Monday, October 22, 2012

Discussion Topic 10/22/2012
What do you think about Romney's economic plans. Are you in favor of his plans? and why?


  1. Tim Shoji
    Since "Economic Plans" can be too broad of a topic, perhaps we should focus on the "tax" part of Romney's plan for this discussion. Unfortunately, it is difficult to have an intelligent opinion on Romney's tax plans because he has not communicated the specifics of his plan. In general terms, we know that he proposes:

    1. Extending the Bush tax cuts
    2. Cutting individual income tax rates
    3. Cutting capital tax
    4. Cutting corporate income tax

    So he's cutting a bunch of taxes, but he does not tell us how he plans on bringing in more tax revenue to make up for those cuts. Therefore it is difficult to tell if his plan is revenue neutral, or if it puts the government further in debt. From an economist's perspective, one interesting thing to think about is what we often call the "Ricardian Equivalence" when it comes to taxation. In essence, the theory tells us that rational consumers, or taxpayers in this case, are not idiots; they know that if government cuts taxes now, it just means they'll have to increase taxes eventually in order to pay for their spending, so consumers modify their behavior accordingly by putting money aside to pay for taxes later. In other words, it doesn't matter if I cut taxes now and increase taxes later, or increase tax now and cut taxes later...if the fundamental forces that drive government spending don't change, everything else is just window dressing. Of course, there are disagreements over whether Ricardian Equivalence holds or not, but it's thought-provoking nevertheless especially because there is indeed some evidence that it holds, and if you're the analyst that has to come up with real projections on tax policy, you have to make real decisions about what you want to assume.

    Regardless of which side of the political spectrum one comes from, most economists agree on the following:
    1. Cutting capital gains tax is a good idea. We should have a tax policy that encourages investment in capital, so that we can continue to fund future growth.
    2. We should close loopholes that are given out to individual companies, sectors, or individuals. For instance, many believe that tax deductions for employer-health insurance and home ownership should be eliminated. Subsidizing employer-based health insurance distorts the insurance market (makes people purchase too much insurance) and also makes the labor market rigid. (people are afraid to switch jobs because they don't want to lose their insurance) Giving tax breaks to homeowners is essentially taking money away from renters and redistributing it to owners, which makes no sense. There is a wide-spread belief that home ownership is good for our society, or that it is the fabric that ties together a community, but it is a myth. Home ownership rates in Spain are above 80%, compared to about 65% in the U.S. and below 40% in Germany. Is the Spanish society better than the U.S. and Germany? It's nearly impossible to tell.

  2. gsalpert
    One area of concern surrounding Romney is that because he has more of a corporate background compared to Obama, it is assumed that his policies will immediately benefit corporations and harm those that are less well-off. However, any actual legislation must pass through Congress in order to be approved and put into law. My personal concern about Romney is that he has changed his position so many times in order to win voters that I am unsure of his true policy position. He has stated that we are going to balance the budget and re-strengthen America's military at the same time. I think the Romney is mimicking George Bush Sr.'s strategy of making big promises to a lot of people, but will fall into the same situation as Obama is in currently. I remember when the euphoria of Obama's election wore off, we had the subprime mortgage crisis and a near financial collapse. If Romney gets elected, he will inherit a bad economic situation that he did not create, and he is doing the best he can to appeal to as many voters as possible. In REALITY, we have no idea what Romney's policies will be if he is elected president.

  3. Xiao Zhong
    In Romney’s five-point plan (increase domestic energy, fix public education, cut government deficit, reduce taxes on job creation and repeal “Obamacare”), it seems that the “bill” is mostly borne by the poor lower-class, which could very likely exacerbate what we discussed days before—income/welfare inequality between the rich and the poor, at least in the short-run. It seems that Romney’s plan (if as he promised) favors the rich and the middle class more than the grassroots.

    On one hand, the former business leader is cutting taxes on job creation and is committed to building a stronger middle class by giving more freedom to small businesses; on the other, he has promised to cut government deficit. However, with decreased taxes how can he manage to control deficit? The money has to come from somewhere, which is from the poor in this case. By distributing more power to individual states in deciding the health care plan that works best for them, Romney actually repeals the Obamacare which can be extremely important for low income families that rely heavily on the health care plan to support their olders. Trying to “save” money from “wasted” national health care plan seems his way of controlling deficit, which may not be a problem for the richer at all but would indeed be a headache for the poorer.

    So as I see it, Romney is coming up with short-term plans to ease economic downturn by stimulating businesses and creating jobs. While the long-term dilemma remains: total social welfare are not maximized since the more surplus earned by the rich cannot be passed down to the poor through taxation and government welfare programs.

  4. Pian Li
    The tax plan of Romney alone seems good. However, there are potential conflicts among all these tax policies. Romney points out the policies of broadening the base, eliminating various deductions and exemptions for upper-income Americans and preserving only those related to savings and investment. In fact these cannot be realized according to some mathematical analysis. According to Urban Institute and Brookings Institute, any revenue neutral plan outlined by Romney will reduce taxes for higher-income households with higher taxes on middle and lower class households. If it is true, the middle-class will bear more impact of the policies on taxes than the rich households. Since middle-class households account for a larger part of the voters for president, Romney will suffer a lot.

    Also, I mentioned in the previous discussions about the taxing on the rich in US. If the president wants to reduce the gap between the rich and poor, he must balance the income between the rich and poor. What Romney is doing now is to enlarge the gap and cause potential social chaos.

  5. Amine Bensaid
    I completely agree with Glenn's statement, Romney changed his position so many times that we do not know for sure what is his real plan today. I refute the premise that Romney will be a good president because he was successful at managing his private equity firm. Running a government is nothing like running a company, not even close. In my opinion Romney's political position has nothing to do with saving the economy, all he cares about is to get more votes than the actual president and he is doing so by criticizing all his past decisions.

    Let's not forget that the policies that Romney wants to implement are not too different from the policies that have gotten this country into this financial crisis. Romney specifically stated in the past that he is against safety nets and he wants to cut taxes on the upper class. Now he stated in his last debate vs the president that his goal is to cut the taxes to the middle class.

    Romney's version 3.0 plan might seem to be attractive to many voters in the short term, but in reality if we have a look at those policies he proposes they are not as attractive as it seems. For instance, version 3.0 is promising tax cut to the middle class, but this version does not like to promote that those tax cuts come with an important decrease in tax deductions. So in reality those tax decreases could be meaningless or even tax increases if we average the tax deductions that will be eliminated.

  6. Mengyao Kong
    Thanks Tim's Ricardian Equivalence Theory, I did learn something from that but personally I don't agree with that. Most rational consumers would shift their budget constraint line to the left right if the tax is being cut because at the time of tax cut, you are not being told that at some point the tax would be added back. Even it is the truth; people would love to spend more now, because they would have the additional capital to spend.
    I want summarize Romney's plan into two points, cut deficit and cut taxes. Please point out if I am not correct. That would be the most ridiculous thing in the world. How could that happen? The government relies on their tax revenue to cut deficit. He didn't bring an explicit plan to cut deficit by cut government employee and government employee welfare, or the military spending. It is a just simple math. Like Glenn and Tim said, he is trying to promise everyone a piece of the pie, however, the pie is not big enough.
    Also, there is social security problem, which the social security doesn’t have enough funds to feed the next beneficial generations. The number used to be 16 working employees to one working person, right now the number decrease to four to one. There are gazillion debates on them, but I am going to say it is just as simple as the tax cut thing. Politicians actually walked around about the social security problem but they don’t want to be the first one to say it out. There is basically no solution to this but working longer or some rich people would have no access to this pool even you paid for it. The return of the money is stable; we won’t expect a huge increase in the future. The same logic applied here for tax cut as well. All these questions come together and crack. The US is waiting and the world is watching. I think if US get recovery, then we don’t have to wait too long for the globe to recovery.

  7. Jason Zhang
    I agree with Ford. I think Romney will deduct the tax for the rich for sure, then he will have to either increase the deficit or increase the tax for the midle class to balance. Maybe he can stress out that the economic growth will make up the revenue, but in reality it is not the case. At least the tax cut in 2003 and 2011 didnt work out

  8. Tian Tan
    Agree on the point that Romney is making everybody happy and actually it seems very hard to cut tax and deficit at the same time. He must have some explicit plan to cut spending which he haven't talked about.
    But I do have concerns on cutting capital gain tax. I think capital gain tax is significant way to generate tax revenue from the rich and decrease income gap which we had talked last week.
    Let's take a look at what exactly the capital gain tax is right now in the US.
    In the United States, with certain exceptions, individuals and corporations pay income tax on the net total of all their capital gains. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The tax rate for individuals on "long-term capital gains", which are gains on assets that have been held for over one year before being sold, is lower than the ordinary income tax rate, and in some tax brackets there is no tax due on such gains. The tax rate on long-term gains was reduced in 1997 via the Taxpayer Relief Act of 1997 from 28% to 20% and again in 2003, via the Jobs and Growth Tax Relief Reconciliation Act of 2003, from 20% to 15% (for individuals, whose highest tax bracket is 15% or more), or from 10% to 5% for individuals in the lowest two income tax brackets (whose highest tax bracket is less than 15%). (from wikipedia)
    I think the current policy is fine because rich people pay more than others. However, I think the government may adjust the policy by give a tax-free limit for capital gain. In that way middle and low income people's investment will not be taxed. And government may differentiate capital gain from marketable securities and direct investment in business. That approach will not only not hurt employment and production but also prevent overheat of securities market.