Lakhota
Diamond Member
By Josh Barro
Mitt Romney's campaign says I'm full of it. I said Romney's tax plan is mathematically impossible: he can't simultaneously keep his pledges to cut tax rates 20 percent and repeal the estate tax and alternative minimum tax; broaden the tax base enough to avoid growing the deficit; and not raise taxes on the middle class. They say they have six independent studies -- six! -- that "have confirmed the soundness of the Governors tax plan," and so I should stop whining. Let's take a tour of those studies and see how they measure up.
The Romney campaign sent over a list of the studies, but they are perhaps more accurately described as "analyses," since four of them are blog posts or op-eds. I'm not hating -- I blog for a living -- but I don't generally describe my posts as "studies."
None of the analyses do what Romney's campaign says: show that his tax plan is sound. I'm going to walk through them individually, but first I want to make a broad point.
The Tax Policy Center paper that sparked this discussion found that Romney's plan couldn't work because his tax rate cuts would provide $86 billion more in tax relief to people making over $200,000 than Romney could recoup by eliminating tax expenditures for that group. That means his plan is necessarily a tax cut for the rich, so if Romney keeps his promise not to grow the deficit, he'll have to raise taxes on the middle class.
Various analyses have adjusted TPC's assumptions in an effort to bring down that $86 billion deficit. But getting from $86 billion down to $0 is not enough to make Romney's proposal work. For Romney's math to add up, he actually needs a substantial surplus of a high-income base broadening above the cost of his high-income rate cuts.
This is for two reasons. First, TPC's thought experiment -- eliminate as many deductions as possible at the top while holding those below $200,000 harmless from tax increases -- was not only exceedingly generous in granting Romney's assumptions. It was impossibly generous. Under the terms analyzed by the TPC study, a taxpayer earning $199,999 would face a drastically higher tax bill for earning $1 more in income. That doesn't happen in the real world.
Instead you would need to phase in restrictions in deductions on the wealthy, which would reduce the amount of revenue those restrictions generated. Harvard Professor Martin Feldstein, in one of the analyses cited by the Romney campaign, makes a rough estimate that a phase-in would cost about $15 billion. My back-of-the-envelope calculations roughly match that.
There is a second reason Romney needs a big surplus for his plan to work. When asked why he won't lay out a specific plan to eliminate tax expenditures, Romney consistently says it's because he can't dictate a plan to Congress and will work with legislators from a menu of options. As he said in last week's debate:
I'm going to work together with Congress to say, OK, what are the various ways we could bring down deductions, for instance?. . . . There are alternatives to accomplish the objective I have, which is to bring down rates, broaden the base, simplify the code and create incentives for growth.
There are only meaningful "alternatives" to discuss with Congress if Romney can pick and choose from a pool of tax preferences for the wealthy that far exceeds the $250 billion annual cost of his rate cuts for them. If the pool of available base broadeners is just large enough to finance his tax cuts, then Romney actually is dictating a plan to Congress: if they don't eliminate exactly the set of preferences he proposes, his plan will either have to raise taxes on the middle class or grow the deficit.
TPC finds that Romney's rate cuts, plus elimination of the estate tax and Alternative Minimum Tax, would cost the Treasury about $250 billion in revenue from high earners. If he could somehow find, say, $300 billion in base broadeners from the wealthy, $15 billion of which would have to go to a phaseout, that wouldn't leave a lot of "alternatives" on the table. Yet there aren't enough base broadeners for Romney to reach the $300 billion level, let alone exceed it.
Now, on to the six studies.
More: The Final Word on Mitt Romney's Tax Plan - Bloomberg