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Romney Campaign on the Tax Policy Center study: “Objective, Third-Party Analysis”


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August 17, 2012 by  

Or, he was for the Tax Policy Center before he was against the Tax Policy Center, and how to assess think tank research.

That characterization in the title is from a Romney press release [0], earlier this year. But just yesterday, Governor Romney himself (as opposed to his campaign head [1]) presented a drastically revised assessment of the TPC’s work, in a Forbes Fortune interview (h/t The Hill):

… [The Tax Policy Center] made various assumptions about what they thought I would do which are not in fact accurate. They made an assumption that I would reduce the home mortgage-interest deduction. I will not do that for middle-income taxpayers, as I have already indicated. There’s an old expression in the computer world: garbage in, garbage out. They made garbage assumptions and they reached a garbage conclusion. My tax policy will continue to have a very clear direction. We are not going reduce the share of taxes paid by high-income individuals, and we’re certainly not going to increase the taxes paid by middle-income taxpayers.

The TPC analysis is discussed in this post, with the report here. A key graph, depicting the implications for tax burdens:

fig3.jpg

Figure 3, Tax Plan Assuming Revenue Neutrality through Base Broadening, from TPC.

To my knowledge, nobody has really disputed the analysis, per se. Rather they have cast aspersions on the authors of the study, or on the center. For instance, Jennifer Rubin characterizes the TPC as “the very partisan Tax Policy Center”. It apparently matters not one whit that TPC is headed by Donald Marron, who served as a member on the CEA under G.W. Bush.

But this has all lead me to ponder whether these characterizations of think tanks as right or left leaning (or “very partisan” for that matter) are particularly useful. I think we should at the same time consider the methodological approaches undertaken at a given think tank, or say a center at a think tank. For instance, in describing the Heritage Foundation’s Center for Data Analysis, one might more profitably describe the approach imbedded in the simulation model (not characterized by standard employment-output relations, but incorporates high implied supply elasticities outside of the consensus) rather than merely “right leaning.” (In my discussion of the CDA model, [1], [2] , [3], I eschewed describing Heritage’s political leanings). Alternatively, one could characterize where a think tank stands by reference to linkage to mainstream economics (e.g., [4]).

I end off by returning to the point that without a clearer statement on what tax expenditures are to be eliminated, it is very hard to square the circle. That people should be able to agree upon. So, I appeal to the non-partisan Center for a Responsible Federal Budget (CRFB), which notes:

Among the many policies Governor Romney has proposed in his run for President are substantial reductions in tax rates for individuals, including a 20 percent across-the-board cut in marginal rates (for example, the top rate would fall from 35 percent to 28 percent). Governor Romney has called for making this plan revenue neutral, in part by offsetting the roughly $3.6 trillion of individual income tax cuts (through 2022) and $5.1 trillion of total tax cuts by reducing or eliminating tax preferences (especially for high-income earners).

To date, Governor Romney has yet to publicly discuss what cuts would need to be made to tax expenditures in order to finance his very specific tax cuts. However, we got a little preview last weekend when he was overheard talking about two possibilities for reducing tax expenditures at a private fundraiser — cutting the mortgage interest deduction for second homes and the state and local tax deduction.

How much of the $3.6 trillion in cuts would these changes pay for? In part, it depends on the details — particularly since it is unclear whether the cuts would apply to all taxpayers or higher earners. However, we do have enough information to make some estimates.

Assuming Governor Romney takes the most aggressive possible action on the state and local deduction and the mortgage interest deduction for second homes, he will still only have offset about one-third of his individual income tax cuts. When looking at all of his tax cuts — including to the corporate code and estate tax — this base broadening would cover slightly less than one-quarter of the cost.

This means Governor Romney still has a long way to go to achieve his goal of of revenue neutrality. So where else must he look? The answer is probably everywhere. The rates he is proposing won’t require wiping out all tax expenditures, but it will require making some tough choices. Here are the top ten tax expenditures, as estimated by OMB on a static basis. Note that their value is not necessarily equal to the revenue raised from eliminating them and that their value also varies based on other aspects of the tax system (as we noted above).

The table in the post notes “Cost of Romney Tax Cuts = $2.2 trillion” over 2013-17, while total tax expenditures sum to $4.3 trillion.

Benn Steil and Dinah Walker at CFR’s Center for Geoeconomics provides this illuminating graphic of annual cost of tax expenditures.

CGS_Tax-Expenditures.jpg

Figure from Steil and Walker.

The graphic is not comprehensive; it omits the largest, which is the health insurance exclusion, at $190 billion in 2014, according to OMB.

I don’t think anybody sensible has ever characterized CRFB as left leaning. Methodology-wise, in regards to assessing revenue impacts, it tends to rely on JCT or OMB tabulations (so no macro-level dynamic scoring). In other cases, it relies upon CBO and TPC.

Of course, the circle can be squared if one assumes incredibly high factor supply elasticities (much higher than in the TPC report), a la CDA [5].

Update, 5:45PM, Pacific: Reader tj brings my attention to this WSJ article which purports to challenge the TPC study. It cites analysis by Matt Jensen, an economic researcher affiliated with AEI. I must confess I don’t understand the math. CRFB lists the 2013-17 costs of Romney’s tax cuts at $2.2 trn. The muni provision is tenth in the list of top ten, at $228 bn. The life insurance provision doesn’t make into CRFB’s top ten for 2008-12. JCT indicates $121.8 for 2001-04 (since this provision doesn’t make the top 10 in subsequent 4 year periods, the numbers aren’t listed). So I still don’t see how the circle is squared. But I confess to having limited imagination.

Update, 6:30PM Pacific: TPC has released a response to various critiques. See The Hill’s coverage.

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