Martin Feldstein, a conservative Harvard economist, served as chairman of the Council of Economic Advisers under President Reagan. He is also an adviser to Mitt Romney. In that role, Feldstein recently undertook a study of Romney’s proposed tax “plan” to try to prove that it is indeed mathematically possible to accomplish the three basic promises of the Romney approach. They are:
– Cut individual tax rates by 20 percent across the board;
– Make up revenue lost through the lower rates by eliminating tax deductions.
– Ensure that taxes are not raised on the middle class.
Romney has since seized upon the Feldstein study as confirmation that his plan — vague as it is — holds together mathematically. However, there are at least three* rather large and well-documented problems with Feldstein’s study:
1.) To make the math work and maintain the fiction that taxes on the middle class won’t rise, Feldstein begins by redefining that middle class. Under his formulation, every household that makes more than $100,000 would be classified as rich, not middle class. In sheer mathematical terms, that might be a valid argument. But in political terms, nobody defines the middle class as those making less than $100,000.
2.) THIS IS THE BIG ONE: To make the Romney plan work, Feldstein envisions eliminating every single itemized tax deduction available to wealthy households, which again he defines as those making more than $100,000.
Mortgage deduction, gone.
Charitable deduction, gone.
Deduction for state income taxes and for property taxes, gone. Even the standard deduction would be gone.
Those deductions are particularly important for those Americans who are usually defined as upper-middle-class. Thus, the result would be a significant tax increase under the Romney plan on those Americans making between $100,000 and $200,000. And remember, that additional revenue would not be used to reduce the deficit or to make Medicare solvent. For the most part, it would be used to finance additional large tax cuts for the truly rich, such as Romney.
But of course, since Feldstein has magically redefined those making $100,000-$200,000 out of the middle class, he can still claim that the Romney plan would not force a middle-class tax increase.
3.) Feldstein also uses so-called “dynamic scoring” — the theory that tax reform will create economic growth, which in turn will create additional federal revenue — to make the Romney tax plan pencil out. We’ll deal with concept in a post later today.
When these realities are pointed out to the Romney campaign, they fall back on the vagueness defense:. Since Romney has not identified which specific deductions he would eliminate, they claim, it is impossible to guess at what the impacts would be. That is true. But it is also true that when one of his most influential advisers took a stab at what the plan’s impact MIGHT be — using assumptions most favorable to his candidate — he ended up proving that a significant tax hike on the upper middle class would be necessary.
* (Actually, there are four. Feldstein baked an egregious basic mistake into his study, as even his fellow conservative economists concede, that makes the pending tax hike on the upper middle class even larger.
– Jay Bookman