Romney Tax Plan Relies on Growth Paired With Missing Details

Republican presidential candidate Mitt Romney’s plan to cut income tax rates by 20 percent without increasing the U.S. budget deficit relies on unspecified assumptions about economic growth and unannounced details about the tax breaks he would curtail.

The details that Romney hasn’t released will matter as he seeks to claim the mantle of fiscal responsibility while cutting taxes by more than $4 trillion over the next decade.

Specific proposals for curbing breaks can hurt the taxpayers who rely on them. Spending cuts can affect core government services. Relying on growth caused by tax cuts is an uncertain strategy that government scorekeepers don’t employ.

“Everyone would agree that cutting rates and getting rid of some preferences would increase economic growth,” said Roberton Williams, a senior fellow at the Tax Policy Center, a nonpartisan research organization in Washington. “We’d recoup some of the revenues. But how much? How quickly? Would it last?”

Foregone Revenue

The former Massachusetts governor’s tax proposals could cost the Treasury about $4 trillion to $6.2 trillion in forgone revenue over the next decade, compared with extending tax rates that expire at the end of 2012. The lower estimate is based on figures from the bipartisan Committee for a Responsible Federal Budget and the higher figure comes from the Center for American Progress, a Washington group often aligned with Democrats.

Romney announced his revised tax plan on Feb. 22 amid criticism from fellow Republicans that he wasn’t being bold enough in proposing to overhaul the tax code.

“What workers in Michigan and around the country really want is a good job and rising wages,” he said today at the Detroit Economic Club, four days before the Michigan Republican primary. “Reforming the tax code is one of the surest and quickest ways to achieve that goal.”

He provided no new details on his tax plan in the speech.

Romney says he wants to extend all of the expiring tax cuts, and reduce individual income tax rates 20 percent beyond that, putting the top rate at 28 percent and the bottom rate at 8 percent, down from 35 percent and 10 percent today.

His plan would retain the 15 percent top rates for capital gains and dividends while eliminating taxes on investment income for those making less than $200,000 a year. It would repeal investment taxes and other levies in the 2010 health-care law.

Estate Tax Repeal

The estate tax would be repealed, along with the alternative minimum tax, a parallel tax system designed to prevent high-income taxpayers from legally avoiding taxes.

For businesses, Romney would drop the corporate tax rate to 25 percent from 35 percent and make permanent the research and development tax credit.

“He has identified all of the things that would cut taxes and none of the things that would raise taxes,” said Michael Linden, director of tax and budget policy at the Center for American Progress.

Romney has called for spending cuts that would reach $500 billion a year by 2016. Also, he is proposing longer-term changes to limit Social Security and Medicare spending.

In the Feb. 22 announcement, Romney’s campaign said the plan would broaden the nation’s individual tax base by limiting deductions, exemptions and credits, particularly for high-income taxpayers. It also said the corporate tax base would be broadened.

Still, it’s unclear how much revenue could be raised by limits on tax expenditures. In his 2013 budget plan, President Barack Obama proposed raising about $750 billion over the next decade from reducing tax breaks for married couples making more than $250,000 a year and individuals making more than $200,000.

Most Expensive Breaks

Each of the most expensive tax breaks -- employer-sponsored health care, charitable contributions, home mortgage interest and state and local taxes -- has influential constituencies, Williams said.

“Once you take the things off the table that are off the table,” Williams said, “back of the envelope I could not come up with a way to do it.”

Whatever deficit reduction can’t be achieved by broadening the tax base and making spending cuts would come from economic growth. In a Feb. 22 conference call with reporters, Romney adviser Glenn Hubbard said the “precise estimates” of such growth would be released later. The campaign isn’t asserting that the tax cuts pay for themselves.

“Offering gimmicky proposals that rely on implausible levels of economic growth and blow huge holes in the budget is easy,” Romney wrote in the Wall Street Journal yesterday. “Fixing our very serious problems is not.”

Feedback Effects

Hubbard described the feedback effects of the tax cuts as “very large” for corporate rates because those changes would encourage more investment in the U.S. For individuals, he said, there are “substantial” effects in higher tax brackets from lower marginal rates.

Economists and tax analysts disagree as to how much of the apparent revenue loss of a tax cut is made up with more robust economic growth, and the debate on the issue has been lingering for decades, through tax reductions and tax increases.

The estimates are sensitive to assumptions about reactions from workers, investors and the Federal Reserve. They also depend on whether the tax cut is deficit-financed or its cost covered by spending reductions.

The Joint Committee on Taxation, the nonpartisan scorekeeper for Congress, doesn’t include the growth effects of tax cuts in its estimates. It sometimes provides those estimates to lawmakers.

Expiring Tax Cuts

For example, the two-year extension of expiring tax cuts at the end of 2010 cost the U.S. government $858 billion in revenue over 10 years. Depending upon assumptions as to whether the tax cuts would be accompanied by spending reductions and on possible Fed reaction, estimates of the extension’s cost were between $719 billion and $1.05 trillion.

Tax cuts on capital income, such as the corporate income tax, produce more significant feedback effects than do cuts to taxes on labor, said Matthew Weinzierl, an assistant professor at Harvard Business School who co-wrote a paper on the subject with Gregory Mankiw, a Romney adviser.

Over 10 years, the government can expect to recapture about 30 percent of the revenue from tax cuts on capital income and about 10 percent to 15 percent from tax cuts on labor, he said.

“They would be wise to be cautious about claiming too much feedback effect,” said Weinzierl, who is unaffiliated with any presidential candidate.

Linden said the experience of the past two decades -- when the budget deficit rose after the 2001 and 2003 tax cuts were enacted and shrank after the 1993 tax increase -- demonstrates the perils of trying to link tax rates with economic growth.

‘No Evidence’

“When you get good growth, there obviously is a feedback effect,” he said. “There is no evidence whatsoever that reducing taxes on the wealthy will cause that.”

Douglas Holtz-Eakin, who advised Republican presidential nominee John McCain in 2008, said he expects no more than one-third of the cost of the tax cut could be recouped through growth.

He said the Romney campaign can probably hit its targets on broadening the tax base, though some of those changes could be politically difficult.

“There’s some advantage to not being specific about that,” said Holtz-Eakin, who isn’t affiliated with a Republican candidate this year. “When you’re specific, you run the risk of ticking some people off. On the other hand, the more specific you are, the more you have a mandate to implement it.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE