Romney Tax Cuts Work Only When Mortgage Break Mostly Reduced

Mitt Romney says he can lower income-tax rates by 20 percent without costing the U.S. government revenue and without making the middle class carry a bigger share of the tax load.

He’s right -- assuming that Congress eliminates the most widely used deductions by taxpayers earning more than $100,000 a year, says Harvey Rosen, an economics professor at Princeton University whose study Romney cites as evidence that his plan is viable.

The Republican presidential candidate has refused to say which tax breaks he would eliminate. Rosen’s illustration abolishes those for home mortgage interest payments, employer- provided health insurance, state and local taxes, charitable donations and the unrealized increase in the value of life- insurance policies for households with six-figure incomes.

“Even if you could maybe make it work in an abstract world, you can’t assume that all of these deductions will be eliminated, especially by a candidate who so far hasn’t identified one he’d do away with,” says Alan Viard, a former Treasury Department tax expert in President George W. Bush’s administration.

Former Republican Representative William Frenzel, a tax and budget expert who spent 20 years in the U.S. House, says, “Romney’s plan would have enormous difficulty getting through the Congress.”

Photographer: David Paul Morris/Bloomberg

Glenn Hubbard, chief economic advisor to Mitt Romney, told PBS August 28 that “everything is on the table.” Close

Glenn Hubbard, chief economic advisor to Mitt Romney, told PBS August 28 that... Read More

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Photographer: David Paul Morris/Bloomberg

Glenn Hubbard, chief economic advisor to Mitt Romney, told PBS August 28 that “everything is on the table.”

‘Mathematically Possible’

Seeking to curtail tax benefits that save millions of taxpayers billions of dollars each year would spark such a backlash that the Republican Party platform explicitly rules out ending the deduction for charitable contributions.

“What the political system would find feasible, I don’t know,” Rosen says. “It’s mathematically possible.”

Rosen’s analysis -- and separate studies by the Tax Policy Center and Martin Feldstein, a Harvard University economist and once a top adviser to President Ronald Reagan -- found that households with more than $100,000 in annual income could pay higher taxes, even with Romney’s promise to “bring taxes down for middle-income people.”

President Barack Obama’s re-election campaign has sought to capitalize on Romney’s failure to specify his tax plans, maintaining that “two typical teachers, or a police officer and a nurse” would see higher taxes if he was elected, according to a Sept. 12 memo from James Kvaal, policy director for the Obama- Biden campaign.

Middle Class

Under Rosen’s analysis, policy makers have room to reduce the amount of tax breaks eliminated for those making more than $100,000 annually to avoid raising their tax bill.

Feldstein, whose analysis focused on a Romney-like plan, says “it is very reasonable to say that people in that high- income group are not the ‘middle class.’”

Yet Romney, who insists he won’t raise taxes on the middle class, said in an interview broadcast today on ABC, “middle income is $200,000 to $250,000 and less.” Such a broad definition will complicate efforts to make the tax plan work and is at odds with Census Bureau data showing that median household income is $50,054.

About 12 percent of tax returns reported adjusted gross income of more than $100,000 in 2009, the latest year for which detailed Internal Revenue Service data is available.

The Republican nominee is campaigning on a promise to cut tax rates by 20 percent, bringing the top marginal rate to 28 percent from the current 35 percent. He would make up the lost revenue by eliminating some of the $1.3 trillion in myriad breaks that riddle the U.S. tax code.

‘Patchwork Decisions’

On his campaign website, Romney assails the tax code as “an accretion of decades of patchwork decisions that came into being with no systematic thought for their implications for job creation or economic growth.”

Though Glenn Hubbard, his chief economic adviser, told PBS on Aug. 28 that “everything is on the table,” Romney has ruled out raising taxes on capital gains and dividend income. Also, he wants to eliminate such taxes for married taxpayers making less than $200,000 a year or individual filers with less than $100,000 in income.

In the same interview, Hubbard said faster economic growth would make up some of the revenue lost because of lower tax rates. Romney’s economic plan sets an annual economic expansion goal of 4 percent -- a rate the U.S. has achieved once in the past 12 years. The Federal Reserve forecasts economic growth next year of as much as 3 percent.

‘Enormous Incentive’

“You can keep the progressivity in the code, you can remain revenue neutral and you create an enormous incentive for growth in the economy,” Romney said on NBC’s “Meet the Press” on Sept. 9.

In response to a request to interview Hubbard, a campaign spokeswoman scheduled an interview with Rosen. Rosen, a former chairman of the Council of Economic Advisers under President George W. Bush, says he has no formal role with the campaign.

Romney has provided no details of his tax plan, so experts have been left to make assumptions about what provisions might be saved or killed. Each of the three principal analyses uses different assumptions and data. Rosen and Feldstein rely on 2009 aggregate IRS tax-return information while the Tax Policy Center uses an economic model to project 2015 results.

The Tax Policy Center said in August “it is not mathematically possible” to do everything Romney has promised. The center, a joint project of the Brookings Institution and the Urban Institute, said his plan would fall $86 billion short of replacing all the revenue lost by reducing tax rates.

Disputed Finding

Both Rosen and Feldstein disputed that finding and concluded that Romney’s math was theoretically possible, even if politically questionable.

“Critics might not like the Romney plan, but they cannot call it ’mathematically impossible,’” Feldstein wrote on Sept. 2.

William Gale, a co-author of the Tax Policy Center study, agreed that the $86 billion hole could be filled by assuming revenue gains from economic growth and by taxing interest on state and local bonds. That change, however, would violate the candidate’s promise not to reduce incentives for savings and investment.

“We’ve always said you can do revenue-neutral and distributionally neutral tax reform if you violate one or more of the things Romney wants to do,” Gale said in an interview.

Eliminating Breaks

Romney has said his tax overhaul approach -- paying for lower rates by eliminating billions of dollars in tax breaks -- mimics that of the Simpson-Bowles debt commission. But the co- chairmen of that panel, former Senator Alan Simpson, a Wyoming Republican, and former White House Chief of Staff Erskine Bowles, a Democrat, called for taxing capital gains and dividends as ordinary income and retaining the estate tax, which Romney wants to eliminate. They also backed a 15-cent-a-gallon increase in the federal gasoline tax.

In April, Romney was overheard at a private fundraiser in Florida telling donors that he might eliminate the mortgage interest deduction on second homes for high-income taxpayers along with the deductions for state income and property taxes.

Depending upon the specific provisions, ending those tax breaks would likely raise only a sliver of the funds required. Eliminating the second-home deduction for high-income taxpayers might raise about $10 billion, according to the Tax Policy Center.

Deductions Cap

Romney campaign officials have said they would consider a proposal by Feldstein to cap the total value of deductions available to high-income taxpayers.

“Professor Feldstein’s idea is an interesting one,” Lanhee Chen, the campaign’s policy director, said last month at a Bloomberg panel at the Republican National Convention in Tampa, Florida. “And it’s one that we would look at in a Romney administration.”

Earlier this week, a veteran of the last major comprehensive tax overhaul, the 1986 rewrite pushed by Reagan, told Bloomberg Television that Romney’s trade of lower rates for fewer loopholes would face a predictable clash in Congress.

“Part of the problem is when you say that, everybody likes it, and then the pastor of the First Baptist Church comes in and says, ‘Now wait a minute. You’re not talking about contributions to the church,’” said former Senator Phil Gramm, a Texas Republican. “Then the home builder comes and says, ‘That’s a great idea. I loved it, but surely you’re not talking about the ability to deduct mortgage interest rates.’ Well, the plain truth is you are.”

“And this is a world where there’s no free lunch,” Gramm said. “If you want lower rates, if you want a fairer system, if you want to simplify the tax code, you’ve got to give up some things to get it.”

To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net

To contact the editor responsible for this story: Michael Tackett at mtackett@bloomberg.net

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