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Rate of invention SupportiveArgument1 #233429 One blogger claims the growth effect would be even bigger than Entin-McBride predict since their model neglects the effect of lower marginal tax rates on the rate of technical innovation.

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Visualizing the Romney Tax Debate »Visualizing the Romney Tax DebateVisualizing the Romney Tax Debate☜Tax reform has emerged as a major bone of contention in the 2012 Presidential election campaign. While President Obama has identified some tax changes, Governor Romney proposes major systemic reform. But is his plan - especially the proposals for individual taxation - viable?☜F1CEB7

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Romney's plan stated »Romney's plan statedRomney's plan stated☜For individual taxation, Romney proposes rate cuts for all taxpayers to be funded by reducing or eliminating various tax preferences. His plan aims to do this without raising the tax burden on low and middle income taxpayers, defined as $200,000 or less. It also abolishes several other taxes.☜59C6EF

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But does it compute? »But does it compute?But does it compute?☜In early August the Tax Policy Center produced an analysis showing that achieving all the goals of the Romney plan is mathematically impossible. Romney cited six studies in reply. Economists, journalists, bloggers and others then joined in on both sides. So is the plan mathematically possible?☜FFB597

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No - it does not compute »No - it does not computeNo - it does not compute☜The Tax Policy Center argues in its analysis that the various elements of the Romney plan cannot all be achieved. The TPC paper has been invoked and/or defended by almost all of the critics of the Romney plan in the debate.☜59C6EF

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The TPC case »The TPC caseThe TPC case☜The essence of the Tax Policy Centers argument is contained in the excerpt from their paper cited below. We have parsed the argument into a set of premises that must be true for the argument to hold and mapped the debate about each.☜98CE71

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Growth effect claim »Growth effect claimGrowth effect claim☜In estimating the revenue effect of the Romney tax reform, the TPC authors needed to make some assumptions about how tax reform affects economic growth. They argue that Romney tax reform would have little effect on GDP growth - but that their conclusions are robust even if some growth eventuates.☜FF97FF

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Ignores growth potential »Ignores growth potentialIgnores growth potential☜A number of critics of the TPC study claim it ignores the potential for major tax reform to increase economic growth through its effect on labor supply and capital formation. They argue such macro dynamic effects make the Romney plan viable without burdening low to middle income earners.☜EF597B

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Growth-supportive studies »Growth-supportive studiesGrowth-supportive studies☜For the growth objection to rescue the Romney plan, the increment to revenue they produce would need to be significant. Several attempts have been made to put ball-park figures on this in the studies the Romney camp cited in reply to the TPC. The main estimates are added separately.☜98CE71

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2. Entin/McBride »2. Entin/McBride2. Entin/McBride☜Stephen Entin and William McBride use a neo-classical growth model to predict the effect of the Romney tax plan over a 5 to 10 year horizon. They predict that the increment to growth will be substantial and will reduce the tax-expenditure savings task by 60 percent, making Romneys plan viable.☜98CE71

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Rate of inventionRate of invention☜One blogger claims the growth effect would be even bigger than Entin-McBride predict since their model neglects the effect of lower marginal tax rates on the rate of technical innovation.☜98CE71

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Link[1] Dynamic Tax Scoring

Author: John Cochrane
Publication info: 4 October 2012 - blog post
Cited by: Peter Baldwin 5:33 AM 1 November 2012 GMT
Citerank: (2) 233431The right choice13EF597B, 233432Broadening effectsThe authors state they have not included in their model any estimation of the effects of base broadening - since these have not been specified by Romney. But this presumes they have no bearing on incentives. One of the TPC authors raised this in response to Rosen (see citation below)13EF597B
URL:

http://johnhcochrane.blogspot.com.au/2012/10/dynamic-tax-scoring.html

Excerpt / Summary

What are the effects?

The Romney plan would raise actual and potential GDP by about 7.4 percent over a five to ten year adjustment period.

Here I actually think the model is being conservative. It seems the model is removing labor and capital distortions, but assumes no effect of tax rates on growth; the rate of technical change is given. I suspect that lowering marginal tax rates also makes people work harder at inventions. If that's right, then there is a "growth effect" not just a "level effect." Yes, we don't know much about how large it is. But I submit that we know the sign!

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Entered by:- Peter Baldwin
NodeID: #233429
Node type: SupportiveArgument
Entry date (GMT): 11/1/2012 5:30:00 AM
Last edit date (GMT): 11/1/2012 5:36:00 AM
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