TPC Removes the Veil from Romney Tax Plan: The Governor is not Amused
The Tax Policy Center (TPC) caused a kerfuffle on Wednesday when they released a studythat showed that the mostly unspecified parts of Mitt Romney’s tax cut proposals would amount to a giant tax increase on low- and middle-income households. The problem is that Romney has promised large tax cuts that would mostly accrue to the well off and also that the plan would close enough unspecified loopholes so that it doesn’t increase the deficit. However, the only tax breaks and loopholes large enough to offset the cost of the high-end tax cuts disproportionately benefit the middle class. Thus, their taxes would go up on balance.
The Romney campaign responded by calling the TPC “biased” and the study “a joke.”
As Yogi Berra would say, it’s déjà vu all over again. In 2008 (when I directed the TPC), we published a study which, among other things, concluded that Senator McCain’s proposal to allow taxpayers to opt for an alternative flat-rate tax system would add trillions to the deficit and convey a huge tax cut to millionaires. The McCain campaign insisted that the optional alternative tax would be revenue neutral, which could only be true if millions of people would opt for the alternative even though they would pay more tax. That defies logic, but logic has never been a hallmark of political campaigns.
In 2008, both candidates complained that TPC had made up stuff to fill in the giant gaps in their tax plans—all clearly labeled as our assumptions, but still not the actual plans. (Both campaigns, however, were also willing to fill in many, although not all, of the missing pieces when we pointed them out). The critique was that we made assumptions that were not part of the campaign proposals, but the campaigns would not tell us what assumptions we should have made. It’s kind of a Catch-22. Both sides criticized us for making unwarranted assumptions, but the campaigns would not tell us what the actual policies were beyond the unrevealing sound bites.
It is happening again. Governor Romney has done what politicians like to do, which is talk about how he plans to cut our taxes. His plan would cut tax rates by 20 percent across the board (the top rate would fall from 35 to 28 percent and the bottom bracket from 10 to 8 percent); he’d repeal both the AMT and the estate tax; and he’d exempt investment income from tax for couples making under $200,000 (singles under $100,000).
So far, it just sounds like President Bush’s tax plan on steroids, but unlike President Bush, Mr. Romney promises that his plan would not increase the deficit or make the tax system less progressive. He says that he would close unspecified loopholes to make up the lost revenue. He also proposes to eliminate the Obama tax cuts, which disproportionately help those with low incomes, but insists that low-income people won’t see an increase in tax burdens.
The Tax Policy Center on Wednesday basically said that the plan doesn’t add up. TPC tried hard to find loophole closers that could make up the revenue lost from Romney’s plan while preserving the current distribution of tax burdens. They assumed that tax breaks such as the deductions for mortgage interest, charitable contributions, and state and local taxes, and the tax exclusion for employer sponsored health insurance would be entirely eliminated for high-income people. This would be difficult or impossible to implement, but the study’s authors were trying to craft the best possible scenario for the Romney plan. Nonetheless, high-income taxpayers still got a substantial net tax cut under the plan, meaning that tax breaks would also have to be trimmed for those with lower incomes. TPC also gave Romney the benefit of the doubt by assuming (unrealistically) that the plan would significantly boost economic growth and thus produce more tax revenues, but, still, there were not enough high-end loophole closers to offset the super-sized tax cuts the plan would bestow on the rich. Thus, revenue neutrality would require tax increases on the middle- and lower-income groups. And, some really popular tax breaks—such as the mortgage interest deduction and the tax break on employer-sponsored health insurance—would have to be curtailed or eliminated. There are good policy reasons to cut those tax breaks, but those cuts are politically impossible.
There is, in fact, one giant tax break that could be curtailed to offset the effect of the rate cuts: the lower tax rates on capital gains and dividends. (They are the main reason Mr. Romney was able to pay an average tax rate of 13.9 percent in 2010.) Taxing gains and dividends the same as ordinary income, which Ronald Reagan’s Tax Reform Act of 1986 did and two bipartisan debt reduction plans proposed, might have provided the magic bullet to pay for the rate cuts without cutting overall taxes on the rich, but Romney has ruled that out. Indeed, his plan would set the tax rate on investment income to zero for those with modest incomes.
Aside from listing some tax breaks he would not touch, Mr. Romney is mum on which large tax expenditures he would like to eliminate to make his plan work. An advisor said that “it would be up to Congress to help fill in the blanks.”
Well, TPC has given them a head start on the job, and it’s just not possible to do it in a way that meets all of Mr. Romney’s promises. Either the plan will raise taxes substantially on low- and middle-income households or it would balloon the deficit.
TPC’s blogger Howard Gleckman explainsthat TPC’s analysis really just shows something not too surprising—that Mr. Romney will not keep all of his campaign promises.
Thus, the right question to ask Romney is not whether he wants to raise taxes on the middle-class. The right question to ask is which of his campaign promises he will abandon.
Romney won’t, of course, answer that question.
But his campaign’s attack on the TPC’s credibility is unlikely to stick either. Doug Holtz-Eakin (John McCain’s policy director in 2008) chose Donald Marron, TPC’s director, as his deputy at the CBO and George W. Bush appointed him to the Council of Economic Advisers. Donald is also off-the-charts smart and scrupulously honest, characteristics he shares with the study’s authors and the other TPC scholars.