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Feldstein’s Analysis Doesn’t Refute TPC Findings on Romney’s Tax Plan, It Confirms Them

Samuel Brown, William G. Gale, and Adam Looney

In a recent paper, we showed that any revenue-neutral tax reform that included Governor Romney’s specific tax cuts and that met his stated goal of not raising taxes on saving and investment would cut taxes for households with income above $200,000 and would therefore necessarily have to raise taxes on taxpayers below $200,000. This was true even when we considered an unrealistically progressive way of financing the specified tax reductions, and even when we accounted for economic growth and revenue feedback.

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.

While his results confirm our earlier finding, Feldstein employs several questionable assumptions that understate the revenue loss of Governor Romney’s tax cuts and overstate the revenue gains from reducing tax breaks and deductions. Under more reasonable assumptions, Feldstein’s version of the Romney proposals would not be revenue-neutral; instead it would result in large revenue losses. Specifically:

  1. He assumes that each dollar of itemized deductions lost by households with income above $100,000 would generate 30 cents in revenue. However, the Romney plan has a maximum tax rate of only 28 percent and most households with income above $100,000 would face an even lower rate on some or all of the additional income from eliminating deductions.
  2. He assumes that taxpayers earning more than $100,000 who currently itemize would lose not only their itemized deductions but also their ability to take the standard deduction. Normally, taxpayers have the option of itemizing their deductions or taking the standard deduction.

    If the standard deduction were retained for all households, and denying itemized deductions was assumed to raise revenue at a more realistic average marginal tax rate of 24 percent under Romney’s plan, Feldstein’s proposals would fall about $70 billion short of revenue-neutral, even if taxpayers don’t change their behavior.

    However, JCT and Treasury estimates consistently show that the revenue generated by eliminating such deductions would be even lower because taxpayers would change their behavior. For example, taxpayers with positive interest income would likely pay down their mortgages if the mortgage interest deduction were eliminated, thereby reducing their taxable investment income. Hence, the revenue available from eliminating these items is smaller than Feldstein’s static estimates suggest, even after using an appropriate average marginal tax rate.

  3. Feldstein does not offer a specific way to pay for the costs of repealing the estate tax, instead pointing to “other base broadening changes” and arguing that the estate tax repeal could actually raise revenue on net. The estate tax raised $21 billion in 2009, and the JCT, CBO, and Treasury have consistently estimated that estate tax repeal would not only lose revenue but could actually lose more revenue than the listed estate tax revenues, because it would create opportunities for tax avoidance.

Taking the estate tax and other effects into account, Feldstein’s proposals come up at least $90 billion short of revenue-neutral.


Although Feldstein uses a different methodology than we did, his analysis reinforces our central finding about the distributional impact of Romney’s tax proposals: the net effect would be cutting taxes on households above $200,000 and thus requiring net tax increases on households with less income. More broadly, both our analysis and Feldstein’s show that Romney’s tax plan cannot accomplish all of his stated goals. Either taxes must rise on those with income below $200,000, or tax preferences for saving and investment will have to be reduced, or revenues will be cut, or promised tax cuts for high-income households will have to be reduced. Trade-offs exist and solutions are possible, but tax reform cannot do everything that it is sometimes asked to do.

In addition, both Feldstein and we use stylized reforms that could not be implemented in practice and that overstate the progressivity of any cut in deduction or exemption. Under Feldstein’s proposals, for example, taxpayers earning $99,999 would pay dramatically lower taxes than an individual earning only one dollar more—implying enormous marginal tax rates. Any realistic, practical plan to limit tax expenditure cuts to a high-income group would require a phase-in of the cuts or other accommodations, which would add to marginal tax rates, reduce the potential revenue gain, and make the resulting tax change more regressive.

Finally, the debate over what is or isn’t possible distracts from the more important question of what the Romney plan actually is. The governor could settle this issue quickly simply by describing how he’d pay for his tax cuts.

Technical note: Feldstein uses adjusted gross income as his income measure. We use cash income, which is somewhat larger than adjusted gross income. His group of households with AGI of $100,000 and up filed 12.4 percent of tax returns in 2009; our group of households with cash income of $200,000 and up will file 6.3 percent of all tax returns in 2015.

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