46","modified_gmt":"2012-08-02T02:00:46","slug":"squaring-the-circle","status":"publish","type":"post","link":"https:\/\/www.nathanhunstad.com\/blog\/2012\/08\/squaring-the-circle\/","title":{"rendered":"Squaring the Circle"},"content":{"rendered":"

Surprise, surprise: the Romney tax plan to cut taxes for the richest Americans can only be paid for if you raise taxes<\/a> on the other 95% of people. Predictably, Romney is saying that the study is \u201cbiased<\/a>\u201d, because it doesn\u2019t count for the massive economic boom that would result. So who is right? Let me suggest to you a journey through the facts as they are largely agreed to on both sides, and when that journey is complete, there really is no conclusion other than Romney\u2019s numbers don\u2019t add up.<\/p>\n

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So where do we begin? The first is obvious, and everybody agrees, because it is (after all) simple math: The federal government will run deficits every year<\/a> for the near future. We are raising less in tax revenue than we are spending. Simple. Everybody on board? Great.<\/p>\n

What\u2019s next? Well, it turns out that even though we are running deficits, people don\u2019t want to cut spending<\/a>. Especially on the big things like Social Security and Medicare. Social Security, Medicare, and defense spending, and interest on the national debt make up two thirds<\/a> of the budget. The first two people don\u2019t want to cut, and the last is essentially untouchable. Ah, but what about defense spending? Actually, most people<\/a> are fine with defense cuts. However, Congress won\u2019t let this happen. The only popular cuts in survey after survey are in \u201cforeign aid\u201d. See foreign aid on that chart? No, because it\u2019s such a small part of the budget it\u2019s invisible. So there is huge reluctance to having the solution to the deficit problem involve large spending cuts. Whether or not you personally would like to see those cuts, this is current political reality. Onward.<\/p>\n

And that leaves taxes. Romney\u2019s tax plan is very specific about the tax cuts he would engineer: no estate tax or AMT, cuts to corporate taxes, etc. He says he would pay for this by closing \u201ctax loopholes\u201d, or in other words tax expenditures: deductions in the tax code that reduce tax liability. The problem with eliminating these deductions is that the biggest ones are very popular and are enjoyed by many in the middle class. Take a look for yourself<\/a>. The biggest one essentially helps pay for employer-provided health care; any middle class people taking advantage of that? The next is for retirement accounts like IRAs and 401(k)s. Then we have the mortgage-interest deduction. That means the top three \u201cloopholes\u201d have huge benefits for the middle class. The next two (depreciation and state and local tax deduction) aren\u2019t as great for most people, but then you have charitable contributions, another popular one. Also on the list are the capital gains exclusion on home sales and the child credit.<\/p>\n

You can\u2019t eliminate just those loopholes that benefit the wealthy to pay for the Romney tax cut; that is exactly the conclusion of the tax study today. Those top three are too big and enjoyed by too many people. If you got rid of them, not only would taxes go up for just about all working homeowners with kids, but it would cause some employers to drop health insurance. \u201cThe Romney plan: raising taxes and eliminating health care to give to millionaires\u201d. Not very catchy, is it?<\/p>\n

I understand that people may not like these numbers, or may argue that Romney can find enough loopholes to pay for his cuts. If you can make the numbers work, I\u2019m sure Romney would be very interested in talking to you. I\u2019d also like to see them. Please.<\/p>\n

That leaves just one thing: the argument that the Romney tax cuts would pay for themselves. This is probably the statement that provides the most disagreement. Since we can\u2019t clone the U.S., and leave tax rates the same in the control U.S. while cutting taxes in the other one, sadly a real-world study is out of reach. However, economists can model things, and it turns out, they have tried to model tax cuts. The evidence says that no, tax cuts do not pay for themselves<\/a>. The best thing they can do is partially offset the revenue loss. No less a Republican stalwart than Gregory Mankiw (George W. Bush\u2019s chair of the Council of Economic Advisers) says this, in fact. His study shows that at best, tax cuts may recover less than a third of their revenue loss through economic growth. And that\u2019s best-case. If you assume that this recovery takes place due to a robust 3-4% growth rate, then to just break even<\/em> we would need to accelerate that growth rate to 9-12%. That\u2019s incredibly unlikely.<\/p>\n

If models aren\u2019t your thing, let\u2019s not forget that the huge Bush tax cuts of 2001 and 2003 did not pay for themselves<\/a>, despite what one of the most powerful Republicans in Congress<\/a> believes. Probably the closest thing to a real-world example we have had lately.<\/p>\n

Again, this last argument is probably the most controversial, but unless you can point to a specific example of a broad-based tax cut that paid for itself, well, the controversy is all foam and no beer. And keep in mind it has to be \u201cbroad-based\u201d, like Romney\u2019s plan, and it has to reflect current tax rates. The Laffer curve<\/a> does exist, and I\u2019ll buy that cutting tax rates from 91% to 70% may result in more revenue<\/a>, but current tax rates are nowhere near that.<\/p>\n

Finally, one last argument: that taxes under Obama are higher than they have ever been. Ever. Again, this is objectively and mathematically wrong. If you measure tax revenue compared to GDP, really the only consistent and sane way to do so, taxes were much higher<\/a> under Clinton than now. Not only that, but take a closer look at that table, particularly the 1980s: taxes were higher under Reagan than they are now!<\/p>\n

So to sum up, here are the arguments that I\u2019ve made that I think everybody should be able to agree with, even if grudgingly:<\/p>\n