10/4/12 – When Is a Tax Cut Not a Tax Cut?

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Oct 4, 2012 3:15:46 PM

and tagged Politics and the Economy

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I admit that I rarely watch speeches or debates live. I prefer to focus on the content, and reading the transcript allows me to do that without being affected by the atmospherics. But the real reason is that I usually end up yelling at the TV when either or both sides make misstatements.

So I can’t really comment on who “won” the debate last night. The papers generally agree that Mitt Romney did himself a lot of good by moving toward the center and effectively presenting himself as someone who could and would solve the deficit problem. There were front-page articles in the New York Times, “Obama and Romney, in First Debate, Spar Over Fixing the Economy,” and the Wall Street Journal, “Obama, Romney Spar on Taxes.” Both stories cover the content of the debate and the fact that, surprisingly, much of it actually consisted of a discussion of the issues.

Almost makes me sorry I missed it. I did read the transcript, though, and here’s what I think.

First, I was a bit surprised that neither side talked about reducing revenue. This doesn’t really surprise me about Obama, of course, but I was surprised at the extent of Romney’s denial of any intent to actually cut revenue. To quote, “We ought to bring tax rates down . . . but, in order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions, so that we keep taking in the same money when you also account for growth.” So headline tax rates are going down, but deductions are also going down, so that revenue raised—and, therefore, the effective tax rate—will remain the same. This answers my headline question above.

None of this is to hit Romney. The point of his plan is that lowering rates can spur job creation, as real deductions like employee salaries will not be affected and the business owner can keep more of the remainder, creating a greater incentive to start or grow a business. Absolutely correct, but not what the average salaried voter is thinking of when he hears “tax cut.”

The other surprising thing—which is actually kind of encouraging—is the amount of overlap between the two candidates. The most interesting part of this is the support for Bowles-Simpson, the bipartisan deficit reduction plan. Romney (correctly, in my view) calls Obama’s failure to embrace it an error. Although refusing to endorse Bowles-Simpson himself, the fact that Romney very publicly called it out as similar to his plan, and pushed the president to endorse it, suggests to me that, as I have written before, it is the core of a potential bipartisan solution.

The differences, of course, were also very apparent. But none was a surprise, and, in most cases, people already understand the choice. The new information was in the overlap.

So my takeaway from the debate is that there is actually an emerging consensus on what the fiscal future of the U.S. will look like. Revenue will remain fairly constant or go up a bit, even though the tax code will be changed to provide a different set of incentives than it currently does. Spending will be cut. In short, Bowles-Simpson is now a reasonable guide to the future.

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