Mitt Romney, tax reformer?

Columbia University economist Joe Stiglitz dares Mitt Romney to seize the moment, to reform the income tax code of the federal government of the United States, to make it more equitable.

There is an old adage that a fish rots from the head. If presidents and those around them do not pay their fair share of taxes, how can we expect that anyone else will? ….

The billionaire investor Warren Buffett argues that he should pay only the taxes that he must, but that there is something fundamentally wrong with a system that taxes his income at a lower rate than his secretary is required to pay. He is right. Romney might be forgiven were he to take a similar position. Indeed, it might be a Nixon-in-China moment: a wealthy politician at the pinnacle of power advocating higher taxes for the rich could change the course of history.

Joseph E. Stiglitz, “Mitt Romney’s Fair Share“, Project Syndicate, 3 September 2012.

Romney appears willing to say or promise anything to get elected. Wouldn’t it make sense for him to take on the difficult but important job of tax reform, to close the loopholes that let the wealthy get away with paying less than their fair share of taxes? Wouldn’t this be popular with voters? Professor Stiglitz predicts that Romney will not follow this path, only because of ignorance: “He evidently does not recognize that a system that taxes speculation at a lower rate than hard work distorts the economy.”

This assertion must have been written tongue-in-cheek. Romney is an intelligent, informed person. The real reason he will not increase the taxes paid by the wealthy surely must be that the wealthy have enormous influence as donors to the Republican party and to his own campaign. And … they dislike paying federal taxes, or any taxes. 

Martin Feldstein (chairman of Ronald Reagan’s Council of Economic Advisers) recently wrote an op-ed for the Wall Street Journal claiming that Romney’s proposed reduction of the top marginal income tax rate from 35% to 28% 30%, plus elimination of the Alternative Minimum Tax and the estate tax, and an across-the-board decrease of 20% in other tax rates, could be financed by eliminating itemized deductions for taxpayers with adjusted gross income (AGI) over $100,000 (the top 21% of all taxpayers). Facing a barrage of criticism that his numbers do not add up, Feldstein posted a response on Greg Mankiw’s blog. In his response, Feldstein concedes that additional money is needed, so adds three ways to collect taxes from those with an AGI over $100,000: ending the tax breaks they enjoy for employer-provided health insurance and municipal bond interest, and eliminating their child credits. Light taxation of capital gains and “carried interest”, an important deviation from the principal of horizontal equity, is conspicuously absent from Feldstein’s list.

Feldstein has no intention of reducing the fiscal deficit. What he proposes is broadening the tax base only enough to offset lower tax rates, without increasing the tax burden. Importantly, presidential candidate Romney has not promised to cut any specific tax expenditure, only tax expenditures in general. My worst fear is that, on taking office, Romney will rush through tax cuts, and – facing opposition from a Republican-controlled Congress – forget about the need to pay for them. Fiscal deficits will rise and/or spending on programmes for the poor will be slashed.

All this reminds me of the 1966 report of the Carter Commission in Canada, which famously urged elimination of loopholes in the Canadian tax system, following the simple principle of horizontal equity: “a buck is a buck”; tax all personal income in the same way, regardless of its source.

The Carter Commission produced an excellent report that was praised by economists but had almost no impact on legislation. Reform of complex tax code is not easy, especially when it touches incomes of the wealthy.

The Royal Commission on Taxation, under Kenneth Carter, [was] appointed (1962) by [Progressive Conservative] PM John Diefenbaker to examine and to recommend improvements to the entire federal taxation system. In 1966 the 6-volume report declared that fairness should be the foremost objective of the taxation system; the existing system was not only too complicated and inefficient, but under it the poor paid more than their fair share while the wealthy avoided taxes through various loopholes. The commissioners proposed that the same tax be levied on increases in economic power of the same amount however acquired, for as Carter reputedly said, “a buck is a buck.” …. Opposition, however, especially from several provincial governments and from oil and mining companies and small business groups, was so vociferous … that the [Liberal] Trudeau government retreated from any major reform. … [T]he post-1972 federal taxation system bears little resemblance to that advocated in the Carter report ….

Les Macdonald, “Royal Commission on Taxation“, The Canadian Encyclopedia, published by The Historica-Dominion Institute, Toronto, accessed 3 September 2012.

The full Report of the commission can be downloaded here.

From the introduction to the Report of the Royal Commission on Taxation (vol 1, p. 2):

Our bias when we began our task was that the present, system was basically sound and compared favourably with the systems of other countries . While we are still of the opinion that the present Canadian tax system is as good as most other systems, we are convinced that it falls far short of the attainable objectives . We therefore recommend many fundamental changes which, if adopted, would produce a complete transformation and, we believe, result in greater equity and efficiency .

Little has changed in the half century since the Commission began its work. Sadly.

Update: For a response to Feldstein’s reply to his critics, see Brad DeLong (one of the original critics). Slight errors in my original post are corrected – errors that became very obvious on reading Brad DeLong’s post.

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