Tax Cut Man
Oct 15, 2012, Vol. 18, No. 05 • By JOHN MCCORMACK
When Mitt Romney stepped on stage at the first presidential debate in Denver on October 3, he had been losing to President Obama on the issue of taxes for two solid months. The Obama campaign bombarded Romney with TV ads claiming he would raise taxes on middle-class families by $2,000 in order to pay for his tax cut for the rich. Throughout August and September the Romney campaign did little to rebut the charge or attack Obama as a tax-hiker.
‘I will lower taxes on middle-income familes.’
During Romney’s 4,100-word address at the Republican convention, he barely uttered 50 words about taxes. In contrast, an attack on Romney’s tax plan was at the heart of Bill Clinton’s speech at the Democratic convention a week later. Obama kicked off his own convention speech by mocking Romney’s tax plan. On September 17, the Wall Street Journal reported that four different polls showed Romney had lost his advantage on the tax issue to Obama.
So it was astonishing to watch Romney rout Obama in a debate whose first 25 minutes were dominated by a lengthy and detailed argument about taxes. That first segment wasn’t even Romney’s strongest. But it seems to have been enough to begin to turn the tax issue around.
Following the debate, a CNN poll showed that by a 9-point margin (53 percent to 44 percent), voters thought Romney would handle the issue of taxes better than Obama. Even the pollster for the pro-Obama super-PAC Priorities USA acknowledged its focus group showed “Romney did gain ground on the president on the issue of taxes, and he largely negated the advantage Obama had on the issue when respondents first walked into the room.”
Democrats and their allies in the media are attributing Obama’s debate loss to a simple lack of passion. But this was an issue-heavy evening. Obama attacked Romney’s tax plan during the debate as thoroughly as Bill Clinton did at the Democratic convention. Romney got the better of the argument during the debate by repeatedly rebutting Obama’s claims, explaining the rationale of his own plan, and attacking Obama for trying to raise taxes on small businesses during a recession.
At the center of the dispute between Romney and Obama is a study by the Tax Policy Center (TPC), a project of the liberal Brookings Institution and the Urban Institute. The study claims Romney cannot cut tax rates by 20 percent across the board without adding to the deficit or raising taxes on the middle class. According to TPC, even if all deductions and exclusions were eliminated for Americans making more than $200,000 per year, there would still be an $86 billion hole in Romney’s tax plan in the year 2015.
But there are three big flaws in the TPC study. First, as Alex Brill of the American Enterprise Institute has pointed out, it assumes tax reform must pay for repealing Obama-care’s tax hikes—totaling $29 billion in 2015—rather than assuming that repeal of Obamacare’s spending pays for repeal of Obamacare’s tax hikes. Second, it wrongly assumes that $45 billion of annual tax expenditures on interest on state and local bonds and life insurance are off the table. Third, and most important, it assumes pro-growth tax policy can’t actually produce economic growth. According to one model created by Harvard economists Greg Mankiw and Matthew Weinzierl, Romney’s tax plan could annually produce an extra $53 billion in growth. Correct for these three erroneous assumptions, and Romney’s plan can yield $127 billion to fill an $86 billion hole.
Of course, it’s not clear that repealing tax expenditures is politically feasible. Romney hasn’t specified which loopholes he’d close in the tax code, saying he’s willing to work with Congress on that front. What happens if Congress is unwilling to close enough loopholes—or to put a strict enough cap on the total deductions any taxpayer can take, if Romney chooses to take that route? Romney implied at the debate he’d then settle for as large a rate reduction as possible without violating three hard and fast principles. “I’m not looking for a $5 trillion tax cut. What I’ve said is I won’t put in place a tax cut that adds to the deficit. That’s part one,” Romney said. “Number two, I will not reduce the share paid by high-income individuals. . . . And number three, I will not, under any circumstances, raise taxes on middle-income families. I will lower taxes on middle-income families.”