Romney: Increasing Taxes, or Removing Tax Subsidies?

August 27, 2012

NPR Morning Edition had a good report this morning focusing on how Romney’s tax plan would eliminate tax subsidies. Of course, somebody benefits from those tax subsidies and Romney’s critics have latched on to this aspect, particularly claiming that the middle-class would end up paying more taxes as a result.

As economist Glenn Hubbard points out in the NPR report, these subsidies entail substantial economic distortion. Additionally, they increase the compliance costs of the tax code and provide opportunities for tax fraud. By framing Romney’s plan as a “tax increase,” critics ignore the fact that a subsidy implemented through the tax code is virtually the same economically as a traditional subsidy paid out to a recipient. As such, the tax hike framing and singular focus on revenue neutrality for middle income groups is short-sighted and ignores important principles of sound tax policy.

Debate on this topic began when the Tax Policy Center (TPC) released an analysis of Romney’s tax plan focusing entirely on their conclusion that it increases taxes on the middle class. From the report:

“For instance, even when we assume that tax breaks – like the charitable deduction, mortgage interest deduction, and the exclusion for health insurance – are completely eliminated for higher-income households first, and only then reduced as necessary for other households to achieve overall revenue-neutrality– the net effect of the plan would be a tax cut for high-income households coupled with a tax increase for middle-income households.” (Emphasis mine)

Thus, the source of this so-called tax increase is not increases to rates but the elimination of various credits and deductions that are currently in the income tax code.

In a subsequent frequently asked questions piece clarifying their initial analysis, TPC mentions the term “tax subsidies” once in a footnote but otherwise never walks back from the idea that removing tax credits and exemptions from the tax code constitutes a “tax increase.” The Obama campaign has seized on similar rhetoric, suggesting the “tax increase” that taxpayers will see under a Romney administration through their tax calculator, as well as in campaign ads and media appearances.

Interestingly, this perspective on tax credits and exemptions is similar to the position held by Grover Norquist of Americans for Tax Reform (ATR). Below is an excerpt taken directly from ATR’s infamous Taxpayer Protection Pledge:

“Oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

Norquist considers the elimination of tax credits and exemptions as tax increase (and thus a violation of ATR’s Pledge) if not matched with revenue neutral rate reductions. This was a key sticking point between Republicans like Senator Tom Coburn and Norquist last year when the elimination of ethanol tax credits were being discussed. Senator Coburn and many others considered the ethanol tax credits to be subsidies and argued that their repeal did not constitute a tax increase. Norquist argued that if not revenue neutral, the elimination of these credits violated The Pledge.

TPC is usually a champion of a simpler tax code with less tax subsides. For example, TPC’s Howard Gleckman described these same ethanol tax credits as subsidies when their repeal was being debated. But TPC, as well as the Obama Administration and other center-left policy groups, are reluctant to use the phrase “tax subsidies” when describing Romney's plan. It seems TPC and other critics have a different standard for the subsidies that Romney would eliminate.

More on TPC’s analysis of Romney’s tax plan here, here, and here. More on tax reform here.

Follow Will Freeland on Twitter @WilliamFreeland

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