Two Cheers for Romney’s Tax Plan

Mitt Romney is proposing an across-the-board reduction of 20 percent in income-tax rates. The current 35 percent tax rate would become 28 percent, the current 28 percent rate would become 22.4 percent, and so on. These tax cuts would come in addition to his previous proposals to eliminate capital taxes for households making less than $200,000 a year and to eliminate the estate tax. He would also eliminate the alternative minimum tax and reduce the corporate tax rate to 25 percent.

It’s a pro-growth plan. It improves incentives to work, save, and invest, and should thus modestly increase the economy’s long-run growth. It modestly improves the tax structure by reducing the tax code’s bias against saving and investment, particularly when that saving and investment is done in corporate form. Romney’s plan should also be expected to simplify the tax code, on balance. Getting rid of the estate tax and the alternative minimum tax are major steps toward simplification. But creating new income limits for various tax breaks and an income-tier structure for capital taxation are steps backward. Those income limits could also reduce the plan’s effect on growth: Depending on how they are structured, they could amount to increases in the effective marginal tax rate even as statutory marginal rates drop.

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