Thursday, I cited AEI’s Alan Viard and Alex Brill explaining why tax reform like that proposed by Mitt Romney doesn’t remove work disincentives, one of the main ways that tax reform can stimulate growth. Viard and Brill updated their argument Friday, clarifying that they think the Romney plan can still promote growth. It can’t spur people to work more, sure, but it can promote investment:
Unfortunately, the Simpson-Bowles plan would increase tax penalties on saving because it would raise tax rates on dividends and capital gains and narrow other savings-related tax preferences.
In contrast, Governor Romney’s tax plan for individuals would lower statutory tax rates on ordinary income while leaving tax breaks for saving largely untouched. His corporate tax reform plan would further improve the allocation of capital and foster economic efficiency. Overall, the governor’s plan translates into a reduced tax burden on saving and investment, which are key drivers of long-run growth.
However, as Suzy noted, the growth caused by the plan’s lower taxes on investment aren’t going to be close to enough to pay for it. What’s more, the lower statutory tax rates that are necessary for this growth effect are also the reason why the Romney plan is so much more regressive than the current tax code.