Simulating the Economic Effects of Romney’s Tax Plan

October 03, 2012

Tax Foundation Runs the Numbers on Proposed Tax Reform Package

Washington, D.C., October 3, 2012—A new analysis of Mitt Romney’s tax reform package by the Tax Foundation has revealed that, given realistic assumptions about its long-term impact, the plan would result in rising wages and increased economic growth. Economic simulations run by Tax Foundation Senior Fellow Stephen Entin and Chief Economist William McBride also debunk charges that Romney’s planned tax cuts on high-income households would increase the tax burden on low- and middle-income households.   

“While the debate over tax reform has been consumed with distributional issues, the economy continues to limp along in the worst recovery since the Great Depression,” said McBride. “To be sure, this economy faces headwinds that even an ideal tax code will not address, but pro-growth tax reform can provide substantial benefits.”

The Tax Foundation’s results indicate that by lowering tax rates on investment and labor, the Romney tax plan would grow the economy by 7.4 percent, the capital stock by almost 19 percent, wages by almost 5 percent, and hours worked by 3 percent. The benefits would be widely enjoyed, as every income group would experience at least a 7 percent increase in after-tax income. It would benefit the federal budget as well, in that fully 60 percent of the initial revenue loss from Romney’s plan would be recovered from taxing a larger economy.

Economists recognize that there is more to a tax cut than the immediate increase in wealth of the recipient. If investment taxes are lowered, investment increases, because investors expect to keep more of their after-tax returns, and more people become investors. If taxes on wages are lowered, more people work and more people work harder. The benefits from these things spill over beyond the immediate actors. Businesses invest in equipment and new hires, leading to more productive workers, higher wages, and ultimately satisfied customers.

Tax Foundation Fiscal Fact No. 330, “Simulating the Economic Effects of Romney's Tax Plan” by Stephen Entin and William McBride is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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