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Tax Policy Election Analysis

3 min readBy: Richard Morrison

As Election Day 2012 finally approaches, political observers continue to debate the policies of the presidential candidates, with their plans for the nation’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system high on the list. With tomorrow’s vote in sight, here’s a quick round-up of recent Tax Foundation analysis on the Obama and Romney plans.

Most recently, we published Senior Fellow Stephen Entin’s analysis of the Obama tax plan:

The Tax Foundation’s analysis estimates that President Obama’s tax plan would gradually reduce the level of GDP by nearly 3 percent, relative to the baseline projection, over five to ten years. Labor income would be lower by a similar amount, driven down by fewer hours worked and lower wages per hour. The reduction in hours worked would be the equivalent of about a million jobs lost in today’s economy, with those still employed earning roughly 2.28 percent lower wages, or four million jobs at unchanged pay levels.

Low income taxpayers (those earning less than $50,000) suffer a roughly $75 to $1,100 decrease in after tax income as a result of the tax program, with nearly all the reductions in income coming from a weaker economy and lower wages and fewer hours worked. The economic impact of raising taxes on the “rich,” in this case individuals earning more than $200,000, extend well beyond those high-income taxpayers.

Entin also joined us on the Tax Policy Podcast to discuss the Obama plan results: listen here.

An earlier analysis of Mitt Romney’s tax plan by Entin and Chief Economist William McBride yielded very different results:

The Romney plan would raise actual and potential GDP by about 7.4 percent over a five to ten year adjustment period. The private business sector would grow about 7.8 percent. About two-thirds of the growth in GDP would go to labor income, across the board, in the form of more hours worked and higher wages per hour. Total labor compensation in the private business sector would rise by 7.8 percent in line with GDP. About a third of the gain, pre-tax, would accrue to savers and investors. The plan would boost the capital stock by about 18.6 percent (over $5 trillion in additional investment), which is what drives the increase in productivity, wages, and hiring.

Entin also modeled the impact of the Romney plan with a suggested $17,000 cap on deductions, and later with a modified cap of $25,000.

Finally, we put them all together in Friday’s release of “A Comparison of the Long-Term Economic Effects of the Obama and Romney Tax Plans

The candidates’ tax plans would have a starkly different impact on the economy. The Romney plan, which would reduce tax rates on individuals and corporations, would increase GDP 7.4 percent over the long run. The Obama plan, which would raise tax rates on individuals, would reduce GDP 2.9 percent over the long run.

These very different futures are the direct consequence of the candidates’ very different approaches to taxing the inputs of production, i.e., capital and labor. Obama would raise taxes on investors, which would reduce the capital stock by 7.5 percent. Romney would reduce taxes on investors, which would increase the capital stock by 18.6 percent. Obama would raise taxes on labor, which would reduce the wage rate by 2.3 percent and hours worked by 0.7 percent. Romney would reduce taxes on labor, which would increase the wage rate by 4.7 percent and hours worked by 2.9 percent.

More election analysis available here.