Would the Romney Tax Plan Necessarily Reduce After-Tax Incomes for the Middle Class?

October 8, 2012

The Urban-Brookings Tax Policy Center (TPC) released a report in August arguing Mitt Romney's plan for tax reform would raise taxes on the middle class and reduce their after-tax incomes, as well as give a tax cut to high-income taxpayers. Some economists such as Martin Feldstein and Harvey Rosen have taken issue with the study, arguing that Romney's tax plan would not necessarily require raising taxes on the middle class, says Gerald Prante of the Tax Foundation.

The TPC reports that Romney's plan would:

  • Decrease the after-tax income of earners between $75,000 and $100,000 by $884, or 1.2 percent.
  • Yet increase the after-tax income of those earning more than $1 million by $87,000, or 4.1 percent.
  • And all tax units earning less than $200,000 would have their after-tax income fall by $539 on average and by $2,041 for tax units with children.

Those numbers are used heavily by the Obama campaign in many television ads across the country. However, there are several issues that the TPC report overlooks.

  • First, it doesn't take into account the income growth effects of Romney's revenue-neutral tax plan.
  • Furthermore, Romney's plan would reduce economic distortions in the tax code, which increases economic efficiency.
  • Additionally, the revenue-neutral tax reform does not require financing, which by itself would raise revenue because it increases the overall income tax base.
  • A 1 percent increase in pretax income (across the board) would have a dynamic effect of $28 billion.

As the pretax income increases as a result of economic efficiency and the ensuing income growth, so too would the after-tax income for low- and middle-income groups. For instance, if there is even a 2 percent growth rate, there would be a $223 increase in pretax incomes for the lowest tax bracket.

Source: Gerald Prante, "Would the Romney Tax Plan Necessarily Reduce After-Tax Incomes for the Middle Class," Tax Foundation, October 2, 2012.

 

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