Here’s something I have not yet heard said about Romney’s plan to cut tax rates by 20% across the board and have that cut be revenue-neutral by eliminating or reducing deductions and exemptions: It isn’t really a tax cut at all, is it? I mean, if you drop my marginal rate by 20% but also eliminate deductions that save me 20%, it’s all a wash. I’m still paying the same amount in taxes, it’s just being added up differently. In fact, Romney said as much last week:
“Our individual income taxes are ones I want to reform, make them simpler. I want to bring the rates down,” he said. “By the way, don’t be expecting a huge cut in taxes because I’m also going to lower deductions and exemptions. But by bringing rates down, we’ll be able to let small businesses keep more of their money so they can hire more people.”
But if it’s actually going to be revenue-neutral, as he continually promises while offering no actual numbers, there can’t be any net cut in taxes at all. Some people may pay a bit more and some a bit less, but overall it would have to be a wash. But wait…isn’t the whole argument here that cutting taxes will stimulate the economy because people will have more money to spend, which will increase demand and create new jobs? That cannot happen if the same amount is coming out in taxes on a net basis.
But it could have some pretty significant negative effects, depending on which deductions he chooses to eliminate. Different groups of people have different access to the many kinds of deductions and exemptions. If you eliminate or reduce the deduction for health insurance premiums, a large family that pays a lot for health insurance might pay significantly higher taxes while a single person would not lose as large of a deduction and would not see such a big bump (at least not large enough to balance out the 20% marginal rate cut).
If you cut out the deduction for mortgage interest, it might well make it more difficult for the housing market to recover by diminishing the incentive to buy rather than rent a house. If you cut out the deduction for charitable contributions, you could cause serious damage to non-profit organizations that provide important services. The point is that there are always tradeoffs that need to be considered. But if taxes don’t go down on a net basis — and they can’t, if this is truly going to be a revenue-neutral plan — you don’t get any of that imagined economic stimulus, and that wipes out everything on the plus side of the column.