The Romney Hood Fairy Tale

The false, invented analysis behind Obama's tax claims. .

As he escalates his class war re-election campaign, President Obama has taken to calling Mitt Romney's economic plan "Robin Hood in reverse" or "Romney Hood." The charge is that even though Mr. Romney is proposing to cut tax rates for everybody across the board, Mr. Romney will finance this by imposing a tax increase on the middle class. His evidence is a single study by the Tax Policy Center, a liberal think tank that has long opposed cutting income tax rates.

The political left always says Daddy Warbucks gets all the tax-cut money. So this is hardly news, except that the media are treating this joint Brookings Institution and Urban Institute analysis as if it's nonpartisan gospel. In fact, it's a highly ideological tract based on false assumptions, incomplete data and dishonest analysis. In other words, it is custom made for the Obama campaign.


Editorial board member Steve Moore on President Obama's claim that Mitt Romney's tax plan would raise taxes on middle and lower class earners.
.
By the way, even the Tax Policy Center admits that "we do not score Governor Romney's plan directly as certain components of his plan are not specified in sufficient detail." But no matter, the study plows ahead to analyze features of the Romney plan that aren't even in it.

***

The heart of Mr. Romney's actual proposal is a 20% rate cut for anyone who pays income taxes. This means, for example, that the 10% rate would fall to 8%, the 35% rate would fall to 28% and all the brackets in between would fall as well. The corporate tax would fall to 25% from 35%.

The plan says these cuts would be financed in a revenue-neutral way. First, by "broadening the tax base," which means reducing or eliminating tax deductions and loopholes as in the tax reform of 1986. The Romney campaign doesn't specify which deductions—no campaign ever does—but it has been explicit in saying that the burden would fall most on higher tax brackets. So in return for paying lower rates, the wealthy get fewer deductions.

Second, the Romney campaign says it expects to increase revenues by increasing the rate of economic growth to 4%, up from less than 2% this year and in 2011. (Separately from tax reform, but clearly relevant to budget deficits, Mr. Romney says he'd gradually reduce spending to 20% of the economy from the Obama heights of 24%-25%.)

The class warriors at the Tax Policy Center add all of this up and issue the headline-grabbing opinion that it is "mathematically impossible" to reduce tax rates and close loopholes in a way that raises the same amount of revenue. They do so in part by arbitrarily claiming that Mr. Romney would never eliminate certain loopholes (such as for municipal bond interest), though the candidate has said no such thing.

Based on this invention, they then postulate that Mr. Romney would have to do something he also doesn't propose—which is raise taxes on those earning less than $200,000. In the Obama campaign's political alchemy, this becomes "Romney Hood" and a $2,000 tax increase.

The Tax Policy Center also ignores the history of tax cutting. Every major marginal rate income tax cut of the last 50 years—1964, 1981, 1986 and 2003—was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code—i.e., the share of taxes paid by the richest 1% rose.

For example, from 1980 to 2007, three tax rate cuts brought the highest marginal tax rate to 35% from 70%. Congressional Budget Office data show that when the tax rate was 70%, the richest 1% paid 18% of all federal income taxes. With the rate down to 35% in 2008, the share of taxes paid by the rich doubled to 40%.

The Tax Reform Act of 1986, which chopped the top income tax rate to 28% from 50%, was probably most similar to the Romney tax proposal because both were designed to lower rates and broaden the tax base. CBO and Martin Feldstein of the National Bureau of Economic Research found that the 1986 tax reform increased the share of taxes paid by the rich (to about 25% from 21% before the reform), in part because their reported taxable income rose as they lost tax shelters. Many businesses also changed their tax status from corporations to Subchapter S companies, thus paying taxes at the individual rate. This also increased the reported share of income declared, and tax paid, by the rich.

So on four separate occasions what TPC says is "mathematically impossible"—cutting tax rates and making the tax system more progressive—actually happened. Hats off to the scholars at TPC: Their study manages to claim that what happens in real life can't happen in theory.

The TPC analysis also fails to acknowledge how highly dependent the current tax system is on the very rich. As the Tax Foundation explains in a recent report based on CBO data: "The top 20 percent of households pay 94 percent of federal income taxes. The bottom 40 percent have a negative income tax rate, and the middle quintile pays close to zero."

This reality is treated as a state secret in Washington because it refutes Mr. Obama's campaign theme that the rich are undertaxed. The same crowd that has been howling that the rich don't pay their fair share of taxes now touts a study concluding that cutting taxes will only benefit the rich. Well, which is it?

http://online.wsj.com/article/SB10000872396390443792604577574910276629448.html#printMode