Tax “Reform” and Growth

A big part of the complicated makeover Mitt Romney is attempting (and will attempt to consummate tonight) involves connecting his fiscal agenda to some sort of argument that he will “jump-start” the stalled economy into a job-generating machine. And the latest talking point he seems to have seized on (which also has an important defensive purpose in protecting him from claims he’s trying to shower new benefits on the rich) is the claim that a “tax reform” plan that makes reduces loopholes and makes the tax code more efficient has proved in the past to be a big promoter of growth.

At the New York TimesEconomix blog today, Bruce Bartlett, who generally approves of the kind of tax reform effort that trades lower rates for fewer deductions, makes a clear case that they have not in the past (particularly in the big 1986 reform effort) and likely will not in the future represent any sort of “jump-start” strategy:

By the mid-1990s, it was the consensus view of economists that the Tax Reform Act of 1986 had little, if any, impact on growth. In an article in the May 1995 issue of the American Economic Review, the Harvard economist Martin Feldstein, a strong supporter of tax reform who had served as chairman of Reagan’s Council of Economic Advisers, found large changes in the composition of income, but the only growth effect was a small increase in the labor supply of married women.

In a comprehensive review of the economic effects of the 1986 tax reform act, in the June 1997 issue of the Journal of Economic Literature, Alan Auerbach of the University of California, Berkeley, and Joel Slemrod, the University of Michigan economist, also found that the primary impact was on the shifting composition of income. They could find no significant growth effects. They concluded, “The aggregate values of labor supply and saving apparently responded very little.”

So even if you buy the idea that the laws of math can be modified sufficiently to turn the Romney tax plan into a revenue-neutral rates-for-deductions tradeoff, it’s a non sequitur to expect any big impact on jobs or economic growth. And combined with Romney’s austerity spending plans and his deflationary monetary policy leanings, there’s little reason to expect a Romney Recovery unless it’s purely cyclical and would have happened anyway.

Ed Kilgore

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.