Martin Feldstein Accidently Proves Either (i) 152 > 186 or (ii) It Is Mathematically Impossible for Romney to Keep His Tax-Policy Promises
The fact that he sought to prove otherwise and wound up confirming the Tax Policy Center's conclusions purely by accident gives me additional confidence that the TPC knows what it is doing. Martin Feldstein:
Mitt Romney's plan… has been attacked as "mathematically impossible."… this is not the case… IRS data… 2009… cost of the 20% reduction in all tax rates… the Alternative Minimum Tax… the tax on interest, dividends and capital gains for married couples with incomes below $200,000, and for single taxpayers with incomes below $100,000…. This brings the total [dynamically-scored] cost of the Romney income tax cuts to $186 billion… whether this revenue loss can be offset by broadening the tax base of high-income individuals.
It is impossible to calculate the exact effects… since Gov. Romney hasn't specified what he would do… taxpayers with adjusted gross incomes over $100,000… made itemized deductions totaling $636 billion… paid marginal tax rates of 25% to 35%… apply a 30% marginal tax rate to the $636 billion…
Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.
That is Feldstein's point:
- Cost = $186B
- Maximum Possible Revenue = 30% x $636B = $191B
- $191B > $186B
But that point is simply, mathematically, arithmetically wrong.
Taxpayers making more than $100K/year in AGI had marginal tax rates of 25%-35% in 2009--an average tax rate, Feldstein assumes, of 30%.
After Romney's 1/5 reduction in tax rates they will have tax rates of 20%-28%--an average tax rate of 24%.
Multiplying not the wrong 30% but the true correct 24% marginal tax rate by the $636 billion in itemized deductions gets us not $191B but $152B.
$152B < $186B
Note that to get to this point I have already had to give Feldstein four passes--a pass to claim big behavioral responses where they lower his cost number, a pass to claim small behavioral responses where they would raise his cost number, a pass to excuse his failure to use his current bargaining power to get Romney to specify a plan and so commit to good technocratic tax policy, and a pass on his moving-of-the-goalposts in the definition of "high-income taxpayers"--to get this far. I am not happy to give him those four passes. But I am willing to give him those four passes.
This fifth pass, however, I cannot give him.
I cannot let him say that $152B > $186B.
I just cannot.
So I call for the Wall Street Journal to correct the headline. Make it, instead, truthful: "Romney's Tax Plan Can not Raise Revenue without Taxing the Middle Class".
And I call for the Wall Street Journal to further correct the article by adding a subhead: "Martin Feldstein tries as hard as he possibly can to demonstrate that it would not be mathematically impossible for Romney to keep his tax promises, and fails".
And then the last two paragraphs of Feldstein's article needs some editing as well, as part of the correction that I would like to see the Wall Street Journal make:
Since broadening the tax base would not produce enough revenue to pay for cutting everyone's tax rates, it is clear that the proposed Romney cuts would
notrequire anya middle-class tax increase, norand would theyproduce a net windfall for high-income taxpayers. The Tax Policy Center and others are wrong to claim otherwisecompletely correct in their conclusions.
The Romney plan
can reducewill increase the current tax system's distortions, increasing national income in the short run andreducing economic growth in the years ahead. That was the key to the very successful Reagan tax cuts of 1986. It was also the tax-reform strategy embraced by the bipartisan Bowles-Simpson commission in 2010. And it could put the economy back on the right track in 2013.
 The Four Passes: Feldstein writes:
[P]ast experience shows that taxpayers do respond to lower marginal tax rates by acting in ways that increase their taxable incomes… a tax cut that raises the after-tax share of earnings that an individual keeps by 10% raises taxable income by about 5%.
That number seems to me to be about twice what it should be, but let's give Marty a pass and give him his $148B…
Eliminating the Alternative Minimum Tax in 2009 would have reduced revenue by an additional $23 billion. Eliminating the tax on interest, dividends and capital gains for married couples with incomes below $200,000, and for single taxpayers with incomes below $100,000, would cost an additional $10 billion to $15 billion. This brings the total cost of the Romney income tax cuts to $186 billion at 2009 levels.
But where are the behavioral effects here? The $38B seems to me to be $46B, so we are now at a $186B static revenue loss in Feldstein-world and $212B in reality-world. But let's give Feldstein a second pass and give him his $186B…
The key question raised by the Romney plan's critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals. It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn't specified what he would do…
Indeed he has not. And at this point, I think, Martin Feldstein should have gone back to the Republican political masters and told them: "Look. I can defend a tax plan. I cannot defend a non-plan." At the moment Martin Feldstein's endorsement is worth something to the High Politicians of the Republican Party, and so now he can bargain his open and aggressive support for platform commitments to good tax policy. After November he will have no bargaining power: the Randites and the looters will be in the saddle. And I think it is the failure of Republican economists to use their leverage when they had it that made tax and budget policy in the George W. Bush administration so unspeakably awful--cf. Hubbard, R. Glenn; Mankiw, N. Gregory; and Lazear, Edward. But let's give Feldstein a third pass on his failure to use his bargaining power now when he has something of value the High Politicians want.
But refuting the Tax Policy Center's assertions… only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost. The IRS data show that taxpayers with adjusted gross incomes over $100,000…
Hitherto in the tax debate "high-income taxpayers" has meant has meant a reported AGI of more than $200K/year on their return--not $100K/year. Hitherto it never struck anybody in this debate that "high-income taxpayers" could be defined as Feldstein defines it. And the Tax Policy Center explicitly defines high-income taxpayers as those reporting AGI of more than $200K/year.
The fact that Feldstein cannot use the TPC's definitions is proof that the TPC is correct. Feldstein does not disprove the TPC's claim that it was mathematically impossible for Romney to keep his tax promises: instead, he confirms the TPC's claim. But let's give Feldstein a fourth pass on his redefinition of "high-income taxpayers" and his claim that what Romney wants to do is to raise taxes on the $100K/year-$200K/year brackets in order to give a tax cut to the >$200K/year folks.
Note: I do not think that we have a case of Niallism here.
I think that Feldstein was working quickly trying to produce a piece that would be helpful to a candidate, Mitt Romney, who he thinks would make a much better president for America over the next four years than Barack Obama.
I think Feldstein took the standard economist's shortcut of just doing the first-order effects, and then in the press of deadlines failed to check whether the second-order interaction effects were large enough to make a difference.