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InsiderOnline Blog: October 2012

Everybody Gains from Rate Cuts

The Tax Policy Center is wrong, say Stephen Entin and William McBride: Mitt Romney’s plan for a 20 percent across-the-board cut in income tax rates will not require new taxes on the poor and the middle-class in order to be revenue neutral. The Tax Policy Center’s main error, explain Entin and McBride in a new Tax Foundation report, is assuming that tax rates have no impact on economic growth:

Certainly, economists disagree about the degree to which taxes affect behavior, but they will all admit that zero effect is not realistic. So, in an effort to produce a more realistic assessment of Romney’s tax plan, we have simulated the effects using a model built on a standard neo-classical growth model found in virtually all textbook treatments.

The results are considerably different from TPC’s. We find that fully 60 percent of the static revenue loss from Romney’s plan is recovered when the dynamic effects of economic growth are taken into account. We find that while the cuts in the individual income tax rates do not “pay for themselves,” they do grow the economy 1.8 percent over the long run. The biggest boost to the economy comes from the 10 point cut in the corporate rate, which grows GDP by 2.3 percent, the capital stock by 6.3 percent, and the wage rate by 1.9 percent. The corporate rate cut is so economically beneficial that it does pay for itself, when all federal revenue effects are considered. So does the elimination of taxes on capital gains and dividends for middle-income earners and the estate tax.

These benefits are widely shared. Every income group experiences at least a 7 percent increase in after-tax income. [“Simulating the Economic Effects of Romney’s Tax Plan,” by Stephen Entin and William McBride, Tax Foundation, October 3]

Posted on 10/05/12 12:36 PM by Alex Adrianson

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