Taxes & Loopholes
The upcoming election will be, in part, about who voters believe (correctly or not) will be able to restore the economy. Laying aside the matter of perceptions, there is also the question of whether or not the president actually has a significant impact on the economy. However, this question goes beyond the intended scope of this essay.
Obama has, of course, had his first term to create (or destroy) the perception that he can succeed over the next four years. Supporters of Obama point towards the fact that the free-falling economy did not hit the bottom and eventually started recovering. They also claim that the Republican’s main argument is that Obama should be replaced because he failed to clean up their mess fast enough. They add to this that the Republican plan is to return to the approach taken under the Bush administration. If this were true, there would seem to be little reason to believe that the Republicans could achieve something different by doing the same things.
Ryan and Romney were somewhat vague about their proposals, although Ryan believes that “the secret to economic growth is lower tax rates for families and successful small businesses by plugging loopholes.” Ryan seems to claim that closing the loopholes will impact high-income earners the most since they use the majority of loopholes. Under the current system, this allows them to use the loopholes to shelter their income from taxation. Ryan has also made the point that lowering the tax rates and plugging loopholes will be revenue neutral. That is, the government will receive the same amount of money. This, of course, would seem to require that the loopholes that are closed will generate revenue equivalent to the tax cuts (although one might argue that the economic growth alleged to arise from the tax cuts would also be a factor-this would generate more tax income).
In theory, this could be done-it is, after all, a matter of math as to whether the tax cuts would be offset by the loophole closings. Of course, a proper calculation would require knowing the nature of the tax cuts as well as the loopholes that will supposedly be closed. However, Ryan has been reluctant to reveal the specifics of this plan. He did say that he and Romney intend to “show the framework, show the outlines of these plans, and then to work with Congress to do this.”
Not surprisingly, some critics have accused Romney and Ryan of having a secret plan. Given that critics made a similar point against Obamacare (noting that the idea that we would find out what is in it after it passed seemed problematic), this would certainly have some bite against the Republicans, assuming a consistent stance was taken against not knowing what was in it until it was rather late in the day, so to speak.
Ryan’s counter is that the plan is not a secret one because he wants to resolve the details “with the consent of the elected representatives of the people and figure out what loopholes should stay or go and who should or should not get them.” On one hand, this would not be a secret plan, at least not in the sense of having the hashing out of the actual details in secret (assuming, of course, that the elected officials do not do things in secret-which is often business as usual in political matters). On the other hand, it can be seen as a secret plan in the sense that we will not know what loopholes will be plugged until after the election. This is somewhat like saying that the contents of a wrapped present are not secret on the grounds that the present will eventually be opened in front of people. In this case, all we need to do to see the mystery present opened is to vote for Romney and Ryan. At this point, what might be under the wrapping paper is a matter of speculation.
While Ryan claims that the majority of loopholes are used by higher income people, without knowing what loopholes will be plugged it is not clear that the majority (or any) of the plugged loopholes will be those that are used primarily by those with higher incomes. After all, there are numerous loopholes that are also used by people with lesser incomes, such as the tax deduction for mortgages. Plugging that loophole would impact more than just higher income people. For all that is known now, the result might be that a significant number of the loopholes that end up being plugged are those that are used by people with lesser incomes. As such, the tax cuts mentioned by Ryan might be balanced by increasing the tax burden of those with lesser incomes. While this would technically not be a tax increase in the sense of an increase in the tax rate, it would be an increase in the amount of taxes that would be paid. After all, in terms of the money a person has to send in to the IRS it matters little whether that increase was due to a tax rate increase or the removal of a previous loophole. Thus, while Ryan seems to be indicating that the tax decrease will be compensated by closing loopholes that are mostly used by the higher income folks, there seems to be no reason to believe that will be the case.
Naturally, it can be predicted that those who will pick the loopholes to close will endeavor to steer clear of closing popular loopholes (since closing them would be politically damaging). It also seems likely that they will avoid the loopholes dear to those with influence over the deciders. This would seem to leave only unpopular loopholes that benefit people with little or no influence. It is somewhat hard to imagine that closing such loopholes would be enough to offset a significant tax decrease. But perhaps such loopholes exist. Or perhaps the deciders would be able to cut popular loopholes and those used by the influential. Looking at the track record, this seems somewhat unlikely.
Another point worth considering is whether or not this approach would have any effect. After all, if the plan is supposed to be revenue neutral, then the only meaningful impact would seem to be to shift the burden. While Ryan seems to be indicating the shift will be upwards, there is not clear evidence that this will actually be the case. There is also the obvious concern that keeping revenue the same will not, by itself, have any impact on the deficit. If revenues are not increased, this would mean that spending would have to be cut in order to reduce the deficit. Naturally, Ryan has already proposed a budget-one that was condemned by religious leaders as immoral and unpatriotic. While I sometimes differ with the Catholic church on matters, I do find their moral arguments against this proposed budget compelling. This might, however, be due to the influence of my Catholic friends and family.
Since I do not actually know what loopholes would be closed under a Romney-Ryan administration, I cannot say with any confidence that this would lead to good or bad results. I do agree with Ryan that there are loopholes that should be closed, although we might differ in the specifics. My inclination is, however, to see the Romney-Ryan plan regarding loopholes for what it is-something I mainly cannot see.
While the Democrats have provided more in terms of specifics, there are still questions about exactly what Obama would do in his second term. More importantly, there is the question of whether or not his plans will work. At this point, however, Obama has a significant edge in terms of details. Also, the new Republican plan that has been revealed seems to be rather similar to the old Republican plan, namely the one in effect when the economy slid into ruin. Romney and Ryan need to offer more if they wish to provide reasons to think that they can do a better job. After all, while the economy is still weak, it is improving. Going on with Obama would thus seem to lead to a continuance of improvement, although perhaps at a slow rate. Going back to the old Republican plan would presumably have the same results as before, namely ruin. As far as the new Republican plan, the details, if not secret, remain ahead in some possible future.