The Case for Mitt Romney’s Middle Class Tax Hike

DES MOINES, IA - AUGUST 08: Republican presidential candidate and former Massachusetts Gov. Mitt Romney (R) looks at corn with corn farmer Lemar Koethe in a cornfield on August 8, 2012 in Des Moines, Iowa.

Photo by Justin Sullivan/Getty Images

Mitt Romney’s campaign has an unfortunate habit of bobbing and weaving when faced with populist attacks from the opposition rather than standing and fighting. So when confronting with sob stories about workers who got laid off by Bain-owned companies, Romney has tried to say he’s not responsible for things that happened while he was on a leave of absence despite being the CEO of record. But of course CEO or not, Romney doesn’t think there’s anything wrong with companies laying off workers when doing so maximizes profits. Similarly, now that a new study’s out showing that Mitt Romney’s tax pledges would lead to a big middle class tax increase, conservatives are out furiously spinning that he hasn’t formally proposed any such tax increase.

And he hasn’t. What he’s done is propose specific tax cuts, say he wants to keep tax breaks for investment income, and say he wants to make the whole thing deficit-neutral by closing loopholes. It turns out that the only way to do that is with a big increase in middle class taxes.

But since Romney won’t defend this on the merits, I will. The good thing about taxes is they raise revenue, which can be used to do useful things. The bad thing about taxes is they may be a drag on economic growth. But here there are two considerations. One is the “incentive effect” of taxes—higher taxes mean less incentive to do economically valuable things. The other is the “income effect”—less money in your pocket means more incentive to do economically valuable things. The genius of Romney’s plan is that by eliminating deductions it leaves middle class families with less money in their pockets (so a pro-growth income effect) while also lowering the tax rate they pay on a marginal dollar of additional earnings (so a pro-growth incentive effect). Basically it’s a huge win. You get a bunch of revenue in a way that bolsters the country’s growth prospects. The voters don’t want to hear that this is a good idea, but it’s a good idea.

Now a separate issue is what do you do with the money. You could use it to reduce the budget deficit. You could use it to build new aircraft carriers. You could use it to pay for early childhood education. Or you could do what Rommey does and use it to finance a reduction in marginal income tax rates for high income people. I don’t think that’s a smart use of the money, but the idea that high-end tax cuts are more socially beneficial than increased public services is a longstanding American conservative position. Romney’s innovation is the higher taxes on the middle class, and it makes sense. Only he won’t admit his plan has this feature so he can’t defend it.