Understanding Romney’s Approach to Taxes: ‘Lower the Rates, Broaden the Base’

Here’s a clarification of the concepts behind the Romney-Ryan proposal for tax reform.

Republican presidential candidate Mitt Romney has made tax reform a centerpiece of his campaign. His catchphrase description of the proposal is “lower the rates and broaden the base,” a concept that enjoys support not just from other Republican candidates, but also from Federal Reserve Chairman Ben Bernanke and the Bowles-Simpson Fiscal Commission.
But that catchphrase immediately introduces a problem: for the most part, only wonks know what “broaden the base” means. What follows is a two-step clarification of the concept.
For the income tax, “broadening the base” means increasing the amount of income subject to taxation — and there are two ways to do it. One way is to increase the “taxable income” line on the individual tax return. The second way is to increase the number of taxpayers in the economy, by accelerating the private sector’s job creation.

1. Eliminating Deductions to “Broaden the Base” — Static Scoring

The first method of base-broadening, illustrated in Figure 1, focuses on a hypothetical individual tax return and shows what happens when the rate is lowered and the base is broadened by eliminating deductions. Note that, even if the whole pie (gross income) remains unchanged, the taxable income portion (inner circle) will grow as deductions are eliminated.
The red slices indicate tax dollars paid. When the tax rate decreases as taxable income increases, the slices can remain nearly the same size — i.e., there can be no tax increase or decrease on the individual return.

This is called a “microeconomic” analysis because it looks at the effect on individuals. And because it does not take into account the larger, macroeconomic effects — such as any resulting growth of the overall economy — it is also known as “static scoring,” which is the government’s official method for analyzing tax policy.

Read more: http://www.american.com/archive/2012/november/understanding-romneys-approach-to-taxes-lower-the-rates-broaden-the-base