Romney’s Tax Plan: Not Intended As a Factual Statement
Kevin Hassett, a top economic advisor to Mitt Romney, suggested this week that Romney might not cut personal income tax rates by 20 percent after all. Hassett, an economist at the American Enterprise Institute and co-author of the book "Dow 36,000," said if Romney can’t get the base broadening he needs to make his rate cuts revenue-neutral without raising taxes on the middle class, he’ll cut rates less.
Governor Romney says he can get to 28 percent. He believes he can get to 28 percent. When he’s in office, he’ll try to do it. But if Congress won’t give him the base-broadening he needs to get to 28 percent, there’s no way in hell that anyone believes that he’s going to increase taxes by $2,000 on people with incomes below $20,000.
Hassett is sort of getting at something here. Romney can’t have a plan to raise taxes on the middle class because he doesn’t really have a tax plan at all.
Or rather, Romney has laid out a tax “plan” whose parameters cannot all coexist. You can’t cut tax rates as much as Romney wants without either raising taxes on the middle class or growing the deficit. Even Martin Feldstein’s effort to show that Romney’s tax math can pencil required raising taxes on families with incomes just over $100,000, which Romney has ruled out doing.
The Obama campaign has jumped from attacking the incoherence of Romney’s tax math to concluding that Romney is proposing a middle class tax increase. But that’s wrong: Not raising taxes on the middle class is just as integral to Romney’s impossible plan as cutting tax rates by 20 percent is.
Instead, we should conclude that Romney’s tax intentions are simply unspecified. Perhaps he will raise taxes on the middle class, perhaps he won’t cut rates as much as he’s proposed, perhaps he will ditch revenue neutrality. We don’t know because Romney won’t tell us which plank of his tax plan he will jettison (though Hassett seems to think he knows.)
My best guess is that Romney’s tax policy, if he were elected, would bear little resemblance to his plan for a 20 percent rate cut. Before announcing his current tax plan in February, I think Romney had the tax plan he really wanted: Cut corporate taxes, do a small tax cut on capital gains aimed at the middle class, and then make some noises about the need for base-broadening tax reform down the road. Romney’s original plan included no costly promise to cut tax rates on ordinary income anytime soon.
Then, in a competitive primary against candidates with shiny plans for low top tax rates, Romney felt the need to announce his own plan for tax rate cuts. Hence the proposal to cut tax rates by 20 percent. Don’t assume the 20 percent figure came as the result of a detailed, secret scoring process that found that such a cut could be achieved with revenue neutrality and no reduction in progressivity. It was most likely chosen out of thin air.
Here’s a good sign of the slapdash manner in which the plan was put together: The February blog post announcing the plan incorrectly says that interest income is already taxed at a preferential rate of 15 percent, which Romney wouldn’t change. It’s actually taxed at ordinary income rates, up to 35 percent.
Even today, Romney’s “taxes” issue page on his campaign website says he would “Maintain current tax rates on interest.” Taken literally, that implies he would keep rates of up to 35 percent on interest income while cutting the top tax rate on wages to 28 percent. That would be a strange departure from longstanding tax policy, and neither the Tax Policy Center nor Feldstein took this statement literally when scoring Romney’s plan; they assumed interest and wages would continue to be taxed at equal rates.
Romney, who earned over $3 million in interest income in 2011, surely knows how interest is taxed. His plan’s errors on interest income reflect the manner in which it was thrown together -- late in the primary campaign and without much thought given to details.
If Romney is somehow elected, do not be surprised if he shakes the Etch-a-Sketch and moves back to the tax plan he seems to have wanted all along -- which is to say, no major individual income tax changes in the near term and unspecified base-broadening, rate-cutting tax reforms sometime in the future.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.