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So Stephen Colbert says (after cloning himself in two):

RED-TIE STEPHEN: Hey, [Romney] is looking out for the middle class.

BLUE-TIE STEPHEN: He's promising a 20% tax cut for the top 1%.

RED-TIE STEPHEN: Ah, but he's also promising to close their tax loopholes, so they'll still pay the same amount.

BLUE-TIE STEPHEN: Then... why cut their taxes?

I've been wondering the same thing: if we're cutting tax rates by 20%, but also cutting enough tax loopholes that rich people are paying about the same amount as they are now, and middle-class people are paying no more than they are now, and it won't increase the deficit, then what's the point of the tax cut?

There actually is an answer to that: loopholes tend to guide money in particular directions in order to avoid taxes, directions which might not have been the most efficient use of that money. So in theory, closing loopholes in exchange for lower tax rates should make the economy as a whole slightly more efficient. Probably not dramatically more efficient, and there's no reason to believe making the economy as a whole more efficient will put people back to work -- indeed, it might cost jobs.

There's another problem, at least if you're Romney. One of the biggest loopholes, with the most dramatic distorting effects on how people spend and invest their money, is the different tax rates for salary income and interest/dividend/inheritance/etc. income. If you have a choice between an investment that pays $100,000 in dividends, and a job that pays $120,000 in salary, the latter presumably produces more value in the economy, but the tax code gives you an incentive to choose the former instead. Romney knows that very well: he's brought his own Federal tax rate down to about 15% by shuffling most of his income into interest and dividends rather than paychecks. And it's a loophole that Romney has promised to enlarge by eliminating the estate tax, so his kids can inherit billions of dollars from him tax-free.

I hope somebody at tonight's Town Hall (which is taking place about a mile from my office) asks him about closing those loopholes.


I don't believe Romney actually said the wealthy would still pay the same amount -- he's too slick. He said they would still pay the same "share" of taxes. Which they would, of course, if everyone got a 20 percent tax cut. It's just that their 20 percent cut is much larger than the average person's 20 percent cut. So they would, in fact, get a very large tax cut in absolute terms, though the same percentage. Am I not right, mathematician?
I'm not sure exactly what Mitt said when, to which audience (which is really the point :-)

But right now I'm looking at http://mittromney.com/issues/tax . It makes some good points: tax loopholes and differential tax rates do distort the economy and lead people to put money where it is taxed least, not where it's most productive. (And he should know: he's never missed an opportunity to shuffle his own money to lower tax brackets.)

He says "marginal rates must be brought down..., while still raising the revenue needed to fund a smaller, smarter, simpler government." Specifically, he lists eight ways he's going to cut taxes (and one that he's not going to change, up or down). There is no mention of "closing loopholes" or anything else that might increase revenue; the only budget-balancing measures are decreased spending.

There aren't a lot of specifics on the decreased spending, but he does list a few: Obamacare, Amtrak, NEA and NEH, Title X, and foreign aid. All except Obamacare are chump change, adding up to a trivial $2.5 billion (per year?) even in Mitt's presumably-high estimates. And he says there will be a 5% "across the board" cut in non-security discretionary spending -- in other words, it's up to agency directors to figure out where to find the cuts.

Wikipedia says "non-defense discretionary" money was $646 billion last year, so 5% of that would be $32 billion. Adding the nearly $100 billion in specifically identified cuts (mostly Obamacare), we're up to $130 billion. Meanwhile, he says he's going to cut spending by $500 billion/year "assuming robust economic recovery"; I have no idea where the remaining $370 billion/year come from (not to mention what he'll do in the unthinkable scenario that there isn't a robust economic recovery).

Edited at 2012-10-25 04:25 am (UTC)