Pawlenty Tax-Cut Plan Questioned Over Revenue Projections

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Republican presidential candidate Tim Pawlenty speaks to members of the Tea Party at a banquet hall on April 2, 2011 in Cedar Falls, Iowa. Close

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Republican presidential candidate Tim Pawlenty speaks to members of the Tea Party at a banquet hall on April 2, 2011 in Cedar Falls, Iowa.

Republican presidential candidate Tim Pawlenty, seeking notice in a crowded field, offered a tax-reduction and simplification plan that skeptics said projects overly rosy U.S. economic growth.

The former Minnesota governor also called for less regulation and more business-growth incentives, while attacking President Barack Obama as “a champion practitioner of class warfare.”

Speaking yesterday at the University of Chicago, where Obama once taught law, Pawlenty said Obama has “spent three years dividing our nation and fanning the flames of class envy and resentment all across the country to deflect attention from his own failures and the economic hardship they have visited on America.”

In his first major policy speech since declaring his candidacy on May 23, Pawlenty proposed a reduction in the top corporate tax rate to 15 percent from 35 percent, as well as just two tax rates for individuals.

The speech, at one of the world’s most prominent schools of free-market thought, followed last week’s Labor Department report showing that payrolls grew by a less-than-projected 54,000 in May -- the smallest gain in eight months. The unemployment rate rose to 9.1 percent, the highest this year.

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Former Minnesota Governor and Republican presidential hopeful Tim Pawlenty speaks to students at the University of Chicago on June 7, 2011 in Chicago. Close

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Former Minnesota Governor and Republican presidential hopeful Tim Pawlenty speaks to students at the University of Chicago on June 7, 2011 in Chicago.

The jobs report was the latest indicator suggesting the nation’s recovery from the worst recession since the 1930s has hit a soft patch with the presidential election 17 months away.

Gasoline Prices

Spotlighting rising gasoline prices and falling home prices, Pawlenty, 50, said Obama, 49, has failed to nurse the nation’s economy into a healthier condition.

“Our national debt has skyrocketed,” he said. “Our budget deficit has grown worse. And the jobs and manufacturing reports are grim. Now, if that was recovery, then our president needs to enter economic rehab.”

In an interview with Bloomberg Television today in Chicago, Pawlenty also blamed Federal Reserve Chairman Ben Bernanke for the economy’s weakness.

“I didn’t support Chairman Bernanke’s appointment last time for these very reasons,” Pawlenty said. “He has a very, what I would say, loose approach to the dollar and a strong-dollar policy. We need to get back to a strong dollar as one of our economic goals. It reflects a strong country and a strong economy.”

‘Flooded the Market’

Pawlenty said the Fed has “flooded the market with money,” potentially leading to a “significant round of inflation” later.

Democratic National Committee Chairwoman Debbie Wasserman Schultz, a U.S. House member from Florida, said in a statement yesterday that Pawlenty’s plan “would take the Republican policies of the last decade, which exploded our deficit and debt and nearly sank our economy into a second Great Depression, and inject them with steroids.”

Pawlenty’s remarks on federal spending focused little on the largest cost drivers, which include Medicaid, Medicare, Social Security and defense.

When asked about those items by an audience member, Pawlenty said he would offer his own Medicare plan in the “next couple of months or less.”

Ryan Plan

He has previously said, when pressed on the matter, that if he were president he would sign the House Republican proposal by Representative Paul Ryan of Wisconsin that would privatize the traditional Medicare program for older Americans.

Pawlenty called for means testing for Social Security’s annual cost-of-living adjustment, as well as a gradual increase in the program’s retirement age. He said he would like to see block grants to states for Medicaid, the health-care program for the poor, and a slowing in the rate of spending on defense-related items.

His proposal to limit federal spending to 18 percent of gross domestic product ignores rising health-care costs and an aging U.S. population, said Leonard Burman, a professor of public affairs at Syracuse University in Syracuse, New York.

“The level of disconnect from reality is just disturbing,” Burman said.

Pawlenty said much of the revenue that would cover the tax cuts he is proposing would come from the 5 percent annual economic growth his tax cuts would help spur.

‘Deep Doo-Doo’

“If that 5 percent becomes 4, 3, 2 or 1 percent, we’re in deep doo-doo,” Pawlenty said during a question-and-answer session after the speech. “So this isn’t about whether some people are going to get wealthier or not. It’s about what are those things that we need to do to make it more likely, not less likely, that businesses are going to start, grow, add employees, buy capital equipment, build buildings, conduct research and do all the things it takes to keep a private economy going.”

Pawlenty pointed to similar levels of growth during periods in the 1980s and 1990s. He didn’t mention that Congress also raised taxes several times during those decades. The U.S. GDP has grown by 5 percent in only 13 of the 65 years since the end of World War II, according to the Commerce Department, and it hasn’t hit that target since 1984.

Senator Orrin Hatch of Utah, the ranking Republican on the tax-writing Finance Committee, said Pawlenty’s proposal was “forward looking.”

“I was very interested in that,” Hatch told reporters today. “If that would bring companies back to America, my gosh, we all ought to be praising Governor Pawlenty.”

Trillions of Dollars

The Center for American Progress, a Washington policy group often aligned with Democrats, estimated that Pawlenty’s tax-rate cuts would reduce revenue collections to 13.5 percent of gross domestic product, below the post-World War II average of about 18 percent. To bring that number high enough to cover spending, he would have to eliminate trillions of dollars worth of tax breaks, the group said.

“It’s radical, to say the least,” said Michael Ettlinger, the center’s vice president for economic policy.

Ettlinger called Pawlenty’s 5 percent growth target “patently ridiculous,” and said it didn’t warrant serious discussion. “The idea that we’re going to get substantially levels of higher economic growth, for a longer-term period, it’s just not realistic,” he said.

Pawlenty suggested that his tax cuts could be offset through spending cuts and the elimination of certain tax breaks for businesses.

“The tax code is littered with special-interest handouts, carve-outs, subsidies and loopholes,” he said. “They should be eliminated. Such reform would not only help offset short-term revenue loss from the rate cuts, but it would also reduce cronyism -- favoritism -- and government manipulating markets for political purposes.”

Mortgage Interest

Pawlenty wouldn’t target any of the popular personal tax breaks, such as mortgage interest deductions.

“In the individual tax code, we’re not proposing to change the tax deductions, exemptions or credits,” he told reporters after the speech.

Pawlenty said his plan would reduce the lowest tax rate by one-third by setting the bottom bracket at 10 percent. The tax cuts enacted in 2001 already established a 10 percent bracket, and it applies this year to the first $8,500 of taxable income of individuals and the first $17,000 of taxable income for married couples. Pawlenty’s proposal would widen that 10 percent bracket by making it apply to $50,000 of income for individuals and $100,000 for married couples.

25 Percent

Above that level, Pawlenty would set a single 25 percent bracket, shrinking the current six-bracket structure to two. The top rate of 35 percent now applies to taxable income exceeding $379,150 for both individuals and married couples. His 25 percent top individual rate matches the targets set by House Republicans.

Pawlenty proposed eliminating the taxes on estates, capital gains, and dividend and interest income, all of which tend to go to taxpayers with higher incomes. More than 90 percent of the tax savings from the lower rates on capital gains and dividends go to taxpayers in the top 20 percent of the income distribution, according to the Tax Policy Center, a nonpartisan Washington research organization.

To contact the reporters on this story: John McCormick in Chicago, at jmccormick16@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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