In Election Year, Tax-Policy Debate Becomes Political Hot Potato
08/17/2012| 01:31am US/Eastern
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By Siobhan Hughes
WASHINGTON--The U.S. presidential campaign has taken a turn for the negative--and that isn't making it easy on the economists who are in the business of analyzing tax policy.
William Gale, an economist at the Tax Policy Center, and his colleagues found themselves in a political maelstrom when they released a report earlier this month. Their analysis concluded that the only way Republican presidential candidate Mitt Romney would be able to achieve his stated goals of lowering tax rates by 20%, eliminating the estate tax and alternative minimum tax, and keeping dividends and capital gains tax rates at 15%--all without raising or lowering the amount of federal tax revenue--would be to shift more of the tax burden onto middle-income and low-income households.
President Barack Obama made the conclusions a campaign issue, and the campaign developed advertisements around the report. The right fired back that the Tax Policy Center, a joint venture of the liberal Brookings Institution and the Urban Institute, had made unfair assumptions about Mr. Romney's plan. The economists were left in the middle, trying to explain that their report was simply a straightforward analysis that made use of the handful of proposals that Mr. Romney has clearly spelled out.
The frenzy over a single report helps explain why both sides in the presidential race have avoided too many specifics about their tax and spending plans. It also shows why the economic modeling taking place in parallel with the political campaigns tends to remain under wraps, leaving the public to guess about what any one person's campaign platform actually means.
"This political, name-calling vortex ... is just unpleasant," Mr. Gale said in an interview.
The policy analyses taking place in think tanks around Washington are described by both sides as more collegial. Mr. Gale said that a debate with a research at the conservative-leaning American Enterprise Institute was "constructive." The researcher, Matt Jensen, said in a blog post this week that the Tax Policy Center could have factored in other options, such as the possibility that Mr. Romney would remove tax breaks on interest paid on municipal bonds and on life-insurance policies. In that circumstance, Mr. Jensen blogged, the government could generate additional revenue, "balancing out" the "supposed $86 billion windfall for the rich and tax hike on the middle class and poor," and making "the impossible suddenly possible."
The debate is still playing out, in ways that get to the heart of the larger policy questions that Congress and next year's president will have to take on if they follow through on reforming the tax code. Among such questions: If Mr. Romney can't possibly meet all of his five tax goals without shrinking the tax base, what elements of his plan might he tweak?
"I think Romney and his team believe the five goals can be met," Mr. Jensen said. Still, "I do think if it did come down to it, the would change something." His concept: "to me, the most obvious thing to do would be to change the rate on the highest-income individuals. Rather than cutting at 20%, cut at some number under 20%. That would be the most obvious thing. Then you maintain the low rates on savings and investment, which is what matters the most for economic growth."
Speaking of the dueling AEI and Tax Policy Center analyses, Mr. Gale said that "gee, if the debate could be between comments like that and stuff we're writing, that would be a wonderful, constructive discussion and we could get to tax reform pretty quickly."
At least it isn't a debate over Medicare. The health insurance program for the elderly has become a political hot potato since Mr. Romney picked as his running mate Rep. Paul Ryan (R., Wis.), the architect of a controversial plan to change Medicare into a system that subsidizes private insurance.
"Contrast the ideas generated by the AEI blog post to the Medicare discussion going on in the election right now--and I'll take the tax reform discussion that we're having with AEI any day," Mr. Gale said.
Write to Siobhan Hughes at siobhan.hughes@dowjones.com
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