A Comparison of the Long-Term Economic Effects of the Obama and Romney Tax Plans

November 5, 2012

Over the past several weeks, Tax Foundation economists have published a series of studies that analyze the long-term economic and distributional effects of the tax plans outlined by President Barack Obama and Governor Mitt Romney. These comprehensive assessments were done using the Tax Foundation's Tax Simulation and Macroeconomic Model, which measures how changes in tax policies affect the economic levers that determine economic growth, workers' incomes and the distribution of the tax burden, says the Tax Foundation.

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 gross domestic product (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.

However, Obama's plan does raise more tax revenue, even after accounting for macroeconomic affects. Obama's plan would raise $41 billion while Romney's plan would lose $136 billion (without including any unspecified tax offsets such as the 17 percent deduction cap). But the larger question is at what cost to the economy? Tax Foundation's analysis indicates that for every dollar of tax revenue raised under the Obama plan, the economy loses $10. Under Romney's plan, for every dollar of tax revenue lost, the economy gains $8.

Source: "A Comparison of the Long-Term Economic Effects of the Obama and Romney Tax Plans," Tax Foundation, November 2, 2012.

 

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