Obama Has the Edge on Taxes

Having assessed the plans put forth by both candidates on taxes, I find Obama’s plan more appealing. But before I explain myself, it is important to note that neither Obama nor Romney will make major inroads into the federal deficit in the next four years. This is because cutting the deficit significantly requires the government to have a lot more money than it does now. Obviously, this can be achieved through a combination of revenue increases and spending cuts. However, neither candidate would allow all the Bush tax cuts to expire (hence no major revenue soon), nor will they specify spending cuts. This observation brings out a point that both candidates accept, namely, that reducing the federal deficit is a long-term priority for both, not a short-term one. Keeping this in mind, let’s compare their policies.

To erode the federal deficit, government must have a source of increased revenue. From this perspective, Obama’s plan offers a more direct source of revenue than Romney’s. Obama’s plan to selectively let the Bush tax cuts expire for high income earners would raise about $1.6 trillion over the next decade. In contrast, Romney has no direct revenue source. He assumes that economic growth from his tax policies will provide the needed revenue. However, this is highly speculative, and moreover, Obama could/would make the same claim about his own tax policies.

Obama’s plan is also more thorough than Romney’s. In a way, this is to be expected because as the sitting president, Obama is required to provide a detailed budget each year. However, while Gov. Romney deserves some leeway in this regard, it is reasonable for us to expect at least the details that will allow us to judge whether he has a plausible plan. Unfortunately, Romney comes up disappointingly short. For instance, if the federal deficit is as big a problem as Romney has been arguing, we would expect his plan would show how he would reduce it. Instead, his tax cuts would increase the deficit by about $480 billion a year. How would he pay for that? He says, by eliminating certain tax deductions and loopholes. Would he eliminate tax preferences for health insurance and 401K contributions that employers make towards their employees? Would he eliminate the mortgage interest tax deduction for homeowners? For these are the biggest deductions in the tax code right now, and are extremely popular.

Without eliminating these deductions or the tax preferences for capital gains, deficits would be significantly higher in the Romney plan. However, Romney has vehemently insisted that his plan will be revenue neutral. How could this be achieved? Cuts will have to be made elsewhere. Even if we give Romney the benefit that he will eliminate those remaining deductions progressively (i.e. eliminate the deductions for high-income earners first), there aren’t enough deductions available to offset the cost of his tax cuts, and so an unintended consequence of enacting his plan in a revenue neutral manner will be a rate cut for high income earners, but a tax increase for middle, and perhaps even, low income earners.

So judged on these criteria, Obama’s plan appears more practical than the Romney plan, at least in the short-term (this is my view with the caveat that neither candidate has addressed how they will solve the deficit problem in the long run). However, how does Obama’s plan measure up to the core of Romney’s plan, namely, that reducing taxes will boost economic growth and that the ensuing revenue will more than offset the cost of the tax cuts in the long run? This is the topic of my next post.

One thought on “Obama Has the Edge on Taxes”

  1. It is interesting to read a more detailed analysis of the debate topics. But, I am not satisfied with the fact that neither candidates are providing any solid plans. I wonder if the funding for research is going to go down over the years. I know that Obama might be better in this regard than Romney. But, in the debate Romney said that he would not change the funding situation. What are your thoughts about this?

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