Immediate repeal of some of the most popular tax benefits would pay for only a 4 percent cut in U.S. income tax rates, according to an estimate by Congress’s nonpartisan scorekeeper that illustrates the mathematical and political challenges of financing rate cuts by limiting tax breaks.
The analysis by the Joint Committee on Taxation emphasizes the difficult choices facing lawmakers as they balance the benefits of rate cuts against the consequences of changing or ending deductions, such as for mortgage interest and charitable contributions. Republican presidential nominee Mitt Romney proposes a 20 percent income-tax rate cut and says he would pay for it by limiting deductions, credits and exemptions.
While there are major differences between the assumptions underlying Romney’s plan and the JCT study, the findings emphasize shortcomings in Romney’s approach, said Daniel Shaviro, a tax law professor at New York University.
“There really is no serious dispute that the parameters of their plan can’t be met,” Shaviro said. “It’s like saying you’re going to drive from Boston to Los Angeles in 10 hours without speeding. There’s just no way to make the numbers add up.”
Broadening the Base
Still, there are some important distinctions between Romney’s approach and the JCT analysis that make it difficult to compare the 4 percent finding in the study with Romney’s pledge of a 20 percent tax cut. Much of the base broadening in the analysis covers the costs that Romney assumes as his starting point and that lawmakers from both parties don’t want to pay for. That means Romney could use the changes to deductions to cut rates by more than 4 percent.
“This self-described ‘experiment’ says nothing about the pro-growth tax reform proposed by Mitt Romney,” Andrea Saul, a Romney spokeswoman, said in a statement yesterday. “It has different assumptions and different revenue goals. It’s simply irrelevant to any analysis of his plan.”
The estimate assumes that the George W. Bush-era tax cuts expire Dec. 31 for all income levels, meaning that the starting point for the analysis presumes a tax increase that neither party supports. Thus, the top rate achieved under the analysis would be 38.02 percent.
Repealing itemized deductions would generate $2.5 trillion over the next decade. That’s known as broadening the tax base because it increases the size of the pool of income that is taxed. Lower rates reduce the pool of money available from deductions, because they are less valuable.
Capital Gains Rates
In the JCT analysis, the base broadening covers the cost of repealing the alternative minimum tax and extending provisions of the child tax credit and earned income tax credit. The approach assumes that capital gains would be taxed as ordinary income, which under some analyses might cost the government revenue.
The estimates are contained in an Oct. 11 letter from the Joint Committee on Taxation to Senator Max Baucus of Montana, the Democratic chairman of the Senate Finance Committee, and Senator Orrin Hatch of Utah, the panel’s top Republican. The letter was obtained by Bloomberg News.
Thomas Barthold, chief of staff for the Joint Committee on Taxation, described the estimate as an “experiment” that his staff conducted and said it doesn’t represent all of the possible broadening of the tax base.
Under this approach, many tax breaks wouldn’t be affected, including the exclusion of employer-sponsored health insurance, the earned income tax credit and the child tax credit.
“There are a significant number of other identified individual income tax expenditures or other possible base-broadening policies that I did not include in this experiment,” Barthold wrote.
Because of those omissions, the report doesn’t show that a bipartisan tax overhaul is impossible, said a joint statement former Republican Senators Alan Simpson and Pete Domenici and Democrats Erskine Bowles and Alice Rivlin. The Bowles-Simpson plan from 2010 estimated that a top rate of 23 percent was achievable if all tax breaks were eliminated.
“Nothing in the JCT analysis changes our belief that it is possible for tax reform to reduce rates and produce additional revenues if policymakers are willing to make the tough choices to eliminate or scale back tax expenditures,” said the joint statement from the four, who have been working on plans that would broaden the tax base, lower rates and raise more revenue than an extension of current tax policies. “There is no question that reforming the tax code will require making hard and careful choices.”
23% Top Rate
In a blog post last night, the Committee for a Responsible Federal Budget said the U.S. Treasury Department found in 2005 that eliminating all tax deductions and credits including the health exclusion and retirement preferences would allow the top rate to fall to 23 percent, while still dedicating about $1 trillion in revenue to deficit reduction this decade.
Two separate bipartisan plans, one by the co-chairs of President Barack Obama’s fiscal commission, and the other called the Domenici-Rivlin plan, proposed top rates between 28 percent and 33 percent. The current tax code includes more than $1.1 trillion in tax expenditures -- credits, deductions and loopholes -- that go mainly to higher earners, according to the CRFB.
President Barack Obama and Romney have been sparring over whether Romney’s tax proposal is mathematically possible. Romney says he can broaden the tax base and create enough economic growth to offset his tax cuts. Obama maintains that Romney would either raise middle-class taxes or increase the deficit.
“This JCT study is but one analysis of one hypothetical tax reform option,” Antonia Ferrier, a spokeswoman for Hatch, said in an e-mailed statement. “Those who seek to use the study to kill tax reform efforts should be accountable for the defects of the current system.”
In a speech this week, the Senate’s third-ranking Democrat, Chuck Schumer of New York, questioned the priority that Republicans are giving to rate reduction.
“Broadening the base as Republicans propose would not only fail to cut the deficit, it also fails to reduce rates much,” he said in a statement.
The report includes a set of tables that estimate how the combination of tax-policy changes, including taxing capital gains as ordinary income rather than at preferential rates, would affect taxpayers in different income levels.
In 2015, taxpayers making between $75,000 and $100,000 a year would see their federal taxes reduced by 0.8 percent. Taxpayers making more than $1 million would pay 5.7 percent more than they would otherwise.