The Tax Foundation runs the numbers on Romney’s tax plan.
The debate over Mitt Romney’s tax plan has largely revolved around the short term concerns of who gets what and how much, rather than the more long term concerns of economic growth, job creation, deficit reduction, and tax reform. This is unfortunate, especially in a time of record unemployment and debt levels. These serious issues have been put aside to focus particularly on the results of a single study by the Tax Policy Center (TPC), which finds Romney’s tax plan would require raising taxes on low- and middle-income earners to pay for tax cuts for high-income earners. However, to get there, TPC assumes that tax rates do not matter for economic growth, i.e., Romney’s plan to cut income tax rates by 20 percent across the board will have no effect on labor supply or saving and investment decisions. Only among Washington score keepers does such an assumption make sense, but it certainly has no credibility among academic economists.
So, what will be the effect of Romney’s tax plan?
The results are considerably different from TPC’s. We find that fully 60 percent of the static revenue loss from Romney’s plan is recovered when the dynamic effects of economic growth are taken into account. We find that while the cuts in the individual income tax rates do not “pay for themselves,” they do grow the economy 1.8 percent over the long run. The biggest boost to the economy comes from the 10 point cut in the corporate rate, which grows GDP by 2.3 percent, the capital stock by 6.3 percent, and the wage rate by 1.9 percent. The corporate rate cut is so economically beneficial that it does pay for itself, when all federal revenue effects are considered. So does the elimination of taxes on capital gains and dividends for middle-income earners and the estate tax.
These benefits are widely shared. Every income group experiences at least a 7 percent increase in after-tax income.
That’s reform I can get behind.