Romney Defends Tax-Cut Plan With Assumptions by Analysts

Photographer: Andrew Harrer/Bloomberg

The former Massachusetts governor would cut all income tax rates by 20 percent, dropping the top rate to 28 percent from 35 percent. Close

The former Massachusetts governor would cut all income tax rates by 20 percent,... Read More

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Photographer: Andrew Harrer/Bloomberg

The former Massachusetts governor would cut all income tax rates by 20 percent, dropping the top rate to 28 percent from 35 percent.

Republican presidential nominee Mitt Romney cited a group of economic studies to show that his tax-cut plan won’t increase the U.S. budget deficit or shift the tax burden to middle-income taxpayers.

Yet Romney won’t provide specifics on what he would cut, and the analysts he cites have had to create their own assumptions.

“People at the high end, high income taxpayers, are going to have fewer deductions and exemptions,” Romney, 65, said yesterday on NBC’s “Meet the Press” program. “Those numbers are going to come down. Otherwise they’d get a tax break.”

The former Massachusetts governor would cut all income tax rates by 20 percent, dropping the top rate to 28 percent from 35 percent. He would repeal the estate and alternative minimum taxes, while tax rates on capital gains and dividends would remain at 15 percent and the corporate tax rate would be cut to 25 percent from 35 percent. The rate cuts would cost the government more than $4 trillion in forgone revenue over the next decade.

Romney says he would broaden the tax base by reducing deductions and other tax breaks to ensure his plan generates as much revenue as the current system and doesn’t shift the tax burden from high earners to the rest of the population.

‘A Break’

“I’m bringing down the rate of taxation, but also bringing down deductions and exemptions at the high end, so the revenues stay the same, the taxes people pay stay the same. Middle income people are going to get a break,” Romney said on NBC.

Fiscal issues are at the core of Romney’s and President Barack Obama’s campaigns. Obama’s plan includes a combination of tax increases and spending cuts to stabilize debt as a share of the economy.

Romney seeks a spending-only approach to deficit reduction that would cut social programs by more than one-quarter and add money for the Pentagon. Romney’s plan promises tax-rate cuts and avoids immediate changes to Medicare and Social Security benefits.

“I want to make sure people understand, despite what the Democrats said at their convention, I am not reducing taxes on high-income taxpayers,” the Republican nominee said on NBC.

No Details

When pressed several times for examples of which deductions he would trim, Romney didn’t provide any. Romney said studies from Princeton University, Harvard University, the American Enterprise Institute and the Wall Street Journal show that his proposal to lower tax rates while reducing the number of deductions and exemptions for high-income earners would work.

Harvey Rosen, a Princeton economics professor who focuses on public finance, said in a paper published this month that he analyzed Romney’s proposal by taking into account the additional tax income that might be generated by economic growth.

“Under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue-neutral and keep the net tax burden on high-income individuals about the same,” Rosen wrote. “An increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.”

Congressional budget rules don’t allow the use of assumed revenue from economic growth.

Tax Policy Center

Obama has been attacking his Republican rival’s plan as mathematically impossible and requiring a tax increase on middle-class earners after the Tax Policy Center published an analysis of whether Romney could meet his objectives on rates, revenue and keeping the tax system progressive. The policy organization is a joint project of the Urban Institute and Brookings Institution in Washington.

The Tax Policy Center initially calculated on Aug. 1 that Romney would need to shift $86 billion of the federal tax burden in 2015 from top earners to everyone else to meet other goals in his fiscal plan. It said there weren’t enough tax breaks for high earners to offset the rate cuts.

An updated analysis Aug. 16 lowered that estimate to $41 billion and said the gap would be eliminated if Romney were allowed to count higher revenue caused by economic growth. That analysis assumed that Romney’s plan would eliminate decades-old tax breaks for life insurance and municipal bond interest.

“Even if tax expenditures were reduced in that most progressive manner, the Romney proposals as a whole imply a shift toward a less progressive tax system,” co-authors Samuel Brown, Adam Looney and William Gale wrote in an updated paper released Aug. 16.

Romney’s Goals

The researchers set up the study as a bend-over-backward approach to see if Romney could meet his goals for revenue, tax rates and the progressivity of the system.

The Romney campaign said the study was flawed and biased. Looney was an economist in the White House under Democrat Obama, while Gale worked in the White House under Republican President George H.W. Bush. Brown is identified on the Tax Policy Center’s website as a Brookings research associate who previously worked as an analyst at the Federal Reserve Board.

The Tax Policy Center estimated that in 2015, the rate cuts would provide a $360 billion tax break for taxpayers making more than $200,000 a year. Then the researchers examined whether enough tax deductions for high-income people could be eliminated to cover the cost, assuming that breaks for savings and investment remained.

Speculative Model

In an opinion piece published in the Wall Street Journal on Aug. 29, Martin Feldstein, a professor at Harvard and a member of the newspaper’s board of contributors who advises the Romney campaign, said the Tax Policy Center’s forecast based on a computer model is “inevitably speculative.”

“The key question raised by the Romney plan’s critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals,” he wrote. “It is impossible to calculate the exact effects of the future reforms since Governor Romney hasn’t specified what he would do.”

Even so, Feldstein said disproving the Tax Policy Center’s assertions doesn’t require specifics from the Romney campaign.

“It only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost” of Romney’s tax cuts, he wrote. Feldstein calculated the $186 billion figure based on 2009 income tax revenue.

Taxpayers with adjusted gross incomes over $100,000, or the top 21 percent of all taxpayers, made itemized deductions totaling $636 billion in 2009, Feldstein wrote.

Marginal Tax Rate

Applying a 30 percent marginal tax rate to that $636 billion would produce “extra revenue” of $191 billion, “more than enough to offset the revenue losses from the individual income tax cuts proposed by Governor Romney,” Feldstein wrote.

In a post on the American Enterprise Institute’s website, economic research analyst Matt Jensen wrote that the Tax Policy Center had suggested the threshold of “high income” should be placed at $150,000 rather than $200,000, the definition used by Democrats.

“This arbitrary definition matters a lot to this analysis,” he wrote. By lowering the definition to $150,000, “the plan might appear to be a transfer from rich to poor rather than the other way around, or at least closer to neutral,” Jensen said.

The Romney campaign has resisted explaining how it would ensure his tax plan wouldn’t add to the deficit.

Romney has offered only hints. In remarks overheard at an April 15 fundraiser, he said he was considering eliminating mortgage interest deductions for second homes and the deduction for state and local taxes.

Mortgage Interest

Ending the state and local tax deduction could generate $862.2 billion over the next decade, the Congressional Budget Office estimated last year. Phasing out the mortgage interest deduction over that period would yield $214.6 billion. The estimates would be lower if tax rates also were cut.

Eliminating tax breaks is politically difficult; the breaks for mortgage interest, state and local taxes and charitable contributions survived the 1986 tax overhaul that broadened the tax base. Still, in an indication that Romney wants to keep his options open, Republican party platform drafters refused to endorse a proposal that would have called for preserving the mortgage-interest deduction.

To contact the reporter on this story: Roxana Tiron in Washington at rtiron@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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