Mitt Romney’s Challenge

By :: February 23rd, 2012

Mitt Romney has added a new plank to his campaign tax platform: Cut all ordinary tax rates by a fifth. That would bring the top individual income tax rate down to 28 percent and cut federal revenue by perhaps $200 billion a year. Romney says that a combination of economic growth and base broadening would make up that revenue loss.

But he’s put a few pretty big hurdles in the way of making sure his plan does not add to the deficit. He would repeal the alternative minimum tax (AMT) and thus eliminate a major backstop against revenue losses from his rate cuts. He’d retain the current 15 percent top tax rate on long-term capital gains and qualified dividends and do away entirely with taxes on that income for households making less than $200,000. And he promises not to increase the share of income tax paid by low- and middle-income households. That means any tax increases would have to fall entirely on the rich.

Assuming no other changes, the 20-percent cut in rates reduces taxes most at the top of the income distribution. The top rate would come down 7 percentage points, compared with just 3 percentage points for the 15 percent tax bracket. As a result, maintaining the tax share paid by the rich requires trimming their tax preferences much more than those of other households.

What could Romney target? The rich benefit disproportionately from three tax preferences: the reduced rates on gains and dividends, exclusions from income, and itemized deductions.

Romney has already taken the first off the table and it’s big—75 percent of the tax savings from low rates on capital gains and dividends go to the top 1 percent, cutting their tax bills by nearly a quarter. As for exclusions, the biggest are employer-paid health insurance premiums and retirement savings, which benefit most taxpayers—only a small fraction goes to high-income households. And Romney says he’d keep major deductions and won’t accept provisions limiting their value for the rich.

That leaves Romney trapped in a policy dead-end. After promising to retain lots of tax preferences, Romney has no clear way to recoup the revenue he loses by cutting rates. So he offers no specific proposals to broaden the tax base—promising those will come later.

Economists generally favor the principles behind Romney’s plan: Lowering rates and broadening the base is good policy. But a plan that cuts rates and only promises unidentified future base-broadening? Not so much.

14Comments

  1. AMTbuff  ::  1:53 pm on February 23rd, 2012:

    I don’t think there has ever been a campaign proposal for tax cuts or tax reform that did not fall far short in revenue if you ran the numbers. This is a universal failing, not a partisan one.

    Very few campaign proposals are enacted in anything resembling what the public expected. Those which are enacted increase the deficit much more than promised during the campaign.

    Be fiscally responsible and vote for the candidate who promises not to change tax policy at all. Too bad there is never such a candidate. Too bad a huge portion of tax policy is programmed to self-destruct within a year or two.

  2. Some Guy  ::  3:58 pm on February 23rd, 2012:

    Which puts the lie to the preceding post about clothes. The difference between Romney’s income tax plan and Obama’s corporate tax plan is that Obama’s is merely politically impossible, whereas Romney’s appears to be mathematically impossible.

  3. Benton Cook  ::  5:42 pm on February 23rd, 2012:

    Romney reveals himself here as a crony capitalist and nothing more. First, taxes are not our highest priority, crony banking and insurance scamming are. Taxes are about third on the list, behind entitlements and ahead of defense. As for taxes, an increase in revenue to the fed is paramount… probably to about 20% of GDP. Equally important is equity which fully escapes the crony Romney.

  4. 3 Holes in Mitt Romney's Tax Plan | Reviews  ::  6:30 pm on February 23rd, 2012:

    […] Tax Policy Center estimates that cutting tax rates by 20 percent would reduce government revenue by about $200 billion per year. So at a time when the nation needs to start paying down its debt, Romney’s move would send […]

  5. Michael Bindner  ::  12:50 am on February 24th, 2012:

    In the unlikey event that Romney is elected president, he will have to compromise with the Senate Democrats, who will insist on higher rates for capital gains, dividends and other items. Essentially, peole are inching toward Simpson Bowles. Romney is certainly closer to being in the right ballpark than any of his GOP rivals. My plan, however, is actually meant to produce a balanced budget and if it does not, will be adjusted accordingly until it does – while ending the requirement that most households file to get their Child Tax Cut benefits.

  6. WeMustChange » Blog Archive » Former GOP Governor Dismisses Romney’s Budget-Busting Tax Cuts: ‘Voters Aren’t Analysts’  ::  12:35 pm on February 26th, 2012:

    […] Last week, 2012 GOP presidential hopeful Mitt Romney released a tax plan that, in addition to giving the richest 0.1 percent of Americans a $240,000 tax cut, would blow a $10.7 trillion hole in the deficit. Romney insists that his tax cuts would be paid for by limiting deductions for the rich, but many analysts have pointed out that his numbers simply can’t add up. […]

  7. Robert L. Borosage: Romney: Peddling the Indefensible – Political Schmooze  ::  11:02 am on February 29th, 2012:

    […] there only by projecting fantastical rates of growth and using magic asterisks to indicate cuts or loophole closings that he isn’t prepared to […]

  8. USW Blog » Blog Archive » Romney: Peddling the Indefensible  ::  3:00 pm on February 29th, 2012:

    […] there only by projecting fantastical rates of growth and using magic asterisks to indicate cuts or loophole closings that he isn’t prepared to […]

  9. House GOP Budget Chairman Calls GOP Candidates’ Budget-Busting Economic Plans ‘Very Credible’ » Meslema  ::  12:31 am on March 2nd, 2012:

    […] Ryan then dismissed the Tax Policy Center analysis showing that Romney’s planned 20 percent reduction in tax rates and repeal of the Alternative Minimum Tax would increase the debt by $3 trillion, claiming that Romney has “base broadening” that will offset the cost. Romney has made the same claim, but has yet to provide any specifics about what sort of tax provisions he’ll eliminate. Simply put, his plan’s math doesn’t add up. […]

  10. How will Romney pay for his tax cuts? | My Blog  ::  7:21 pm on March 8th, 2012:

    […] billion in new rate reductions and other tax cuts). Their response: Tax cuts would be funded by offsetting tax increases combined with stronger economic growth and changes in behavior driven by the tax reductions […]

  11. How will Romney pay for his tax cuts? | POTUS NEWS  ::  11:44 pm on March 8th, 2012:

    […] billion in new rate reductions and other tax cuts). Their response: Tax cuts would be funded by offsetting tax increases combined with stronger economic growth and changes in behavior driven by the tax reductions […]

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