Mitt Romney has proposed a 20 percent across-the-board personal income tax rate cut to promote jobs growth. It is claimed his tax plan will create millions of new jobs for Americans. On the face of it, we would expect such a policy to stimulate the economy and help with job growth by giving individuals more money to spend.
But, on closer inspection, the job-growth promise has to be questioned. There is a quid pro quo with the tax cuts calling for the removal of many personal tax deductions so that, on net, the tax changes will be "revenue neutral." Most of us interpret that to mean that total tax collections will neither rise nor fall as a percent of GDP after the change. If that is the case, then it is hard to see how his proposal will create many jobs.
Don't get me wrong: Reform would be good for Americans by simplifying the tax code so that we can at least do our own taxes and by eliminating many of the deductions that unfairly favor some special interest groups with strong lobbying power. But this proposal is not a jobs-creation program.
Where would the stimulus for economic growth derive? If the government raises and spends X tax dollars under today's tax code and the new tax proposal is revenue neutral, it raises and spends the same X dollars after the change. There will be no additional government demand for goods and services to help create jobs.
By the same token, if taxpayers had Y dollars to spend before the change, they would have the same Y dollars afterward. So likewise, there is no reason to expect additional personal consumption if their portion of taxes paid does not change. Where is the stimulus to provide job growth?
But overall revenue neutrality may be different than revenue neutrality across income classes. The elimination of particular deductions may favor one group over another so the elimination of particular deductions could reduce the total tax burden for middle income Americans who would then be likely to spend more. That could provide some stimulus.
But Romney has been remarkably reluctant to explain how all this will work. In fact, he has been unwilling to reveal the specific tax deductions that will be eliminated to achieve neutrality.
The choices could be critical. Let's pick the mortgage interest deduction, for one. It has to be a reform target because it is a large reason why many people can itemize deductions on their tax returns. But this is, in many respects, a middle-class deduction. Middle-income Americans typically have a larger portion of their wealth invested in their homes than do wealthier Americans. And that means larger mortgages as a percent of wealth and larger interest expense as a percent of income for the middle class.
If that deduction disappears, then there is a relative tax saving shift from middle-income to high-income earners and, with an across-the-board percentage tax cut, higher-income people will benefit at the expense of lower-income people. Because lower-income Americans typically consume a greater portion of their income than those with high incomes, eliminating this deduction could lead to less consumption rather than more and economic contraction rather than expansion.
The same argument can be made if the deductibility of health care costs that benefits most working Americans is eliminated. Because that cost is largely the same for all workers, the burden of that loss would also fall more heavily on the middle rather than on higher-wage earners. In a tax reform discussion, these deductions along with all others should be on the table. But the point here is that the choice of deductions to be eliminated is important if one purpose of the reform is job stimulus.
While it is possible deductions could be eliminated, or limited, in a way that provides overall tax neutrality while providing some job stimulus, it is likely that would have to mean a net tax cut for middle-income people and a net tax hike for higher-income earners.
But this is essentially what the president has proposed and Romney has rejected. We need some transparency here because the Romney math doesn't add up.
Richard Meyer is a professor emeritus in the College of Business at the University of South Florida. He wrote this exclusively for the Tampa Bay Times.