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Princeton Economist: The Math Behind Romney's Tax Plan Adds Up

11:48 AM, Oct 4, 2012 • By JOHN MCCORMACK
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At last night's presidential debate, Barack Obama said that Mitt Romney's tax plan--cutting rates by 20 percent across the board and maintaining revenue neutrality by eliminating loopholes--is mathematically impossible.

"If you are lowering the rates the way you describe, Governor, then it is not possible to come up with enough deductions and loopholes that only affect high-income individuals to avoid either raising the deficit or burdening the middle class," Obama said. "It's — it's math. It's arithmetic."

Obama was basing his claim on a study by the Tax Policy Center, a project of the center-left Brookings Institution and Urban Institute. But there are at least three critical flaws the the TPC study: (1) it assumes pro-growth tax reform can't actually produce economic growth, (2) it assumes two tax expenditures worth $45 billion per year are not 'on the table', and (3) it assumes tax reform must pay for repealing Obamacare's tax hikes, rather than assuming that the repeal of Obamacare's spending will pay for repealing the tax hikes. If one corrects these erroneous assumptions, the math checks out

As Princeton economics professor Harvey Rosen writes, Romney's plan would neither require a net tax hike on the middle class nor a tax reduction for the rich under "plausible" growth assumptions.*

"[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 Rosen. But growth is the whole point of Romney's plan. "[A] proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same," Rosen writes. "That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral."

*What counts as plausible? Rosen notes that that's in the eye of the beholder, but it wouldn't be zero, as the Tax Policy Center assumes.

Rosen finds that Romney's plan could work if tax reform causes the economy to grow 3 percentage points more over a given period of time than it would have grown without tax reform.

Do note that Rosen is not saying the annual GDP growth rate would be, say, 5 percent rather than 2 percent. He's saying it would be 2.29 percent, rather than 2 percent, over a 10 year period. Rosen does the math in an email to me: 

Say that GDP today is R.  In 10 years, with a growth rate of 2 percent a year, it will be 1.219 x R.   Suppose we think that GDP will be 3 percent higher in ten years if we enact the Romney plan.  In this case, 10 years from now GDP will be  1.255 x R.  Now the question is: starting today, what annual growth rate would lead to a GDP of 1.255 x R in 10 years.  The answer is 2.29 percent.

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