The Romney Tax Plan and “Media Bias”
by Benjamin Studebaker
Increasingly, whenever anyone tries to talk about political or economic facts, no one listens, because it is assumed that all “facts” are really opinions and that the evidence in inconclusive, with an equal amount of distortion by all sides and parties involved. However, the result of this kind of thinking is that it becomes absolutely impossible to inform people, because any factual evidence that contradicts a person’s preferred position will be assumed away as “media bias”.
Our case study is Romney’s tax plan. First off, let’s look at what Romney says his tax plan does:
America’s individual tax code applies relatively high marginal tax rates on a narrow tax base. Those high rates discourage work and entrepreneurship, as well as savings and investment. With 54 percent of private sector workers employed outside of corporations, individual rates also define the incentives for job-creating businesses. Lower marginal tax rates secure for all Americans the economic gains from tax reform.
- Make permanent, across-the-board 20 percent cut in marginal rates
- Maintain current tax rates on interest, dividends, and capital gains
- Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
- Eliminate the Death Tax
- Repeal the Alternative Minimum Tax (AMT)
The key thing to notice here is that Romney is promising a 20% cut in marginal rates–that’s a lot of revenue lost, and Romney wants to close the deficit, so Romney has also promised to make his tax plan “revenue neutral”. This means that the 20% cut in marginal rates (as well as his other, smaller tax reductions) has to be made up by other policies that recover the lost revenue. Romney claims he can do this by closing loopholes in the tax code that allow various revenue to be lost through tax deductions–this is called “base broadening”.
Now, the Tax Policy Centre has gone and run the numbers on what this plan would do, and they came to this conclusion:
Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.
The Tax Policy Centre reached this conclusion by realising that these tax deductions would cost around $360 billion. To make back up that $360 billion, Romney has to close loopholes and broaden the tax base. However, Romney has also promised to preserve tax deductions that encourage people to invest, so many of those deductions are off the table so far as base broadening goes. This leaves him with this set of possibilities:
Looking at this chart, for every blue bar that is not matched by a red bar, the Romney plan will necessarily lead to a tax decrease (as there is not enough revenue available from closing the remaining non-investment loopholes to match the rate cut). To fill those gaps and make the plan revenue neutral, Romney must have other income groups in which the situation is reversed–the amount of revenue gained by closing loopholes must be greater than the size of the rate cut. For these income groups, the Romney tax plan necessarily raises taxes. The Tax Policy Centre summarises it this way:
This means that even if tax expenditures are eliminated in a way designed to make the resulting tax system as progressive as possible, there would still be a shift in the tax burden of roughly $86 billion from those making over $200,000 to those making less than that amount.
The plan lowers taxes on the top 5%, while raising it for the remaining 95%. An annual family income of $200,000 seems to be the dividing line–those under it would see a 1.8% fall in their after tax income, while those with children under it would see a 3.5% fall (many of the loopholes closed to make it work would necessarily impact tax deductions on people with dependants).
This report has been met with glee on the left, with many pundits and media sources talking it up, but it has not resulted in a substantial move in the polls numbers between Romney and Obama, in which Obama has maintained more or less a 2-point lead. The 45% who consistently poll for Romney either recognise that most of them will see higher taxes under Romney and accept that policy as beneficial, or they deny the validity of the Tax Policy Centre’s report, calling it another example of “media bias”. I suspect that the vast majority fall into the latter category.
On what grounds is the Tax Policy Centre accused of bias? It has reached a conclusion that favours the political left, and therefore all those sympathetic to the political right assume it to be wrong somehow, that it must be messing with the data by assuming things that are not true. The Tax Policy Centre is however, an independent, non-partisan organisation, and, furthermore, a careful examination of the assumptions the centre used in its report reveal many assumptions that would seem to bias their result, if anything, in Romney’s favour–they assumed that all non-investment tax loopholes that benefited the wealthy would be closed first, for example. Reading the report, there is not a single instance in which Romney’s plan seems to get any significant bias in its treatment from the Tax Policy Centre. Those on the right who are not in the top 5% economically and who do not wish to see their taxes rise have their heads in the sand on this one.
Now, there will of course be readers who are themselves sceptical of me and think that I am yet another example of “media bias”, so for these sceptics I have this challenge:
Below is a link to the Tax Policy Centre’s report. Read it. If you find bias, leave a comment on this post explaining how what the Tax Policy Centre did in its report to bias it against Romney. If you don’t find bias, I challenge you to change your view, and if you can’t, if you still support Romney’s tax policy, I want to know why–leave a comment explaining your view.
The Tax Policy Centre’s Report:
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I agree there needs to be tax reform. When 50% of the piulbc pays no taxes, that is a problem. If we could lower the top rate and broaden the base, cut corporate subsidies (especially boondoggles like ethanol), and then reform entitlements, I think we can get there. We need a growing economy to make the numbers work, but we also have to cut government spending, and that is hard to do when so much of the piulbc pays no taxes. When we hammer the over $250,000 per year people with higher taxes, we hit small businesses that are sole proprietorships. Job creation is our problem; job destruction is what the current administration produces with its heavy-handed approach to regulation, endless extended unemployment benefits, and crazy health care schemes. Why is all of the money on the sidelines? Because we hammered the small banks with Dodd-Frank while leaving Fannie Mae and Freddie Mac untouched. We bailed out car companies and Wall Street, and used stimulus to pave roads that didn’t need paving, initiated Cash for Clunkers, Dollars for Dryers and other kooky ideas, and drove ourselves into unsustainable debt. We need a new president, and then a fresh, thoughtful approach to deficit reduction and economic growth. Sorry academia, the last presidential election will go down as one of the most profound blunders the American voters have ever made.
I think perhaps you are under a misapprehension–the “50% of the public pays no taxes” statistic is inaccurate. 47% do not pay income tax, but of those 47%, 28% pay payroll taxes, and the remainder are mostly the elderly and college students. I wrote on the subject in September:
I would question the supply side view taken here–the issue is not that business is overtaxed or over-regulated, but that its sales are insufficiently high because of high levels of private sector debt. In the run up to the global economic crisis, private households ran up unprecedented high levels of debt, and now consumers are struggling to pay those debts off. With all consumers saving more of every dollar in income than was saved prior to the economic crisis, consumer spending (and consequently demand) is reduced. This makes it unprofitable for businesses to expand their supply and hire additional labour. To correct this problem, the answer is not merely one of government getting out of the way, but one of government working to relieve households of their debt burden and to inject cash into the economy to boost consumer spending. I have discussed this in the past on the blog as well:
On the question of public sector debt, the difficulties of the government are overstated–borrowing costs for the federal government remain quite sustainable, at under 2%, and most of the money the state is borrowing from American citizens and companies rather than from foreigners. I wrote about this on the blog as well:
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