Political Animal

Blog

October 16, 2012 10:07 AM Tax “Reform” and Growth

By Ed Kilgore

A big part of the complicated makeover Mitt Romney is attempting (and will attempt to consummate tonight) involves connecting his fiscal agenda to some sort of argument that he will “jump-start” the stalled economy into a job-generating machine. And the latest talking point he seems to have seized on (which also has an important defensive purpose in protecting him from claims he’s trying to shower new benefits on the rich) is the claim that a “tax reform” plan that makes reduces loopholes and makes the tax code more efficient has proved in the past to be a big promoter of growth.

At the New York TimesEconomix blog today, Bruce Bartlett, who generally approves of the kind of tax reform effort that trades lower rates for fewer deductions, makes a clear case that they have not in the past (particularly in the big 1986 reform effort) and likely will not in the future represent any sort of “jump-start” strategy:

By the mid-1990s, it was the consensus view of economists that the Tax Reform Act of 1986 had little, if any, impact on growth. In an article in the May 1995 issue of the American Economic Review, the Harvard economist Martin Feldstein, a strong supporter of tax reform who had served as chairman of Reagan’s Council of Economic Advisers, found large changes in the composition of income, but the only growth effect was a small increase in the labor supply of married women.
In a comprehensive review of the economic effects of the 1986 tax reform act, in the June 1997 issue of the Journal of Economic Literature, Alan Auerbach of the University of California, Berkeley, and Joel Slemrod, the University of Michigan economist, also found that the primary impact was on the shifting composition of income. They could find no significant growth effects. They concluded, “The aggregate values of labor supply and saving apparently responded very little.”

So even if you buy the idea that the laws of math can be modified sufficiently to turn the Romney tax plan into a revenue-neutral rates-for-deductions tradeoff, it’s a non sequitur to expect any big impact on jobs or economic growth. And combined with Romney’s austerity spending plans and his deflationary monetary policy leanings, there’s little reason to expect a Romney Recovery unless it’s purely cyclical and would have happened anyway.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • c u n d gulag on October 16, 2012 10:22 AM:

    Republicans have gone, once again, to "Ye Olde Turde Shoppe," and re-bought the same well-used turd, polished it to a high gloss with some new verbiage, and hope the rubes in the public buy it.

    You know what?
    There's a lot of dumb sh*ts out there, who don't know turds from Shinola.
    Not a bad bet at all...

  • anandine on October 16, 2012 10:22 AM:

    Romney and Ryan claim that their tax plan is revenue neutral, that the reduction in tax rates is exactly offset by elimination of loopholes.

    If this is true (when pigs fly), and everybody's tax bill ends up exactly the same as it is now, then how can it cause growth even under its own theory of growth through tax cuts?

  • T2 on October 16, 2012 10:23 AM:

    wrong. If Romney is elected there will be a Recovery. Every major Media Outlet will be telling us that night and day and twice on Sunday. Of course, it won't have to be an actual recovery, they can just say it is, and it will be so.
    If, by some mistake, a Magic Recovery doesn't happen, MItt will simply say "Obama left the country in much worse shape than we could possibly have anticipated". And that will be that.

  • Th on October 16, 2012 10:57 AM:

    Almost every "loophole" is really a bribe by the government for us to invest. It may be a house or a college education or a computer for our business, but we have to spend money on some sort of investment to take advantage of the "loophole." Lowering the rate and removing deductions and credits let me pay the same taxes without spending any money to invest. I can just gamble it away in the Bahamas. No wonder it doesn't work.

  • castanea on October 16, 2012 11:01 AM:

    T2--

    You are exactly correct.

    If circumstances were exactly the same now, but if McCain had won in 2008, I have no doubt that the media would be touting the "McCain Recovery," and would be swooning over his incredible statesmanship in ushering out Mubarak in Egypt and Gaddafi in Libya, and so forth.

    Oh, and by the way, McCain would be celebrated as the guy who brought bin Laden to justice.

  • RimKitty on October 16, 2012 11:10 AM:

    If I could ask a question at the debates tonight.

    Governor Romney, we know you have a plan to redo the tax code, but we can't seem to get any specifics out of you about what you'll cut and what you'll save. Plus, you refuse to show America your own taxes for at least 5 years as customary, even though they might give us your view on ethics in taxes or be used to show us what loopholes you have proudly taken advantage of that you would do away with in the future. Add to that the fact that the majority of your contributions come from large corporations and the very richest of the rich, I'd like to know why we should believe that you will work for us, the middle class, and not just your rich constituents?

  • Peter C on October 16, 2012 11:50 AM:

    The idea that a reduction in a tax based upon profits will increase hiring sounds good, but doesn’t actually make sense. Here’s a small-business example:

    Say that you own a small doughnut shop. You think if you open the shop an hour earlier, you can increase your sales. So, you try it. You get to the shop an hour earlier yourself and prove out your idea; sales do go up. You discuss it with your employees. You conclude that if you hired one additional person, you could rearrange everyone’s hours to staff the additional store hour every day. You calculate that, after including all your costs, this will increase your profits by, say, $1000/week.

    Does your decision depend upon the tax rate? Do you decide not to implement the plan if the increase to your income is only $650 after taxes instead of $780? NO. You maximize your profits. Your decision is based upon your experiment, not on the rate.

    Now, let say that your experiment fails. If opening early DOESN’T increase your sales enough to cover the cost of an additional employee, do you hire a person ANYWAY if your tax rate drops? No. You pocket the difference on what you are already getting and employment doesn’t change a bit.

    The gain to both the economy and the doughnut shop owner comes from more people buying doughnuts, not from lowered tax rates, because the taxes are only paid on PROFITS.

    If there is an effect, it comes from pumping money into the system through normal Keynesian economic stimulus, and not from some magic about ‘fostering small business job creators’. In this case, it comes from pumping money into the system by giving it all to the 1%, who buy only a little bit more than 1% of the doughnuts. AND, if they decide to pay off some of their doughnut-machine debt instead of buying things, then it doesn’t stimulate the economy much at all.

    The Republican’s whole argument is a ploy to convince us to give rich people more money. A tax on profits does not affect the basic cost/benefit calculation of a hiring decision.

  • Mimikatz on October 16, 2012 11:54 AM:

    The main thing that allegedly is holding back business is uncertainty about taxes and to some extent regulation. Supposedly, they just want to know what rates will be and where Obamacare goes or not. Resolution itself is lmore important, they say, than what the resolution actually is.

    However, every loophole and preference is there at someone's insistence, many are there at people like Romney's insistence. My tax law professor years ago said that the Internal Revenue Code and Regs could be reduced by at least half if the preferential tax rate for capital gains was removed. Now we have a preferential rate for dividends as well, and these two things, along with carried interest, contribute greatly to income inequality. We could do away with both and beef up the estate tax and remove some dodges for off-shore accounts and insurance schemes and leave top rates where they are, most likely not losing revenue. But for too many "tax reform" and especially "broadening the tax base" really mean raising the zero bracket amount, doing away with the earned income tax credit and otherwise sticking it to the working poor. Most rich people seem to be unabashedly selfish and heartless in wanting to squeeze more for themselves out of the have-much-lesses and Romney epitomizes these attitudes.

  • Peter C on October 16, 2012 11:56 AM:

    The idea that a reduction in a tax based upon profits will increase hiring sounds good, but doesn’t actually make sense. Here’s a small-business example:

    Say that you own a small doughnut shop. You think if you open the shop an hour earlier, you can increase your sales. So, you try it. You get to the shop an hour earlier yourself and prove out your idea; sales do go up. You discuss it with your employees. You conclude that if you hired one additional person, you could rearrange everyone’s hours to staff the additional store hour every day. You calculate that, after including all your costs, this will increase your profits by, say, $1000/week.

    Does your decision depend upon the tax rate? Do you decide not to implement the plan if the increase to your income is only $650 after taxes instead of $780? NO. You maximize your profits. Your decision is based upon your experiment, not on the rate.

    Now, let say that your experiment fails. If opening early DOESN’T increase your sales enough to cover the cost of an additional employee, do you hire a person ANYWAY if your tax rate drops? No. You pocket the difference on what you are already getting and employment doesn’t change a bit.

    The gain to both the economy and the doughnut shop owner comes from more people buying doughnuts, not from lowered tax rates, because the taxes are only paid on PROFITS.

    If there is an effect, it comes from pumping money into the system through normal Keynesian economic stimulus, and not from some magic about ‘fostering small business job creators’. In this case, it comes from pumping money into the system by giving it all to the 1%, who buy only a little bit more than 1% of the doughnuts. AND, if they decide to pay off some of their doughnut-machine debt instead of buying things, then it doesn’t stimulate the economy much at all.

    The Republican’s whole argument is a ploy to convince us to give rich people more money. A tax on profits does not affect the basic cost/benefit calculation of a hiring decision.

  • bdop4 on October 16, 2012 1:52 PM:

    Want to stimulate the economy? RAISE THE MINIMUM WAGE TO $10/HOUR.

    The people who need it the most will spend every single extra cent on daily goods and services. That will allow retailers to hire more employees and order more inventory, which will in turn cause supply vendors to hire more employees to accomodate increased demand. The need to move extra inventory will require the trucking companies to hire more people, and so on.

    This ain't rocket science. It's common sense (a commodity in short supply these days).

    $10/hour = $400/week = ~$1,600/month = ~$20,800/year (52-week year)

    Someone can get by on that amount.

    Will this affect the consumer? Yes, but not in the catastrophic way that conservatives suggest, and will likely be offset by wage increases due to increased labor demand (eventually).