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Losing the Tax Debate

Romney is behind, but there's time for a turnaround.

12:10 PM, Sep 26, 2012 • By JOHN MCCORMACK
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And what about Democratic claims that the Bush tax cuts are largely responsible for the debt? Senator Pat Toomey (R, Pa.) says it's "absurd" to think Obama's tax plan is a solution to the deficit. Toomey points out that, under the dubious assumption the tax hike wouldn't hurt economic growth, Obama's plan "would generate enough additional revenue over the next 10 years to reduce the deficit by 8 percent."

"What about the other 92 percent?" Toomey asks. "Since they’re not willing to cut spending on anything ever, obviously the only solution is a tax increase on the middle class. That’s inevitably where they’d end up going." 

The case for tax reform may not be as easy to make as the case against Obama's tax hikes, but the good news for Romney is that his vice presidential running mate Paul Ryan makes a very effective and comprehensible argument about why current tax code--about which Obama has done nothing to reform--is corrupt, irrational, and anti-competitive. 

Call it the "GE Rule." While reporting on Paul Ryan's congressional townhall meetings in 2011, I watched as multiple constituents brought up the fact that GE, one of the largest corporations in America, doesn't pay any taxes. That provided Ryan with the perfect opportunity to make the populist case for tax reform.

"Is it right and fair that ... the third or fourth largest company in America, General Electric, made about $14 billion and didn’t pay any taxes? Of course not," Ryan said at a townhall meeting in the fall of 2011. "Drive around town for the next 10 minutes, and you’ll see a brown UPS truck somewhere. UPS is a really large company as well. UPS paid a 34 percent effective tax rate…. Their [biggest foreign] competitior DHL pays a 24 percent tax rate. [UPS is] at 34, GE was at zero. Okay, what’s going on there? GE was able to utilize all of these various loopholes, all of these various deductions--it's legal." GE's tax return was a whopping 57,000 pages long.

The solution, Ryan said, is: "Get rid of those loopholes and lower tax rates by a corresponding amount. Don't lose revenue, but for every loophole you pull out, and deny a company from being able to get this little carveout, you can lower the rates so we can be more competitive with our competitors overseas. We want to stem the bleeding of jobs going overseas, of foreign companies buying U.S. companies and taking headquarters overseas."

The argument for corporate tax reform is closely tied to the argument for individual income tax reform because many small businesses are taxed as individuals. "The president’s budget raises their taxes to 44.8 percent. You throw Wisconsin state income tax on it, it goes over 50 percent," Ryan said at another townhall meeting in the spring of 2011. "The point I’m trying to make here is you keep going down that path and you’re going to shut down the economy and make it harder to compete and keep jobs."

Then Ryan brought home the point that higher taxes on the wealthy can't solve our debt problems. "A lot of folks think that just raising taxes on other people is kind of like the fairy dust that makes budgets all of the sudden balanced," he said. "If you took every profit from every Fortune 500 company today, it would fund the government for 40 days. If you took a 100 percent tax on every individual making over $200,000 and every couple making over $250,000, including all the small businesses—that’s a lot of money—you’d fund the government for 7 and a half months. If you just let the Bush tax cuts expire on top income earners, which is what a lot of people are advocating, the amount of revenue you’d get for over 10 years would get about half of this year’s deficit closed."

Of course, the Romney campaign also needs to explain why his plan wouldn't raise taxes on the middle class. The huge flaw with the charge against Romney is that it is based on a paper by the Tax Policy Center, which, like government scorekeepers, doesn't factor in economic growth when assessing tax plans.

The Tax Policy Center isn't saying Romney's model is incapable of producing growth, it just doesn't attempt to calculate growth. "[T]he TPC model assumes that regardless of the tax rate, people work the same amount, save the same amount, and invest the same amount," writes Princeton economics professor Harvey Rosen

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