Cutting Tax Rates by 20 Percent Could Add $3 Trillion to the Deficit Over a Decade

By :: February 29th, 2012

Last week, Mitt Romney proposed a new tax plan that would, among other things, reduce individual tax rates by 20 percent across the board and repeal the Alternative Minimum Tax. To get a rough sense of what those two tax cuts would cost, the Tax Policy Center crunched the numbers. The result: They would be really, really expensive.

TPC found that repealing the AMT and cutting rates by 20 percent would increase the deficit by more than $3 trillion over the next 10 years, even after the 2001/2003/2010 tax cuts are extended.

Romney says the rate cuts and AMT repeal would be paid for by faster economic growth, changes in taxpayer behavior, and reductions in individual tax credits, exemptions, and deductions. This being the middle of a campaign, Team Romney won’t say what tax breaks he’d eliminate. Nor will it say how much growth it expects the tax cuts will generate. And while aides insist his overall plan including the unspecified offsets would raise roughly as much money as the existing system, even this gets complicated because Romney has created a new baseline against which he’d measure these changes.

Keep in mind that TPC did not try to estimate revenues for Romney 2.0. There are other tax cuts in that plan, but we took two of the biggest and projected what would happen. As a result, TPC has come up with a conservative estimate of how big a hole Romney would have to fill if he intends to pay for these tax cuts.

To start, TPC took a world where the 2001/2003/2010 rate cuts are already made permanent and the AMT is temporarily patched.  Then, modeler Dan Baneman figured what would happen if the AMT is abolished entirely. Next, he looked at what happens if  today’s rates of 10-15-25-28-33-35 are each cut by 20 percent so they become 8-12-20 etc. up to a top rate of 28 percent.

TPC did figure people would change their behavior in the wake of rate cuts this big, and incorporated those responses in the estimate.  But TPC did not take into account any economic growth the rate reductions might generate.

I suspect they would boost growth, but nobody has a credible way to measure by how much. And despite the fervent wishes of tax cutters everywhere, there is simply no evidence that tax cuts ever generate enough growth to pay for themselves.

The bottom line: Leaving aside any broad economic benefits, the AMT repeal would increase the shortfall by $670 billion while the rate cuts would add about $2.7 trillion to the deficit. That’s more than $3 trillion over 10 years. In 2022 alone—the last year TPC estimated—the twin changes would add $450 billion to the deficit.

Romney has taken to campaigning under one of those digital debt clocks that shows the flow of red ink increasing by the second. But if he can’t find about $3 trillion to offset this exceedingly generous tax cut, that clock will be running a lot faster on his watch than it does today.

34Comments

  1. Michael Bindner  ::  1:41 pm on February 29th, 2012:

    His rates still look like Bowles Simpson if you assume the same tax benefits are abolished. The only real difference is that Bowles-Simpson would drop special rates for capital gains and dividends, while Romney may not tax them at all, at least for the middle class. If he agrees to tax them at normal income rates for higher income taxpayers, I suspect the impact will be less – although until he gets the nomination, he won’t say this. I still suspect that a deal will get done before he could ever take office, since there is no way the Democrats are losing 13 seats. Without that much of a shift, there will be compromise (unless they continue to pass two-year extensions).

  2. It’s Worse Than That, Paul | Jared Bernstein | On the Economy  ::  9:34 pm on February 29th, 2012:

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