Debunking Romney (Part 2): The Advisers Respond

 This post is part two of a three part series debunking a few central claims that have been made by the Romney campaign this year. The first part deals with Romnay's tax policies, the recent Tax Policy Center study, and Romney's response to that study. The second part deals with the white paper Romney's advisers wrote to attempt to justify his plan. Finally, the third part deals with Romney's recent Medicare claims, as well as his impossible promises on the subject. 

Romney's economic advisers attempt to defend Romney's Tax and Economic plans:

As FactCheck points out, Romney initially tried to defend the plan using other studies before the most recent TPC study emerged:

"But, when pressed for specifics, Romney told Schieffer that he will “go through that process with Congress as to which of all the different deductions and exemptions” will be eliminated or reduced. In that interview, he said the National Commission on Fiscal Responsibility and Reform issued a report in December 2010 that proved it is “mathematically … possible” to reduce tax rates and reduce the deficit.

That’s true — but Romney failed to note that the commission’s illustrative tax-reform proposal “taxes capital gains and dividends as ordinary income” (see footnote on page 29), eliminating a tax break that benefits mostly those with high incomes. But Romney’s tax plan would “[m]aintain current tax rates on interest, dividends, and capital gains,” taking that option off the table. Under current law, capital gains (profits on sale of stock or real estate, for example) are generally taxed at a top rate of 15 percent, while ordinary earnings from salaries or business are taxed at a top rate of 35 percent of income over $388,350. (If the Bush-era tax cuts are allowed to expire, the rate would return to 20 percent.)

So how can Romney design a revenue-neutral plan that would cut income tax rates without disproportionately benefiting the wealthiest, and still maintain the current low rates on capital gains and dividends? That was the subject of the Tax Policy Center’s latest report, which immediately renewed the debate over who would benefit — and who would not — under Romney’s tax plan." (emphasis mine)

This was just of the Romney campaign's misrepresentations of various studies to defend the proposal. In an attempt to put some intellectual weight behind their ideas, Romney's economic advisers drafted a white paper to back them up. In the paper Romney's team combined more misrepresentations with  blatant falsehoods, partisan research, and the ignoring of research they should know about. In addition, many authors of the studies they cite actually called out the Romney campaign for misrepresenting their research (this link is the Ezra Klein source for the bullet list below). Brad DeLong has taken look at the paper and has provided a point by point rebuttal of the paper's main arguments. I will summarize and expand here:

• Romney's team incorrectly calls this recovery the most anemic in recent History. But the Bush recovery was actually just as slow from the private sector's point of view. The difference is that the downturn Obama inherited was much worse than the one Bush inherited. In addition austerity has slowed the recovery quite a bit.
• Romney's team claims that history has shown this recession should have experienced a quick recovery. The problem is that they ignore the fact that history shows the aftermath of financial crises (a housing bust in this case) tend to include sustained periods of slow recovery (Reinhart and Rogoff 2010). Romney's team should be familiar with this.In order to bolster their claim, Romney's team used a paper by Bordo and Haubrich (2012). Ezra Klein asked Bordo if the Romney team's interpretation of his paper was correct. Evidently Romney's team got it wrong:

“This recession is really quite different,” Bordo said. But he didn’t see government policy as the obvious cause. “We found that a lot of the difference between what would’ve been predicted by the normal behavior of recessions and what we observed now is explained by the collapse of residential investment. Put another way, if residential investment were what it was in a normal recovery, we would have recovered already.”

That is to say, what Bordo found was fairly consistent with the rest of the literature on this topic: Recessions associated with a housing bust tend to have very slow recoveries. That’s rather different than the Romney campaign’s interpretation of Bordo’s paper, which is that the features of this particular recession couldn’t explain the slow recovery, and thus you had to conclude that “America took a wrong turn in economic policy in the past three years.” (emphasis mine)

In a later op-ed in the Washington Post, two of Romney's advisers further claimed that if the recession was supposed to be a “Rogoff-Reinhart” slow recovery recession, then stimulus didn't make much sense, since it would be largely ineffective. However, as Ezra Klein points out, Ken Rogoff was one of the economists Obama consulted about the proper size of the stimulus. Rogoff recommended the stimulus be $1 trillion over two years (larger than the real stimulus):

"As for Reinhart, I asked her about this for a retrospective I did on the Obama administration’s economic policy. “The initial policy of monetary and fiscal stimulus really made a huge difference,” she told me. “I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn’t fully appreciated.”

Now, it’s true that Reinhart and Rogoff have opposed “indefinitely sustaining aggressive post-crisis fiscal stimulus“ without accompanying deficit reduction. But even in an op-ed making that case, Rogoff was careful to say, “aggressive fiscal stimulus in the run-up to the financial crisis was reasonable as part of an all-out battle to avoid slipping into a depression.”" (emphasis mine)

So both economists have argued that the stimulus was necessary to keep the recession from being worse, even if it wasn't supposed to necessarily accelerate recovery. Perhaps the Romney campaign was confused by this distinction.

• Romney's team makes claims about his mostly non-existent plan that can't be backed up because his plan is mostly non-existent. The TPC made the most favorable assumptions for Romney's plan. So we can assume no matter how Romney shapes his plan, the criticisms seen here will still apply.
• Romney's team tries to blame the slow recovery on "structural biases against business, financial imbalances, and regulatory choices." They also claim this has been happening for multiple decades. Only Obama has made it worse. Brad DeLong graphs growth in multiple areas and shows that the real fault lies with government purchases (austerity) and residential construction (the housing crisis).

• Romney's team tries to blame Obama for his focus on stimulus, despite the fact that Republicans in congress have kept him from being able to do any of said stimulus for nearly two years.
• Romney's team attempts to argue against the same Keynesian ideas they have already argued for and proven effective.
• The paper tries to claim that empirical studies have documented “The negative effect of the administration’s ‘stimulus’ policies." However, Dylan Matthews surveyed the research and found 13 our of 15 studies actually showed the stimulus had a positive effect. Of the two studies cited by the Romney team, one was written by a Romney adviser and the other looked at just the Cash for Clunkers program. The paper's author, Amir Sufi has called out the Romney campaign on this distortion. When Ezra Klein asked him about his view of the stimulus he responded positively.

"So I asked Sufi what he thought of the stimulus more broadly. “Most of the research is pretty positive on stimulus,” he said. In particular, he pointed to a paper from Emi Nakamura and Jón Steinsson that used “cross-sectional data that seems to indicate the fiscal multiplier is quite large when you’re in a recession.”" (emphasis mine)

• Romney's team falsely claims Obama has avoided tackling long term budget issues.
• DeLong claims Romney's team has misrepresented the work of Baker, Bloom, and Davis (2012) over the role of uncertainty in the slow recovery. However, after skimming the paper, I'm not 100% sure they have. It is arguable since Romney's team failed to mention that the largest spikes in uncertainty had more to do with the debt ceiling fights, recessions, bailouts, and elections than tax and regulatory policy in general. They also blame this on "short-termism." However, the biggest spike occurred as a result of a long term policy debates that occurred during the debt ceiling fight. John Taylor (who seems unaware of the complaints from the authors of the studies Romney misrepresented) claims this was what Romney's team was talking about, saying "Policy uncertainty is high now for a number of reasons, and reducing it with a long-term strategy rather than more short-term fixes will increase economic growth and create jobs." He may have a point, but as I have noted before. Obama has been working for long-term policy solutions. Republican obstructionism has kept this from happening. In addition, Ezra Klein points Baker, Bloom, and Davis may be attributing uncertainty to the wrong factors in this paper:

The larger issue is that, as Baker, Bloom and Davis concede, the biggest driver of economic policy uncertainty is usually a bad economy, full stop. This past fall, Mark Schweitzer and Scott Shane of the Cleveland Fed tried to figure out whether Baker, Bloom and Davis were picking up real effects of uncertainty, or whether the uncertainty itself was just an outgrowth of a bad economy, and had no further bad economic effects of its own. Their conclusion was that while uncertainty does reduce small business hiring and purchases, the weak economic fundamentals are a much more important factor: (emphasis mine)



The blue line is expected small business hiring under Schweitzer and Shane’s model, and the brown line expected hiring in the absence of uncertainty. The models show, the authors conclude, “statistically significant negative effects of policy uncertainty on small business owners’ plans to hire and make capital expenditures.” But they also note that a model that doesn’t take uncertainty into account explains 79 percent of variation in hiring and 76 percent of variation in business spending. So while uncertainty can explain some variation in hiring and spending by businesses, other factors (like economy-wide hiring and interest rates) are needed to explain the vast majority of it. (emphasis mine) 

• Romney's team perpetuates the myth that Obama had the kind of filibuster proof majority needed to tackle their priorities for two years. Try 14 weeks.
• Romney's team misrepresents studies to show his tax-reform proposals will increase GDP by .5% to 1% per year. Ezra Klein explains:

"Of the four studies mentioned, two of them are co-authored by Berkeley economist Alan Auerbach. When I looked deeper into the studies, however, they didn’t seem all that applicable to Romney’s tax plan. The Romney campaign, for instance, was using an estimate from a simulation Auerbach ran in which he replaced the income tax with a consumption tax. If the Romney campaign proposed such a policy, that would be very big news. But they have not proposed such a policy.

So I e-mailed Auerbach the relevant quote from the Romney campaign’s paper, and added two questions: “Given what we know and don’t know of the Romney plan, is it reasonable to attach these kinds of dynamic estimates to it? Do you think that reporters like me should assume that the 0.5-1% gdp boost is a reliable base case?”

His response came quickly. “I did not see the [Romney campaign's] paper, but from your description the basic answer to both of your questions is ‘no’,” he replied. His paper looked at “a much bigger tax change than Romney is proposing.” It also “assumed that all tax changes were revenue-neutral on an annual basis; the size of the Romney tax cuts makes this a questionable assumption.” (emphasis mine)

• Romney's team appears to blame Obama for the fiscal cliff, which was set in motion by a bipartisan deal in 2011, a deal the VP pick, Paul Ryan, voted for. Maybe Romney would have a leg to stand on if he had not been silent practically the entire time while embracing the kind of attitude that led the the deal in the first place.
• Romney's team cites partisan research to back up their claims of fiscal consolidation and deregulation.
• Romney's team cherry picks research to claim that tax cuts would be more stimulative than spending increases. Macroeconomics is very divided on this issue. In addition, the research considers cases where interest rates are far from the Zero Lower Bound, unlike today.
• Romney's team claims that Romney's policies are similar to the policies used to help fight the recessions of the early 80s and the structural problems of the 70s. The problem is that these were two very different recessions. David Frum explains:

Yet in almost every way, today's economic problems are exactly the opposite of those of 30 years ago. Then we had inflation, today we are struggling against deflation. Then we had weak corporate profits, today corporations are more profitable than ever. Then we had slow productivity growth, today it is high. Then the top individual income-tax rate was 70%. Today it is 36%. Then energy regulations produced energy shortages. Today the removal of banking regulations has produced an abundance of debt.

In the end Romney's team produces a list of policy objectives:

"The Romney plan will achieve these objectives with four main economic pillars.... reduce federal spending as a share of GDP to 20 percent – its pre-crisis average – by 2016; reduce individual marginal income tax rates across-the-board by 20 percent, while keeping current low tax rates on dividends and capital gains... [r]educe the corporate income tax rate... to 25 percent... broaden the tax base to ensure that tax reform is revenue-neutral;... reduce growth in Social Security and Medicare benefits... block grant the Medicaid program to states; remove regulatory impediments to energy production and innovation... repeal and replace the Dodd-Frank Act and the Patient Protection and Affordable Care Act..."

And Brad DeLong responds:

"DOES NOT FOLLOW: Repealing Dodd-Frank—with not a hint as to what will replace it—does not decrease but increases regulatory uncertainty. Repealing ObamaCare—also with not a hint as to what will replace it—does not decrease but increases regulatory uncertainty, especially as up through the middle of 2009 what we now call ObamaCare was then called RomneyCare, and its biggest booster was Mitt Romney. How can uncertainty fail to be generated by would-be President Romney’s declaration that he opposes RomneyCare and seeks to replace it with something else that he will not reveal?

Similarly, Romney has not even the outlines of a plan for how to reduce federal spending to 20% of GDP, or how he could possibly broaden the tax base to keep his tax cuts for the rich revenue-neutral.

If you do indeed fear uncertainty about tax and regulatory policy, you need to vote against Romney as you would vote against the plague—and urge everybody you know to vote against Romney, and urge them in the strongest possible terms." (emphasis mine)

More on this plan in part 3.

As Ezra Klein notes, Romney's plan cannot produce the economic output he envisions because it fails to tackle the most important factor in the slow recovery of the last four years, the housing market:

"So, that’s three economists named in the Romney paper, not one of whom would sign on to the interpretation the Romney paper gave to their work.

There are interesting criticisms of the Obama campaign buried in the work of the economists the Romney campaign cited — the problem is that the Romney campaign doesn’t have the standing to make them.

Both Sufi and Bordo agree that the housing market was at the core of this recession, and of the sluggish recovery that has succeeded it. So one possible criticisms — which I’m sympathetic to — is that the Obama administration bobbled the single most significant policy question related to the recovery: What to do about housing." (emphasis mine)

Indeed the issue of housing is a complex issue where nobody can seem to agree on a single solution. But there are solutions available, sometimes as relatively simple as high short term inflation targets. But Romney has no such plan. Ezra Klein continues:

"Indeed, the Romney campaign doesn’t have a housing policy at all. “Housing” isn’t one of the issues on their Web site. The word is only mentioned twice in their 160-page economic plan. There are no recommendations in this paper. Indeed, Hubbard, one of the authors of this paper and a key adviser to Romney, has advocated a large program to encourage mortgage refinancing in the past, but Romney hasn’t embraced it.

Indeed, as Nick Timiraos notes, Romney’s comments on housing have been self-contradictory. At one point, his position was, “Don’t try to stop the foreclosure process. Let it run its course and hit the bottom.” Later, he said, “The idea that somehow this is going to cure itself by itself is probably not real. There’s going to have to be a much more concerted effort to work with the lending institutions and help them take action, which is in their best interest and the best interest of the homeowners.” But the campaign never released a formal policy resolving these tensions." (emphasis mine)

So Romney still cannot escape the conclusions of the TPC paper. And his plans rely on regurgitated Republican talking points that either do not apply to this recession or have been discredited altogether. Romney's team also relies on blatant falsehoods, ignores highly respected research they should know about, misrepresents other research, cites unreliable partisan research, and tells blatant lies to support his plan. This is not the level of competency we should expect from a presidential candidate.

Next we take a look at Romney's plans for medicare, as well as his criticisms of Obama's Medicare policies.

Update 8/20/12: Ezra Klein expands on the problem of the housing market, as well as the Obama administrations failures in that area. It is a MUST READ for anyone curious as to why this recovery has been so anemic.

The Roundup: 

Romney's Failed Policy Ideas Edition

Paul Krugman: Culture Of Fraud

"The big story of the week among the dismal science set is the Romney campaign’s white paper on economic policy, which represents a concerted effort by three economists — Glenn Hubbard, Greg Mankiw, and John Taylor — to destroy their own reputations. "

"And when I talk about destroying reputations, I don’t just mean saying things I disagree with. I mean flat-out, undeniable professional malpractice. It’s one thing to make shaky or even demonstrably wrong arguments. It’s something else to cite the work of other economists, claiming that it supports your position, when it does no such thing "

Romney's Failed Unemployment Strategy and the Bizarro Stimulus of Paul Ryan
Romney has no serious plans to curb unemployment. He wants to fix the "structural problems" with the market and hopes the unemployment rate goes down. Ryan, on the other hand, has embraced the discredited "bizzaro stimulus" of expansionary austerity (even though Romney has recently criticized they idea). Neither of the two has embraced real conservative stimulus ideas. Mike Konczal discusses some of these ideas while pointing out why Ryan and Romney's ideas will fail if implemented.

Erskine Bowles: Romney’s tax plan wouldn’t cut the deficit
Erskine Bowles, who served as chief of staff to President Bill Clinton, was co-chairman of the National Commission on Fiscal Responsibility and Reform. Possibly the most respected deficit hawk on the left, he was a co author of the famous Simpson-Bowles commission, which provided a number of recommendations to the president and congress for reducing the debt. Romney has tried to compare his tax reform proposal to that famous plan. However, as Bowles puts it, Romney's plan just doesn't measure up:

"This month, Romney said that his tax reform proposal is “very similar to the Simpson-Bowles plan.” How I wish it were. I will be the first to cheer if Romney decides to embrace our plan. Unfortunately, the numbers say otherwise: His refor m plan leaves too many tax breaks in place and, as a result, does nothing to reduce the debt."

...

"Obama hasn’t gone as far in cutting spending, particularly in health care, as is necessary to stabilize the debt at a reasonable level and keep it on a downward path as a percentage of the gross domestic product. But in contrast to Romney, the president — like the “Gang of Six” and other like-minded members of both parties — has embraced the central principle of Simpson-Bowles: that America will turn the corner on its debt only if Republicans and Democrats come together to support a balanced deficit-reduction plan. For the numbers to work, both parties need to put aside partisanship." (emphasis mine)

Note: Ezra Klein also argues why Erskine Bowles, Paul Ryan's "favorite Democrat", should be chosen as Obama's next Treasury Secretary.

Paul Krugman: What’s In The Ryan Plan? 
Paul Krugman goes through the CBO's report on Ryan's 2011 plan:

"Ryan basically proposes three big things: slashing Medicaid, cutting taxes on corporations and high-income people, and replacing Medicare with a drastically less well funded voucher system. These concrete proposals would, taken together, actually increase the deficit for the first decade and beyond.

All the claims of major deficit reduction therefore rest on the magic asterisks. In that sense, this isn’t even a plan, it’s just a set of assertions." (emphasis mine)

Update 8/27/12:

David Frum: Are Housing Hawks Wrong?

Dean Baker of the Center for Economic and Policy Research delivers a strong reproof to those (like me!) who believe that reducing consumer debt is the key to accelerating recovery.

Debunking Romney (Part 1): Tax Policies

This post is part one of a three part series debunking a few central claims that have been made by the Romney campaign this year. The first part deals with Romnay's tax policies, the recent Tax Policy Center study, and Romney's response to that study. The second part deals with the white paper Romney's advisers wrote to attempt to justify his plan. Finally, the third part deals with Romney's recent Medicare claims, as well as his impossible promises on the subject.  

Although the Obama campaign is no stranger to inaccurate campaign videos, this one was different. This one was actually accurate, receiving a rare "Geppetto" from the Washington Post Fact Checker, indicating its accuracy (note that this is the same Fact Checker Romney has relied upon to call out Obama in the past):

"The rest of the ad concerns the new study by the Tax Policy Center, which examines whether the numbers add up in Romney’s tax plan as described on his Web site. As we have noted, Romney has not detailed how he would cut tax rates by 20 percent and yet eliminate enough tax loopholes to keep the plan revenue neutral.

The study essentially concludes that, no matter what choices are made, taxes will be lower for the very wealthy while raised for most middle and lower income taxpayers. That’s because there are not enough loopholes to close for the rich — and the real money available to boost revenue would come from getting rid of tax credits that mostly benefit middle-income taxpayers, such as the home mortgage deduction. The study came to this conclusion even after trying to grant every positive assumption to the Romney plan.

The ad accurately describes the main points of the study, using headlines such as from The Wall Street Journal to underline its points: “Study: Romney’s Tax Plan Hits Middle Class.”" (emphasis mine)

The study by the non partisan Tax Policy Center really hurt Romney's campaign message. It showed that Romney's promise to cut individual income tax rates without either favoring the wealthy or losing revenue is not mathematically possible. FactCheck also agreed:

Romney has proposed very specific tax cuts. He would make the Bush-era income tax cuts and capital gains tax cuts permanent, then cut all income tax rates by an additional 20 percent across the board, repeal the Alternative Minimum Tax (which hits primarily upper-income taxpayers), and permanently repeal the estate tax (which currently applies only to estates valued at $5 million or more).

Romney has said he would offset the loss of personal income tax revenue (estimated at $360 billion a year by the Tax Policy Center) by reducing tax deductions and credits. And he has said he would do this while making sure that those at the top keep paying the “same share of the tax burden they’re paying now.”

But he has steadfastly refused to say which tax preferences would be cut or reduced. He has pointed to the revenue-neutral proposals for rate-cutting put forth by the deficit commission as evidence that what he proposes is possible in theory, but those proposals pay for the cuts largely by taxing capital gains at the higher rates that apply to ordinary income, a measure Romney has specifically ruled out.

So Romney has failed to produce evidence that what he promises is possible. And we judge that the weight of evidence and expert opinion is clear — it’s not possible. (emphasis mine)

The FactCheck article also does a good job detailing the history of Romney's plan, as well as the study by the TPC. It is well worth a read.

Romney has predictably rejected the study. The Washington Post Fact checker notes:

"The Romney campaign has emphatically rejected the study on several grounds. First, it claims the paper is “biased” because of the involvement of an economist (Adam Looney) who worked on the staff of Obama’s Council of Economic Advisers. Second, it says it ignores “pro-growth elements” of Romney’s plan, such as corporate tax reform and reduced deficits. Finally, it says the study admits it is not really examining Romney’s plan."

We will look at each of these justifications for rejection to see if they hold any water.


Is the paper biased?

The Washington Post Fact Checker calls this claim ridiculous:

"The charge of bias is pretty ridiculous. Looney, the third name on the paper, was an economist, not a principal, on the CEA and spent six years as an economist at the Federal Reserve Board. The economist positions at the CEA, in fact, are nonpartisan. Indeed, another co-author of the study, William Gale, was an economist for the CEA during the George H.W. Bush administration. (emphasis mine)

Ezra Klein of The Washington Post continues:

But the Tax Policy Center is directed by Donald Marron, who was one of the principals on George W. Bush’s Council of Economic Advisers. (emphasis mine)

As the Fact Checker notes, there is also a bit of hypocrisy here:

The Romney campaign would have more credibility to claim bias if it had not approvingly cited the Tax Policy Center as providing “an objective, third-party analysis” when the group critically examined the tax plan of Texas Gov. Rick Perry."

Readers of this column know that we have frequently cited the Tax Policy Center’s work. In a town full of partisans, the group is about as even-handed and nonpartisan as possible. The staff roster consists of serious and credible analysts with experience working in the administrations of both parties. (emphasis mine)

So not only are there economists from both political parties involved in the study, but Romney wants to have it both ways. He wants to cite this think tank when it backs him up, but poison the well when it doesn't.

In addition, as FactCheck points out, the TPC is not alone in its conclusions:

"it’s also the conclusion of an expert from the pro-business Tax Foundation, who states that the Tax Policy Center analysis “correctly identified the Romney plan as a tax cut, at least in static terms, that accrues mainly to high-income earners.”"

Does the paper ignore Romney's pro-growth elements of his plan?

Ezra Klein elaborates on this point:

There’s a reason the study ignores those “positive benefits”: Romney has called for a revenue-neutral corporate tax plan that brings the rate down from 35 percent to 25 percent while also promising to balance the budget. He has not said how he will achieve either goal. Until he does, those positive benefits — if they exist — are impossible to calculate.

If Romney tries to pay for his tax cuts by reducing spending, the results, as the Tax Policy Center notes, would be even more regressive. Romney has promised to increase defense spending and hold benefits steady for the current generation of seniors. The only remaining big spending programs are those that help the poor; that’s where Romney’s cuts would have to be concentrated. Paying for tax cuts for the rich by curtailing programs for the poor is even more of a reverse-Robin Hood act than paying for tax cuts for the rich by cutting the tax expenditures (deductions and the like) of the middle class. (emphasis mine)

Ezra Klein also points out the implausibility of Romney paying for some of his tax cuts with spending cuts:

The Center on Budget and Policy Priorities produced its own analysis of Romney’s plan, based on an assumption that Romney pays for half of his tax cuts through spending cuts. The conclusion: By 2022, Romney would need to cut all non-defense, non-Social Security programs by 49 percent. That is not plausible, to say the least. (emphasis mine)

Indeed at least one person who agreed with the TPC study argued there would be growth. FactCheck notes:

"William McBride of the Tax Foundation, a pro-business nonprofit, writes that reducing the corporate tax rate will spur 1 percent to 2 percent more economic growth. But McBride also writes that TPC “correctly identified the Romney plan as a tax cut, at least in static terms, that accrues mainly to high-income earners.” That’s not a bad thing, he argues, because the U.S. already has “the most progressive income tax system in the industrialized world,” and it is “well past time to consider the costs and benefits of such an extremely progressive system.”

So the conservative Tax Foundation argues that making the tax system less progressive will spur growth. However, there is reason to doubt this. Yes the federal income tax is very progressive. But it is not the only tax faced by US tax payers. When you include all federal, state, and local taxes (which are often regressive), taxes are actually just barely progressive. This means that, if Romney were to make the federal income tax less progressive, US taxes as a whole may lose their progressiveness altogether!

In fact, one of the authors of the TPC study points out just how improbable such growth would be under the Romney plan. FactCheck notes:

"Looney, one of the authors of the Tax Policy Center study, calls that “an implausibly large estimate,” but nevertheless ran the study again assuming that growth rate and an additional 12 million jobs. The result, he told ABC News, is that it would offset only about 15 percent of Romney’s revenue loss from individual tax cuts.

“Even in that case, there’s still a shift in the tax burden from high-income taxpayers to low- and or middle-income taxpayers,” Looney told ABC News. “It’s smaller, but it would require a net tax increase on the middle class.”" (emphasis mine)

And Looney wasn't alone, Brad DeLong also explained how assuming the growth would make up for the shortfall is actually bad arithmetic:

1% extra of GDP--if you could get it--taxed at an average rate of 20% is an extra $32 billion/year of tax revenue. $32 billion/year < $85 billion/year. $32 billion/year is less than 2/5 of $85 billion/year.

This is an arithmetic fail.

And, of course, if you bust open the long-run deficit further--which Romney does, not just through this tax-cut-for-the-upper-class plan but through the repeal of the efficiency-promoting portions of the Affordable Care Act--you don't boost but slow long-run growth. You increase uncertainty about the future: somebody is ultimately going to pay taxes to pay for government spending, we just don't know who. And in the long-run in which we get out of the slump government borrowing does crowd out private investment and slow growth.¹

In all likelihood we don't get a growth boost from this plan, we get a growth slowdown. And so the gap that must be closed is not $85 billion/year, but rather more. (emphasis mine)

More on this in Part 2...

¹Note: Notice DeLong is talking about long-term deficits, not short term. This is not expansionary austerity it is Keynesian economics.


Is the paper not really examining Romney's Plan?

The Washington Post Fact Checker notes how odd this accusation really is:

"It is also a bit rich for the Romney plan to complain that the paper does not really examine Romney’s plan — or is missing key elements — when the major problem with the plan is that Romney has released precious few details about it. The Tax Policy Center analysis makes clear that a full review is not possible because “certain components of his plan are not specified in sufficient detail.” In other words, if Romney would actually spell out those details, then a full review would be possible." (emphasis mine)

So Romney's only justification for this criticism is that he has made his plan UN-judgeable. Special pleading?

In addition, as Ezra Klein reminds us,  the TPC chose the most unrealistically charitable assumptions for Romney's plan:

To help Romney, the center did so under the most favorable conditions, which also happen to be wildly unrealistic. The analysts assumed that any cuts to deductions or loopholes would begin with top earners, and that no one earning less than $200,000 would have their deductions reduced until all those earning more than $200,000 had lost all of their deductions and tax preferences first. They assumed, as Romney has promised, that the reforms would spare the portions of the tax code that privilege saving and investment. They even ran a simulation in which they used a model developed, in part, by Greg Mankiw, one of Romney’s economic advisers, that posits “implausibly large growth effects” from tax cuts.

The numbers never worked out. No matter how hard the Tax Policy Center labored to make Romney’s promises add up, every simulation ended the same way: with a tax increase on the middle class. (emphasis mine)

So it sounds like none of Romney's excuses work to discredit the TPC paper and its implications for Romney's tax policies. You would think this would be a good time to revisit the drawing board. Sadly, Romney instead doubled down on the argument when his economic advisers released a white paper attempting to justify his plan. I take a look at this plan in n Part 2.

Update 8/18/12: Mitt Romney further responded to the TPC study in an interview in Fortune:

I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today. And second, that there would be a reduction in taxes paid by middle-income taxpayers. Those are the key principles of my plan that the Tax Policy Center chose to ignore. (emphasis mine)

Ezra Klein debunks this assertion:

"No, the Tax Policy Center didn’t “ignore” those principles. It tried to test them. And the principles failed.

What’s more, they failed for a comically simple reason. “The total value of the available tax expenditures (once tax expenditures for capital income are excluded) going to high-income taxpayers is smaller than the tax cuts that would accrue to high-income taxpayers, high-income taxpayers must necessarily face a lower net tax burden.”

That is to say, the tax cuts Romney is promising the rich are larger than the available storehouse of tax breaks Romney can close to pay for them. As such, if the plan is going to be revenue neutral, as Romney has pledged, it is mathematically impossible for it to do anything but shift the tax burden away from the rich." (emphasis mine)

Romney continues:

Instead they made various assumptions about what they thought I would do which are not in fact accurate. They made an assumption that I would reduce the home mortgage-interest deduction. I will not do that for middle-income taxpayers, as I have already indicated.

However, we have seen that the TPC already took the most favorable assumptions for Romney in its analysis, getting rid of all upper-class tax expenditures before touching middle class ones. So Romney seems to have missed the point. If they take the middle-class home mortgage interest-deduction off the table in their analysis, they will have to replace it with some other middle class tax increase. As we have seen throughout this article, there is simply no other way to make the budget revenue neutral.

Ezra Klein also notes just this further reinforces the fact that Romney's budget a fantasy:

"So let me get this straight. Mitt Romney, who has refused to officially name even one offset for his tax cut, has taken the bulk of the mortgage-interest deduction off the table. In his 10-year deficit-reduction plan, he has refused to name the spending cuts necessary to hit his targets, but he has taken Social Security, Medicare and defense off the table for cuts.

Tell me again why I’m supposed to believe that this presidential candidate who is systematically ruling out cuts to the most popular spending programs and tax breaks is going to be able to make incredibly unpopular spending cuts and tax changes once in office?"

In a previous article (to be covered more in depth in part 3), Ezra Klein already explained why Romney's decision to take Social Security, Medicare, and defense spending off the table for cuts makes his budget promises practically impossible. Taking the mortgage-interest deduction for middle class taxpayers off the table makes it even worse.

In addition, Romney has attempted to play the "but you are doing it too" game with Obama.

"Now, interestingly, the same center did an analysis of President Obama’s tax plan and concluded that he’s raising taxes on the middle-class." (emphasis mine)

I consider myself something of a connoisseur of the Tax Policy Center’s reports, and I didn’t remember any showing that result. So I asked the Romney campaign: What analysis were they referring to? They pointed me to Table T12-0045, which analyzes President Obama’s 2013 budget request against current policy. Here’s the relevant section:

I know, lots of numbers. But my fellow TPC-ophiles will notice something off the bat: Those numbers do not appear to show a middle-class tax increase. Here’s where to look:

The highlighted boxes show the net tax change for different income quintiles. For the bottom four quintiles — the bottom 80 percent of the country — there is, on average, a tax cut, not a tax increase. And I don’t know where you find the middle class if not in the bottom 80 percent of the income distribution.

But the Romney campaign clarified that they weren’t looking at those columns. They were looking at these columns:

Those columns show the percentage of tax units (a technical term, but think “households” and you’re close enough for our purposes) in a given income group that will see a tax increase under the new plan. As it happens, under Obama’s plan, a majority of the bottom 80 percent sees no tax change. A minority of tax units see a small increase. A somewhat smaller minority see a somewhat larger tax cut. And so, while there’s a tax cut overall, some households see a tax increase.

Because any tax change has winners or losers, we tend to look at averages when assessing whether a tax plan raises or lowers taxes on an individual group. The Romney campaign is asking whether anyone in the group that could be called “the middle class” sees a tax increase, and some do. If I were Politifact, I’d rate Romney’s claim “mostly false,” but you can decide for yourself.

Now, there’s a separate tax policy table (T12-0049, for those keeping track) that looks at Obama’s budget a few years down the road and finds a small tax increase for the fourth quintile. I think you can fairly say that the 60-80th percentile includes at least some of “the middle class,” and so if the Romney campaign was pointing to that table, which perhaps they’ll start doing, I’d say their claim is mostly true. (emphasis mine)

So Romney may be on to something here (Is it safe to say he has also dropped the pathetic "biased" accusation towards the TPC?). Down the road, the highest middle class taxpayers may see a small increase. But, as the Obama campaign noted to Ezra Klein, this is only because of the inclusion of corporate taxes in the TPC analysis. In additionr, these pale in comparison to the increases middle and lower-income taxpayers will see under Romney's plan. If we ignore the revenue neutral aspects of Romney's plan, we get this TPC table:

Romney’s plan is a net tax increase on poorest Americans, as it permits certain stimulus-related tax breaks to expire. But even in this version of the plan, which doesn’t include any offsets and increases the deficit by trillions of dollars, some tax units see an increase. (emphasis mine)

So even without the revenue neutrality, Romney's plan still contains a tax increase on the poorest of Americans. As the TPC points out, once you include attempts to make the plan revenue neutral, you definitely get middle class tax increases, even under the most favorable conditions for Romney. In addition, it should be noted that these "most favorable conditions" are almost completely politically impossible. They include popular tax expenditures Republicans have generally never shown even the slightest interest in repealing. So, in order to keep Romney's plan revenue neutral under realistic political conditions, you would need an even larger tax increase on the middle and lower classes. Maybe Romney should remember the old saying "He who lives in a glass house shouldn't throw stones."

Fox Nation Hypocrisy Over IRS Tax Code

This last summer, when Fox Nation pitched a bitch about Media Matters supposedly violating IRS tax law, I wondered if they had expressed similar outrage when churches (who are also 501(c)(3) Tax Exempt) had explicitly endorsed political candidates, in clear violation of IRS tax law. Turns out, when "Project Fair Play" 2010 came around, Fox Nation showed support:

Nearly 100 pastors across the country took part in Pulpit Freedom Sunday today, an in-your-face challenge to what the government says can and cannot be said in church. The pastors, along with the Scottsdale, Ariz.-based nonprofit Alliance Defense Fund, planned today's event as a reaction to a law stating that churches are not allowed to support politicians from the pulpit, according to the ADF. The growing trend is a challenge to the IRS from the churches, and may jeopardize their all-important tax-exempt status. But some pastors and church leaders said they are willing to defy the law to defend their right to freedom of speech. Pastor Dan Fisher from Trinity Baptist Church in Yukon, Okla., who took part in today's challenge, said should be allowed to discuss politics with their congregation. Separation of church and state is not in the Constitution, but the government uses tax exemption as a means to enforce that notion, he added. "The crowd applauded, and said it was wonderful," Fisher said of his sermon this morning. "I can't say that everyone was happy, but no one came up to me to complain." Federal tax law, established in 1954, prohibits churches and tax exempt entities from endorsing or opposing political candidates. (emphasis mine)

Never mind the misleading rhetoric about "Separation of church and state" not being in the Constitution (a fallacy). Given how much rage was seen from Fox Nation over Media Matters (despite the incredible shakiness of their claim), one would expect similar outrage to what amounts to a clear violation of tax law. But this is Fox News we are talking about. So why would anyone be surprised at the hypocrisy. Let's see what happens this year...

Update 9-29-11: The details of what a church could actually lose are detailed in the "IRS tax Guide for Churches and Religious Organizations:"

"When it participates in political campaign activity, a church or religious organization jeopardizes both its tax-exempt status under IRC section 501(c)(3) and its eligibility to receive tax-deductible contributions. In addition, it may become subject to an excise tax on its political expenditures."

Income Inequality Shows Up In Taxes (that fun 70% figure)

Ive been meaning to post on this for quite some time, but never got around to it. However, it looks like Chris Hayes seems to have already done essentially what I was going to do:



As Chris Hays points out, the fact that the richest 10% pay over 70% of income taxes doesn't necessarily suggest the rich are over-taxed. He mentions other taxes that are not factored into the analysis (but misses the Corporate Tax). However, he mentions that another cause of this income tax phenomenon could also be income inequality. His simple model makes this point rather well. I will use another more dramatic model later in this post. However, it seems that Chris also had another argument to make: The US is "Inequalistan."

Now for my model. Let's take a fictitious 2 person country where one poor person makes $10 a day while the other rich person makes $950 a day. Let us also say there is a regressive-style tax rate where the rich person pays only 10% of their income in taxes while the poor person pays 50%.

The poor person would contribute $5 to daily income tax revenue.

The rich person would contribute $95 to daily income tax revenue.

Since total daily income taxes would equal $100, that means the rich person would contribute 95% of income tax revenue, despite the fact that they are taxed at a much lower rate than the poor person! Do you think the rich person could make the case he is over-taxed by saying he is responsible for 95% of the tax revenue?

Unlike Hayes, I was not trying to make the last point that my fictitious country is actually any real country. My point was to show that the rich paying the lion's share of income taxes does not necessarily mean the rich are over-taxed. I did this with a simple counter example, extreme enough to make the point painfully obvious. Now we may never see any example this extreme in real life. However, this example does point out that one should not come to abrupt conclusions about statistics where the outcome is affected by more than one variable.

On Ending/Lowering Corporate Taxes

Lately there has been a bit of a stir over Rep. Louie Gohmert's proposal to eliminate corporate taxes as a single solution to fixing the economy:

Republican Congressman Louie Gohmert of Texas introduced legislation to the House of Representatives on Wednesday that would drop the corporate tax rate to all the way down to zero.

It should be noted that lowering or removing the corporate tax is actually a bi-partisan idea. Moreover, as Harvard Economist Robert Barro pointed out:

"the inefficiency is magnified here because of double taxation: the income is taxed when corporations make profits and again when owners receive dividends or capital gains"

However, unlike Barro, I do not think Austerity will save the economy:

"Although advanced economies need medium-run fiscal consolidation, slamming on the brakes too quickly will hurt incomes and job prospects"

And unlike Gohmert, I do not think lowering the corporate tax rate is sufficient to get us out of the recession

"Corporations are already sitting on trillions in cash, so cutting their taxes would likely do very little to help the economy,"

Nonetheless, it is definitely something that should be included in any serious jobs bill as it is sure to help increase business investments once demand has increased to the point where businesses actually want to invest again:

According to a 2008 study by the Organization for Economic Cooperation and Development, “Corporate taxes are found to be most harmful for growth.” Tax reform that reduced the burden on capital income and shifted it toward consumption would improve prospects for long-run growth and, in so doing, encourage greater investment today.