Last week’s big news in campaign policy was the Tax Policy Center’s white paper by Samuel Brown, William G. Gale, and Adam Looney, arguing that it is mathematically impossible for the Romney tax plan to meet its described goals. Ezra Klein has write-ups here and here, and James Pethokoukis has a contrary analysis here. Since Romney hasn’t released his plan, Brown, Gale, and Looney cleverly put together the best case scenario and crunch the numbers — and conclude they don’t work.
Romney’s plan has three goals: It starts by lowering tax rates by 20 percent. It then seeks to keep raising the same amount of tax revnues as before by removing tax expenditures, or the variety of exemptions, deductions, or credits in the tax code that function as government spending. As the wonks would say, it wants to “lower the rates and broaden the base.” However, and this will be crucial, it excludes expenditures related to investment income and savings from these cuts. Finally, it attempts to maintain the current level of progressivity by making sure that the top one percent pays no less in taxes and everyone else pays no more.
The Tax Policy Center analysis shows that it is impossible to do all three, however. To enact the Romney plan requires cutting taxes on the top one percent — and raising them on everyone else.
In order to better understand why Romney’s aims are incompatible, we need a quick, back-of-the-envelope class and distrbutional analysis of how tax expenditures work in the United States. Tax expenditures are thought to be regressive, benefitting those with more resources. The general argument says that because tax expenditures are closely linked with employment compensation or spending, those who have jobs and get paid more or spend more will benefit more. Being able to pay less in taxes disproporationately benefits those who are better off — and also can take advantage of often complicated tax planning. A privatized welfare state administered through these coupon-like mechanisms, compared to public programs, involve less compulsory risk-pooling and more individualized risk-bearing, which also tend to benefit more affluent citizens.
Let’s take a closer look, using this great New York Times chart based on Tax Policy Center numbers, at who gains from different types of tax expenditures in the United States.
This chart examines five types of tax expenditures and the distributional consequences for each class. But it also shows which tax expenditures benefit three classes of people.