Title Image

Supply-Side Forum

Welcome to an informal forum dedicated to the dissemination and advancement of the principles of supply-side economics.



Home
Article Archives
Discussion Forum
About This Site



[Most Recent Quotes from www.kitco.com]

Romney's Tax Plan

Ed Breen, March 6, 2012 (© 2012)

Reading the Mitt Romney Op-Ed, "A Tax Reform to Restore America's Prosperity" from the Wall Street Journal February 23, 2012, along with the WSJ's own editorial, "Romney's Tax Reboot" it is clear that the Journal is firmly behind Romney for the Republican nomination for president. The Journal editorial was a gushing promotion that attempted to whitewash the problems with the Romney plan. Let’s dig deeper into Romney's Op-Ed explanation of his plan.

Governor Romney states that his plan seeks to address three goals: "more jobs, less debt, and smaller government."

With regard to the "less debt" goal, he makes short shrift of his spending cut plan saying that he has discussed the details elsewhere, but I don't recall where. He has said he will do a managerial review of each department and expenditure but with no details. It seems that engineers and MBA's have tremendous confidence in their sharp pencils. Maybe, Romney will do better than other Presidents who have made this promise, but he never really addresses the "smaller government" goal.

Moving next to the "more jobs" goal, Romney writes, "We must reduce tax rates for job creators to promote economic growth." That is a nice sentiment, but it would have been more powerful, more credible, if Governor Romney had identified who he thought the "job creators" were so that we could judge how his reform plan would address them as a group. There are extensive studies on job formation in our economy and they show that the lower and middle classes are not the job creators, and neither are the public C-Corporations. How will Romney’s lower rates help the "job creators" create jobs?

Romney is aware of the diverse forms of organization that make up business enterprise because he writes, "[The Plan] reduces tax rates for the many businesses that pay at individual rates and employ the majority of private sector American workers, thus driving significant increases in hiring and wages." Here he is close to identifying the "job creators." He speaks of the 90% of all businesses that are organized as pass-through entities (Sole Proprietorships, RICs, REITs, Partnerships, Sub-S Corps, LLCs and general Partnerships), but he does not say where, among these choices, we find the job creators. He does suggest that cutting individual tax rates will drive "significant increases in hiring and wages," but how exactly will lower marginal rates do this? Does he mean that the economic actors will have more cash resulting in a rise in aggregate demand that will in turn create economic expansion, or does he mean to suggest that the lower marginal rates will make work more attractive for workers at the margin and that in the upper brackets the lower rates will provide more retained earnings for investment? If he means the latter, then he must explain why he will look to the higher bracket to pay for the reduction in the marginal rates of the lower bracket. This ‘take back’ from the higher bracket to pay for the reduction in the lower bracket conflicts with the representation that he is reducing rates for businesses that report on an individual basis. If he means the former then he is motivated by a Keynesian misapprehension of how the economy works, and we can at least understand when he compounds his mistake by contradicting the rate cut for the higher bracket. Stated differently, if he means Keynesian stimulus, he doesn't understand how the economy really works. In either case his plan as proposed does not materially reduce business taxes on the pass through entities that employ most workers.

On corporate taxes Romney says he will reduce the rate to 25% from 35% by removing unidentified loopholes. He proposes to retain the R&D tax credit but he says nothing about accelerated depreciation for the purchase of machinery, nor does he indicate how much these tax subsidies cost in revenue that would otherwise be collected.

Importantly, Romney writes, "I will ... transition from a world-wide taxation system to a territorial one." Why does he choose the wiggle word, “transition?” Such a change would require no transition, unless he intends to play scoring games with the CBO to pretend that gradual reduction of the repatriation penalties will produce revenue for some time until it is phased out. If he does that he be promoting a lie and he will not achieve the positive result he desires, an immediate reinvestment of retained earnings in domestic U.S. plant and equipment.

It is philosophically awkward that the Plan leaves Capital Gains and Dividends at 15% and eliminates those taxes for taxpayers who earn less than $200,000. It appears to be a ruse to show fairness to the middle-class but it is intellectually dishonest because these assets are primarily owned by the upper-bracket taxpayers. Additionally, in the case of a significant capital gain, the event of the gain itself could push the taxpayer into the upper bracket in the year the gain is realized. While it is positive that he does not raise these rates, it is revealing that he is willing to pander with policy that is economically and intellectually incoherent.

Abolishment of the death tax is clearly positive.

Romney's call to eliminate “uncertainty” is another clear positive. He even suggests he is aware of a study that supports the principle but he makes no cite.

It is distressing that Governor Romney would raise taxes on the upper brackets where the pass-through business earnings are realized. Additionally he seeks to remove, or at least limit, deductions for home mortgages, charitable gifts, and perhaps tax free retirement savings for high earners. He suggests also that he might seek to tax health coverage plans for high earners. As I said such structures attack the pass-through business owner that Romney promised to help through reduced rates; the structure contradicts its expressed goal of job creation.

Finally, Governor Romney promises to "broaden the corporate tax base." But what does he mean by this? He has already said he would reduce the corporate tax base by moving from a worldwide system to a territorial system. What other changes will he make?

So what of his three goals: "more jobs, less debt, and smaller government?" I have noticed that there has been a recent undercurrent on several front page articles in the WSJ describing pass-through business organizations as a form of corporate tax avoidance. These articles have been grossly misleading in that they ignore that pass-throughs were created in reaction to the distortive effects of the double taxation of corporate profits and dividends. It may be that the WSJ anticipates that Romney will seek to disallow, or restrict some pass-through forms, and push those entities into the C-Corporate form. There is awareness at Treasury that the high tax C-Corp form of organization is rapidly collapsing and being replaced by pass-through forms, especially Sub-S, Partnerships and LLCs. There are a number of IRS studies showing alarm about the trend toward pass-through entities. This may anticipate bureaucratic push-back to force more enterprises back into corporate forms with double taxation. It appears that Romney’s tax plan is in step with this trend of attacking job creators, ignoring the debt, and growing government.

*****

EDWARD BREEN was a long-time friend and confidant of Jude Wanniski. He served as a director of Mr. Wanniski's consulting enterprise, Polyconomics, Inc. Mr. Breen is an attorney licensed to practice law in the state of New Jersey and he currently serves as an active director of a private manufacturing business. In his career, he has served as the President of a real estate development company, as the founder and director of a publicly listed regional bank and he has been involved in a number of entrepreneurial investment ventures. Mr. Breen can be reached by e-mail here.


E-mail: admin@supplysideforum.com
Launched 20 August 2006