Mitt Romney’s tax plan is more arithmetically feasible than previously estimated and more politically difficult, according to an updated analysis from the authors of a nonpartisan tax study.
The Tax Policy Center had initially calculated 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, because there aren’t enough tax breaks for high earners to offset rate cuts for that group.
The updated analysis, which assumes that the Republican presidential candidate’s plan would eliminate decades-old tax breaks for life insurance and municipal bond interest, lowers that estimate to $41 billion and eliminates the gap if Romney is allowed to count higher revenues caused by economic growth.
“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 yesterday.
The center issued the updated analysis and explanation after the paper attracted attention on the campaign trail for the past two weeks. President Barack Obama cited it as evidence that Romney wants to raise taxes for middle-income households, and Romney aides challenged the group’s assumptions.
The updated estimate still doesn’t consider other breaks for top earners that Romney might curtail to cover the cost of cutting individual tax rates, such as business tax benefits reported on individual returns and the ability of people to inherit highly appreciated assets at their current values.
The new estimates also don’t consider the effect of economic growth. The previous version of the study had said such growth effects would mean that Romney’s plan would lead to a $33 billion tax burden shift -- which would be wiped out by the changes to municipal bonds and life insurance.
The changes make Romney’s arithmetic potentially workable, even as they add more popular tax breaks to the pile of provisions he would need to curtail. Congressional rules don’t allow the use of assumed revenue from economic growth, and Looney said in an interview yesterday that he didn’t think the effect would be that large.
Looney said that the original paper’s estimate of economic growth was designed to be generous and was based on a paper co-written by Romney adviser Gregory Mankiw, a Harvard University economics professor.
“You’re not really affecting the margins of employment and savings by very much,” Looney said.
Romney hasn’t provided details on how his plan would cover the cost of the proposed tax cuts, which he says won’t increase the budget deficit or shift the tax burden to middle-income taxpayers.
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 also repeal the estate and alternative minimum taxes. 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 whole thing is a disingenuous exercise because it’s politically absolutely impossible,” said Martin Sullivan, an economist and contributing editor at Tax Notes. “All of the tax benefits for the rich are very explicit. All of the offsetting tax increases on the rich are entirely vague.”
Obama has been using the center’s study as a weapon against Romney since it was released Aug. 1.
“Governor Romney’s tax plan would actually raise taxes on middle-class families with children by an average of $2,000 to pay for this big tax break that’s going mostly to the wealthiest folk,” Obama said Aug. 14 in Oskaloosa, Iowa.
The Tax Policy Center, a joint project of the Urban Institute and Brookings Institution in Washington, tried to test whether Romney could meet his objectives on rates, revenue and progressivity all at once.
The 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 tried to figure out whether there were enough tax breaks flowing to high-income people that could be eliminated, assuming that breaks for savings and investment remained.
The result: Under those assumptions, Romney’s task was impossible, requiring an $86 billion shift of the tax burden in 2015 alone from high-income taxpayers to everyone else, or $33 billion assuming that tax cuts induce economic growth.
The nonpartisan center is typically respected by analysts from both parties, because it has one of the most sophisticated private-sector models of the tax system. Romney’s campaign used and cited its data during the primary campaign against Texas Governor Rick Perry’s flat-tax proposal.
The Romney campaign pushed back against the recent study, maintaining that it was flawed and biased. Looney was an economist in the White House under Obama. Gale worked in the White House under President George H.W. Bush.
“There’s an old expression in the computer world: garbage in, garbage out,” Romney told Fortune magazine this week. “They made garbage assumptions and they reached a garbage conclusion.”
He has refused to say what breaks he would eliminate, offering only hints and overheard comments at an April fundraising event.
“Since Romney has said absolutely nothing about what he would do, he can’t complain too much when people make assumptions that he thinks are not accurate,” said Alan Viard, an economist at the American Enterprise Institute, a Washington group that favors smaller government and free markets.
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 study assumes that tax breaks for mortgage interest, state and local taxes, charitable contributions, theft losses and employer-sponsored health insurance, among others, would disappear entirely at $200,000 of income a year. It assumes that breaks that are incredibly popular and have been in the tax code for decades could be dismissed with a minimal transition period.
Sullivan said the center’s analysis was a reasonable attempt to fill in the blanks in Romney’s plan.
“You give out the candy and you don’t talk about the pain,” Sullivan said. “So what’s an analyst to do? How are we supposed to analyze these proposals if you don’t fill in the blanks?”
The updated study added back alternatives that had initially been considered off the table -- exclusion of municipal bond interest and of gains inside life insurance policies.
The municipal bond changes, which would increase borrowing costs for state and local governments, would raise taxes by $25 billion for high-income taxpayers. The life insurance change would raise at most another $20 billion, the study said.
The updated study doesn’t include several other tax breaks that benefit high-income taxpayers. For example, the center assumed that Romney’s plan to repeal the estate tax would touch the so-called step-up in basis.
Under that rule, heirs get to reset the tax basis of assets to the date of death and only have to pay taxes on gains above that amount. The estate-tax repeal that was in place for 2010, however, included carryover basis, in which heirs would have to pay taxes on any gains above what the decedents originally paid for the asset.
The researchers considered stepped-up basis to be a tax break for savings that Romney would keep off the table, based on campaign statements about reducing taxation on investment.
“It requires putting a lot more things that are savings and investment on the table,” Looney said.
The Joint Committee on Taxation estimates that the break for stepped-up basis will cost the government $58.3 billion in 2015. The revenue gained from eliminating it would be significantly less, because that estimate is measured against the 55 percent estate tax rate in effect if Congress doesn’t act.
The center’s analysis also assumed that Romney would use revenue from ending tax breaks for businesses to reduce corporate taxes or otherwise make them not available to offset individual tax cuts. Still, many businesses, including large law and accounting firms and some manufacturers, pay business taxes on their individual returns.
In 2007, the Treasury Department estimated that over 10 years, these breaks for businesses outside the corporate income tax were worth $394 billion. About half the income from these companies is reported by taxpayers in the top two brackets, meaning that there could be billions of dollars in 2015 to offset Romney’s rate reductions.
Of course, Romney still hasn’t been specific at all, leaving tax experts guessing at what he could do to make his arithmetic work and questioning whether anything that’s mathematically possible could be politically realistic.
“It’s very hard to really analyze something this vague in a generally rigorous way,” Viard said. “The questions seem to multiply as you analyze it more.”