Citerank: (9) 230959Growth effect smallIn replying to this criticism the TPC cites research by the CBO and the Treasury department indicating the growth effect of Romney's proposals is likely to be small because the base-broadening measures will provide opposing incentives to the rate cuts -and would be small even without broadening.1198CE71, 230964Conclusion is robustWhile maintaining the claimed growth increment from the Romney plan is likely to be slight, the TPC analysis does consider whether growth predicted by Mankiw (a Romney backer) and Weinzeri would rescue the plan. They conclude it makes little difference.1198CE71, 231212Brill and Viard studyThe TPC cites a study by Alan Viard and Alex Brill indicating that lowering tax rates while broadening the base generally does not reduce work disincentives because it leaves effective tax rates unchanged. Elsewhere Brill has defended the Romney plan.1198CE71, 231214CBO and JCT studiesIn addition to the Brill and Viard study the TPC paper refers to additional studies from the Congressional Budget Office and Joint Committee on Taxation that it claims show that tax cuts even without base broadening would have a small effect.1198CE71, 231725The TPC defendsThe TPC has three lines of defense of its assumption on the growth effect of tax reform - firstly, they point to difficulties in estimating such effects; secondly they cite studies showing such effect will be small; thirdly they claim their analysis is robust even if some such growth is assumed.13EF597B, 232180Modelling difficultiesIn responding to the growth criticism the TPC remarks that to do this properly, all manner of other things would need to be included in the analysis - not just the impact of tax reform in isolation.1198CE71, 232648No - it does not computeThe 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.959C6EF, 232649The TPC caseThe essence of the Tax Policy Center's 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.1198CE71, 232652Growth effect claimIn 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.22FF97FF

The basic arithmetic of revenue neutrality requires eliminating $360 billion worth of tax expenditures to offset $360 billion of tax cuts. We make the following assumptions about which tax breaks are available for elimination with the goal of being as expansive as possible, given the constraints of preserving current treatment of savings and investment and the practical difficulties of eliminating certain provisions.

First, we assume that tax increases on savings and investment are off the table, and therefore allow for no reductions in tax expenditures intended to promote savings and investment.

Specifically, we assume the following savings- and investment-related tax breaks are not reduced: preferential rates on capital gains and dividends; exclusion of income accrued in qualified retirement savings accounts and pensions (e.g., Traditional and Roth IRAs, 401k plans, defined benefit pensions); the step-up basis at death; the exclusion of capital gains on home sales, exemption of interest on state and local securities and certain other small provisions.13 In total, these tax breaks make up about one third of the value of all tax expenditures, according to Nguyen, Nunns, Toder, and Williams (2012).

In addition, certain other tax expenditures are difficult to eliminate for technical or practical reasons. The most significant example is “imputed rent on owner occupied housing,” the measure of the flow of value that a homeowner receives from living in his or her own home. Similarly, the increase in the value of life insurance policies as people age is technically income but is not subject to tax in the current system. In addition, a number of smaller items, like the value of veteran’s benefits, Medicare benefits, and transfer benefits to low-income households, are excluded from taxable income, but in principle could be subject to tax. Rarely have policymakers expressed a desire to target these expenditures. We assume that such expenditures are effectively off the table.

Finally, just as we ignore the corporate and business tax rate reductions, we also assume that corporate and business tax expenditures are not available to offset the individual and estate tax cuts.

Given these assumptions, it may be useful to point out which tax expenditures we are assuming are “on the table”: employer provided health insurance and fringe benefits; the partial exclusion of social security benefits; above-the-line deductions like moving expenses; education-related benefits and tax credits; the deductions for medical expenses, state and local taxes, mortgage interest, and charitable contributions; child- and dependent-related tax credits like the child care credit, earned income tax credit, and child tax credit; and other items listed in the appendix.

Under the assumptions and rate schedules specified above, eliminating all of these available tax expenditures would raise about $551 billion. The magnitude of this figure contrasts conspicuously with headline estimates that tax expenditures reduce revenues by about $1.3 trillion in 2015. According to Nguyen, Nunns, Toder, and Williams (2012), about one-third of these tax expenditures promote savings and investment and an additional 10 percent fall into the hard-to-eliminate category, and are excluded as described above. In addition, the fact that marginal tax rates are 20 percent lower reduces the revenues available from eliminating tax breaks. For example, eliminating $1 of deductible mortgage interest raises $0.35 when the top rate is 35 percent, but only $0.28 when the rate is 28 percent.17 These factors reduce the available revenues from the $1.3 trillion headline number to the $551 billion we estimate.

Thus, in order to offset $360 billion in cuts, one must eliminate 65 percent of all of the available $551 billion in tax expenditures.

In addition, this poses a direct challenge to preserving the same distribution of tax burdens as under the existing tax schedule because many of these available tax expenditures were designed to benefit lower- and middle-income households. For instance, Figure 2 compare the revenue arising from tax rate cuts and AMT and estate tax relief to the potential revenue that could be raised by eliminating the non-protected tax expenditures, by income group. The revenue reductions are concentrated in the middle- and higher-income levels, but the potential revenue raisers are even more concentrated among lower- and middle-income taxpayers. For the top income groups, revenue losses greatly outweigh the potential revenue available from base broadening.

As a result, it is not mathematically possible to design a revenue-neutral plan that preserves current incentives for savings and investment and that does not result in a net tax cut for high-income taxpayers and a net tax increase for lower- and/or middle-income taxpayers under the assumptions we have described above. This means that even if tax expenditures are eliminated in a way designed to make the resulting tax system as progressive as possible, there would still be a shift in the tax burden of roughly $86 billion from those making over $200,000 to those making less than that amount.