Obama supporters have been whining that Romney “lied” his way to victory during the debate. It hasn’t stemmed the Romney “bounce” from the debate and that shouldn’t be a surprise. The lie gambit is lousy politics and lazy analysis. Saying that your guy lost the debate because the other guy lied probably plays well on MSNBC, but it comes across as sour grapes to people who recognize that policy differences often revolve around different expectations of the impact of public policies.
Take the Obama campaign’s complaint that Romney lied about his tax plan. Put simply, Romney argues that his tax cut plan can cut marginal income tax rates by 20% across-the-board (among other tax cuts) and still be revenue neutral. The Obama people think that isn’t just mistaken, but a lie. So now we have Princeton professor Harvey Rosen arguing that a combination of base broadening (reducing or ending tax exceptions) and the “plausible” economic growth effects of Romney’s proposal would add up to a revenue neutral tax rate cut plan that would not raise taxes on the middle-class. Is Rosen lying too? This is a case where shouting “liar” in the face of disagreement is a demand for agreement even if the relevant experts are divided and you can’t come up with convincing explanation why you are right and the other guy is wrong. It is saying “Shut up and trust me and anyone who disagrees with me is a liar and I don’t have to explain myself anymore.” Obama doesn’t have that kind of credibility and he doesn’t deserve to have it. Neither does anybody else on these sort of issues.
But what is worse for the Obama team is that they are missing a chance to launch real attacks on Romney’s tax plan. The amount of base broadening that it would take to make Romney’s plan revenue neutral would be huge. That means that major tax exemptions like the mortgage interest deduction, the health insurance deduction and the tax preference for municipal bonds would have to take a hit. You could insulate the middle-class by capping rather than eliminating those deductions, but the changes would hit the housing market and municipal finance and probably make for some major changes to employer-provided health insurance. I think most economists would argue that the growth effects of lower marginal rates would far outweigh the impacts of the base broadening, but people are risk averse and I’m not sure they would want to trade lower home values and a higher risk of municipal bankruptcy for the promise of higher growth. That is a more complicated tactic than screaming “liar”, but it would be more rooted in reality and it would show that Obama had actually read and thought about Romney’s plan before condemning it.
October 10th, 2012 | 7:03 pm
I see where the housing market would be hit with closing expenditures on mortgage interest, and this would hit the middle class hard–the famous raising taxes on the middle class of the Obama campaign.
But how is the municipal bonds issue a middle class interest? Is the middle class really buying up tax exempt municipal bonds, or is it rather the wealthy? Given that upper income folk would receive a cut on marginal rates, wouldn’t closing this expenditure still bring in revenue (albeit, if not revenue neutral)?
I guess I’m unclear as to whom buys municipal bonds and who this will hurt. Pete, can you clear this up for me?
All in all your case sounds pretty sound here.
October 10th, 2012 | 7:28 pm
John, I was thinking more about indirect effects. I guess you could cap the deduction on mortgage interest to insulate the middle-class, but it would still hit the housing market at the higher end. And ending the preferential treatment of municipal bonds would raise the borrowing costs of cities and towns at a time when budgets are already strained in lots of places. That isn’t, in itself, an argument against the base broadening to my mind (as it would involve correcting distortions caused by the preferential tax treatment itself), but it could, depending on how municipalities deal with the higher borrowing costs, impact middle-class property owners or consumers of municipal services.
October 10th, 2012 | 7:56 pm
I’ve heard Arthur Brooks from AEI in an interview advocating the virtues of eliminating the mortgage interest rate deducation and when posed with this question regarding its effects on housing prices he suggested phasing it in indexed to the rate of the housing recovery. The details of such an approach I think can be argued, but it offers one plausible approach.
October 10th, 2012 | 8:02 pm
Pseudoplotinus, fine by me (I think), but wouldn’t a phase-in impact whether the plan is revenue neutral or not (and wouldn’t the expectation of the eduction being either reduced or taken away impact the housing market?)? Incidentally, I don’t think that would be mostly a bad thing in the long-run. I don’t have the chops to figure it out, but somebody out there does.
October 10th, 2012 | 9:19 pm
I don’t know whether I should like this post or not. You’re right about modern Americans but ultimately the deductions do not promote growth like lower rates do as the study by Harvey S. Rosen, of Princeton University demonstrates. Obama didn’t want to talk about the progrowth aspects of the plan because its easy to say 1.2 trillion in revenue generated by removal of deductions isn’t enough for a 20% lowing of rates.
October 10th, 2012 | 11:47 pm
Pete, I know you have other things to do. But could you do a couple of posts that explained to the “dummies” like me the intricacies of terms and problems of the tax issues, and how revenue raised relates to current budgets? I understand the current debt crisis (I think), but I’m unclear for sure on the ways in which tax policy fits in.
I loved what you said about “liars” and the fact that alternative policies have basic assumptions about wealth effects and what not that can’t be proved. Are we flying blind?
I don’t know this stuff, and you do. I ask at the least to be pointed in a right direction–something for “dummies” like me. Send me to a link that is really “stoopid.”
It would be appreciated. I emphasize questions of philosophy, rhetoric, history because that is all I know. I don’t know about the politics of public finance and economy other than what I have studied in history. The fact that a tax expenditure is a tax cut is bizarre to me.
I know I should just read this stuff for myself, but I never will–that’s why I want a “dummies” version, as bad as that version inevitably will be.
October 11th, 2012 | 8:04 am
I second that request, Pete.
Also, does some one know here about the real expected impact of the planned cuts in discretionary domestic spending (e.g. food stamps)?
October 11th, 2012 | 2:25 pm
Hey, Pete. I take your point above regarding the problem of phasing in elimination of the mortgage deduction in terms of revenue neutrality. I was thinking more in terms of how it could be accomplished without seriously disrupting the housing market which is pretty delicate right now.
I will say this, though: I think all estimates of what is or isn’t revenue neutral are built on so many assumptions that they end up failing at the end of the day to properly predict future economic dynamics, just as Christina Roemer’s estimate of unemployment failed so dramatically to predict the supposed benefits of the stimulus.
My experience is that these assessments tend to be naturally bias toward static assumptions of future revenue. They fail to appreciate the benefits of pro-growth policies on GDP and the corresponding dramatic increases in revenue that results. And they always seem to over-estimate the revenue benefits of tax increases on the assumptions that:
1. One can increase taxes and somehow not dramatically constrain future GDP and therefore revenue.
2. That tax sources aren’t going to adjust their investments and spending to reduce exposure to the new taxes.
In my opinion, Romney could probably undo the regulatory burdens that Obama had placed on the economy, and liberate our restrictions on our conventional energy resources and go a long way to increasing GDP sufficiently to then phase in elimination of the mortgage deduction as indexed to the rate of recovery of the real estate market.
October 11th, 2012 | 6:37 pm
John and Jy, sorry guys but that is about as far as I can go on the above issues. I can’t figure out how much would be saved by limiting the mortgage interest deduction to only the first 400,000 or 500,000, (or whatever) of a mortgage, but presumably guys like Douglas Holtz-Eakin would. I don’t even know if there is a model for what kind of effect that kind of limiting of the deduction would have on the housing market in the short-term (I’m pretty confident the impact would be positive in the longer-term.)
Same thing with the tax treatment of municipal bonds. If interest on municipal bonds was taxed, presumably lenders would demand higher interest rates before buying those bonds. If nothing else, this would increase the cost of rolling over existing debt. I don’t think that most families own municipal bonds directly, but the thought of having to raise taxes or reduce (or reform) services would have broader impact? How much? I dunno. I’m guessing that if the deduction was really on the chopping block, some city managers and mayors would start speaking in tongues and doing the Curly Shuffle.
Pseudoplotinus, I’m more thinking that if it is announced that the MIN is going away, then, the announcement itself, makes buying a home a less attractive long-term investment compared to other potential investments (since whenever it is implemented, the MIN repeal or partial repeal would hit some parts of the housing market.) Now I think that is a good thing in the long-rum. The problem is that the expectations themselves end up doing some of the damage to the housing market. How much? I dunno.
I agree with much of the rest, and especially that the growth impact of a tax code with lower rates and fewer exemptions would be greater than zero. I just don’t know how much above zero. The twin dangers are pure static analysis and somehow assuming that tax cuts (at the current level of taxation) “pay for themselves” – though neither Romney not you have said any such thing.
John, here is a link on the MIN http://www.brookings.edu/research/opinions/2011/03/28-mortgage-interest-deduction-pozen
October 12th, 2012 | 12:49 pm
Why should Romney aim at Revenue Neutrality?
There is an interesting law review article on eliminating the mortgage interest deduction and replaceing it with a basis adjustment.
To simplify, if you do buy a home for 100k on a 30 year mortgage after interest you end up with a basis of around 300k, so you should be able to get this basis that you actually put into your home, when you get to selling it.
You get a mortgage interest deduction to more or less smooth out the basis adjustment you don’t get to take.
Of course getting such a basis adjustment won’t matter that much since a large amount of income on the sale of a house (that you have lived in for 2 years out of 5…and other technicalities) is basically excluded from income.
Getting the basis adjustment does the opposite of “base broadening”, but if you added this and also eliminated the mortgage interest deduction, it would generally have a “base broadening effect”.
“the growth impact of a tax code with lower rates and fewer exemptions would be greater than zero.”
In theory… In theory….In theory.
In re: Pseudoplotinus.
1. One can increase taxes and somehow not dramatically constrain future GDP and therefore revenue.
-True.
2. That tax sources aren’t going to adjust their investments and spending to reduce exposure to the new taxes.
-True.
debate over which groups respond quicker, and in which ways.
For ballance I would add:
3) One can decrease spending and somehow not dramatically constrain future GDP and therefore revenue.
and therefore 4) One can reduce the deficit and somehow not dramatically constrain future GDP.
Of course true growth will come from patent, and to a lesser possible extent progressivism in the form of copyright and more authentic trademark…but mainly Patent. But on the financial side we are talking about distribution of wealth…and base broadening is basically talking about changing the definitions and mechanics of Income. It is mainly class (interest group) warfare.
Basically all of this stuff changes multiples.
October 14th, 2012 | 1:45 pm
John if my last point in my previous post proves true: That a Romney administration succeeds in rolling back regulatory burdens imposed under Obama, liberates restrictions on our conventional energy resources, and I’ll add, shelves the fiscal catastrophe that is Obamacare, then the net benefit to GDP will render whatever effects your points 3 and 4 may have as negligible.
Public sector spending is a poor subtitute for actual private sector growth. The dismal results of Obama’s Stimulus should have made that evident.
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