As every policy wonk knows, a tax-reform proposal isn't worth its salt until the distribution analysis is done. By that I mean the effect of any proposed changes in income-tax rates, loopholes and exclusions on actual taxpayers in various income brackets.
Does it maintain or improve the tax code's progressivity, so that taxpayers in the lower brackets don't bear a larger burden? Or is it regressive, in that it mostly helps the wealthiest taxpayers? The Tax Policy Center, a Brookings Institution and Urban Institute joint venture, has just released the first such in-depth analysis of Mitt Romney's tax plan, and it's not pretty. Unless you happen to be wealthy.
To refresh your memory, Romney would extend the 2001-03 tax cuts of President George W. Bush and reduce individual income-tax rates by 20 percent so that the top bracket would fall from 35 percent to 28 percent and the bottom bracket would fall from 10 percent to 8 percent. Romney also would eliminate taxes on investment income -- dividends and capital gains -- for most taxpayers, end the estate tax, repeal the alternative minimum tax (AMT) and ditch the higher income-tax rates enacted in health-reform legislation.
The Tax Policy Center's study, by Samuel Brown, William Gale and Adam Looney, estimates that Romney's plan would reduce individual income-tax revenue by $360 billion in 2015, using a current policy baseline (that means it assumes permanent extension of the Bush tax cuts and President Barack Obama's 2010 tax cuts but not his payroll tax cut, and that health reform takes effect as scheduled). Romney has said he would offset this revenue loss dollar-for-dollar, but he has offered few details of how that would be done.
To achieve such revenue neutrality, Romney's lower income-tax rates must be financed with an equal-value elimination or reduction in tax preferences. Offsetting the $360 billion therefore requires reducing tax expenditures by about 65 percent. Such a reduction would be unprecedented and require deep cuts in many popular tax benefits, including the mortgage interest deduction, the exclusion for employer-provided health insurance, the deduction for charitable contributions, and benefits for low- and middle-income families like the earned income-tax credit and child tax credit.
The analysis concludes that Romney's tax cuts would predominantly favor upper-income taxpayers. Those with incomes of more than $1 million would see their after-tax income increased by 8.3 percent (for an average tax cut of about $175,000). Taxpayers with incomes between $75,000 and $100,000 would see somewhat smaller increases of about 2.4 percent (for an average tax cut of $1,800), while the after-tax income of taxpayers earning less than $30,000 would actually decrease by about 0.9 percent (for an average tax increase of about $130).
The key point is this: The total value of tax expenditures (excluding tax breaks for capital gains and dividends, which Romney isn't likely to eliminate) going to high-income taxpayers is less than the value of the tax cuts that would go to the same high-income taxpayers, who therefore will face a lower net tax burden. Maintaining revenue neutrality, it seems, mathematically requires a shift in the tax burden of at least $86 billion away from the wealthy to lower- and middle-income taxpayers. This is true even assuming that the maximum amount of revenue possible is obtained from cutting tax expenditures for high-income households. If certain tax expenditures, say, for charitable giving, mortgage interest or health insurance were scaled back by the same percentage for everyone instead of eliminated, then revenue neutrality would force even larger tax increases on middle- and lower-income households.
Even under so-called dynamic scoring, a dubious concept that says tax cuts produce higher tax revenue, Romney's plan falls short. Assuming that, after five years, 15 percent of the $360 billion tax cut is paid for through higher economic growth, tax expenditures would still need to be cut by 56 percent, and lower- and middle-income taxpayers would still need to pay higher taxes.
It gets worse. If Romney's plan imposed an across-the-board reduction in tax expenditures, it would increase taxes much more on families with children than on childless adults. For example, if tax expenditures were completely eliminated for households above $200,000 and reduced across-the-board by 58 percent for taxpayers below $200,000, then taxpayers with children who make less than $200,000 would pay, on average, $2,000 more in taxes, whereas taxpayers without children who make less than $200,000 would receive a small tax cut of, on average, $75.
The analysis doesn't even touch on the difficult politics of eliminating or radically reducing popular tax breaks. Let's just says it's politically unrealistic to reduce benefits including the mortgage interest deduction, charitable giving, the tax benefit for health insurance, the EITC, and the child tax credit by 58 percent for middle-class families and to eliminate them totally for households earning more than $200,000. That means Romney's plan may be both politically unfeasible and mathematically pie-in-the-sky.
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