Tags: Feldstein | Romney | tax | revenue

Harvard’s Feldstein: Romney Tax Plan Would Actually Raise Revenue

Wednesday, 29 August 2012 08:51 AM

GOP presidential nominee Mitt Romney’s plan to cut taxes and loopholes at the same time won’t limit government revenue but will actually raise it, as more taxpayers will pay into the system instead of dodging tax burdens or paying themselves in non-taxable ways, said Harvard economist Martin Feldstein.

Romney plans to slash individual income tax rates by 20 percent, eliminate the Alternative Minimum Tax and the estate tax and at the same time, limit tax deductions and loopholes that allow high-income taxpayers to lower their tax payments.

The income-tax revenue in 2009 before all tax credits came to $953 billion, Feldstein pointed out in a Wall Street Journal opinion piece, adding that $49 billion of that total came from taxing dividends and capital gains at reduced rates that would not be subject to further reductions under the Romney plan.

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Cut that portion out and $904 billion is left over and would be subject to Romney’s 20 percent reduction, which would appear to strip the government of $181 billion in revenue.

Not so, Feldstein wrote in The Journal.

“[P]ast experience shows that taxpayers do respond to lower marginal tax rates by acting in ways that increase their taxable incomes: increasing work effort, receiving more of their compensation in the form of taxable cash rather than untaxed fringe benefits and spending less of their income on tax-favored forms of consumption that are deducted or excluded in calculating taxable income,” he said.

“More specifically, history shows that a tax cut that raises the after-tax share of earnings that an individual keeps by 10 percent raises taxable income by about 5 percent. This implies that the revenue loss from the 20 percent tax cut would be $148 billion, not $181 billion.”

Limiting deductions for high-income earners while lowering rates and broadening the casting net more than offsets that revenue loss.

Plus it would be more equitable.

“Since broadening the tax base would produce enough revenue to pay for cutting everyone’s tax rates, it is clear that the proposed Romney cuts wouldn’t require any middle-class tax increase, nor would they produce a net windfall for high-income taxpayers,” Feldstein wrote.

Tax reform advocates agree that the next president needs to broaden the tax base and lower the rate in a way that increases revenue.

The country’s debt is too high to move forward without sweeping tax reform.
“We need to have a comprehensive plan that gets our debt as a percentage of the economy, or debt-to-[gross domestic product], to about 60 percent by around 2020 and it will keep it at or below that level going forward,” David Walker, CEO of the Comeback America Initiative, which promotes fiscal reform and responsibility, told Newsmax.TV in a recent exclusive interview.

“To do that, you’re going to have to reform social insurance programs, you’re going to have reduce the Fed’s and other spending and you’re going to have to engage in comprehensive tax reform that, among other things, will generate more revenue.”

Today, the country’s total debt-to-GDP ratio stands around 100 percent.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

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Wednesday, 29 August 2012 08:51 AM
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