Redefining the rich

Romney's economic adviser refutes findings on his tax plan by broadening the definition of 'rich.' But it doesn't quite add up.

Earlier this week, Martin Feldstein, a Romney campaign economic adviser and Harvard professor, published this op-ed in the Wall Street Journal, critiquing the Tax Policy Center’s viral (thanks to President Obama) analysis of the implied distributional effects of Mitt Romney’s self-proclaimed-revenue-neutral tax reform plan.  If you recall, the Tax Policy Center’s analysis showed that it was mathematically impossible to cut marginal tax rates as much as Romney proposes, not increase capital income taxes, and broaden the tax base in a revenue neutral way, without the reform resulting in a shift of tax burdens away from the richest households and towards other households (the “non-rich” you might say)–in other words, a “regressive” distributional effect.

Feldstein decided to do the calculation for himself, looking into which tax expenditures he himself could find to reduce/broaden the tax base that would reverse the conclusion that the Romney plan would cut taxes for the rich and raise them on everyone else (…remember, this is relative to Obama’s tax proposals, not relative to current law).  He reports his discovery, which he characterizes as not just a critique of the TPC analysis, but an outright refutation (emphasis added):

The key question raised by the Romney plan’s critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals. It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn’t specified what he would do. But refuting the Tax Policy Center’s assertions doesn’t require that. It only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost.

The IRS data show that taxpayers with adjusted gross incomes over $100,000 (the top 21% of all taxpayers) made itemized deductions totaling $636 billion in 2009. Those high-income taxpayers paid marginal tax rates of 25% to 35%, with most $200,000-plus earners paying marginal rates of 33% or 35%.

And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.

In other words, Feldstein refutes that the Romney plan would raise taxes on the non-rich by redefining the non-rich.  Obama, the TPC, and I’ll bet Romney himself, don’t consider households in the $100,000 to $200,000 range the “rich.”  We know President Obama has always made the dividing line between the “rich” and the “middle class” somewhere in the $200K to $250K range.  Households in the $100K to $200K range are squarely within Obama’s definition of the middle class households who would never be subjected to any increase in tax burdens under Obama tax policy.  (By the way, those households also happen to be the households that tax policymakers often talk about as unfairly bearing the bulk of the burden of the alternative minimum tax, in contrast to the truly “rich”–say, millionaires–who are typically not on the AMT because their marginal tax rate puts their ordinary income tax burden above their broader-based AMT burden.)

So as the Tax Policy Center counter-responded today:

Writing in Wednesday’s Wall Street Journal, Romney economic adviser Martin Feldstein attempts to contradict our finding. Instead, his analysis actually confirms our central result. Under the stated assumptions in Feldstein’s article, taxpayers with income between $100,000 and $200,000 would pay an average of at least $2,000 more. (Feldstein uses a different income measure than we do – see technical note at end.)

Taxes would rise on families earning between $100,000 and $200,000 in Feldstein’s analysis because he considers a tax reform that would completely eliminate itemized deductions for taxpayers with income above $100,000. In 2009, taxpayers earning between $100,000 and $200,000 claimed more than half of these itemized deductions. Eliminating itemized deductions would raise more in taxes from people in this group than they would save from the rate reductions and other specified features of Governor Romney’s plan.

Gee, let’s repeat that Feldstein version/reinterpretation of the Romney plan (emphasis added):

a tax reform that would completely eliminate itemized deductions for taxpayers with income above $100,000. In 2009, taxpayers earning between $100,000 and $200,000 claimed more than half of these itemized deductions. Eliminating itemized deductions would raise more in taxes from people in this group than they would save from the rate reductions and other specified features of Governor Romney’s plan.

One has to wonder:  did the Romney campaign really want Feldstein to “refute” the TPC analysis of the Romney tax plan this way–in effect spelling out that it’s “just” the $100K to $200K households that might get socked with the burden of paying for the net tax cuts for the above $200K households?

I don’t get it.  But that’s probably why I’m not cut out to ever advise a political campaign. (I think I would have said “keep this quiet.”)

There are other, less-fundamental problems about Feldstein’s analysis including his use of 2009 tax year data (an unusually low-revenue year) which you can read more about in the same TPC blog post.