Why Romney’s Tax Agenda Doesn’t Add Up, Even if it Isn’t a Middle-Class Tax Hike

By :: August 2nd, 2012

A new paper by Brookings Institution scholars and Tax Policy Center colleagues Bill Gale, Adam Looney, and Samuel Brown is generating lots of media buzz. Even Barack Obama has put his spin on it with a campaign ad that says if you are middle class, Mitt Romney wants to raise your taxes by up to $2,000 even as he cuts taxes for rich people like himself.

That is a powerful political message, but it isn’t how I read the Gale-Looney-Brown paper. To me, the study highlights something else: The deep contradictions embedded in Romney’s tax platform. Like most candidates, the former Massachusetts governor has made many promises. And like most, he cannot keep them all.

In this case, Romney has promised at least five big things. They are:

  • To start, he’d make all of the 2001 and 2003 tax cuts permanent but repeal the 2009 Obama tax cuts and the tax increases included in the 2010 health reform law.
  • After that, he’d cut tax rates by 20 percent across the board and eliminate both the Alternative Minimum Tax and the estate tax.
  • He’d eliminate taxes on investment income for couples making $200,000 or less (individuals making $100,000 or less) and keep current low rates for those with high incomes.
  • He’d do this without increasing the budget deficit (beyond the cost of extending the 2001-2003 tax cuts) by curbing some tax preferences.
  • He’d do it in a way that retains the progressivity of today’s tax system.

Romney’s problem is he cannot possibly achieve all of these goals. He is doomed by both political reality and simple mathematics.

Romney himself never says how he will make all this happen. Indeed, his tax platform includes a gaping hole. He says he’d finance these rate cuts by broadening the tax base--that is, by reducing some of the tax preferences that litter the Revenue Code. But he never says which of these deductions, credits, or exclusions he’d scale back—or how.

Thus, the real question is not whether Romney is proposing a huge middle-class tax increase (he isn’t). It is which of his ambitious campaign promises he will fail to keep.

That was the exercise that Brown, Gale and Looney engaged in. To show how hard it would be for Romney to achieve all of these goals, they assumed he’d keep his first four promises. If he did, they found it would be impossible for Romney to retain today’s levels of progressivity.  Or, to say it another way, if Romney keeps the promises he has explicitly made, the middle class will pay higher taxes and the rich will pay lower taxes.

That’s because cutting rates this deeply without adding to the deficit or raising taxes on capital income would require massive cuts in those popular tax preferences that overwhelmingly benefit the middle- and upper middle-class. Brown, Gale, and Looney figure that tax breaks such as the deductions for mortgage interest and charitable giving or the exclusion for employer sponsored health insurance would have to be cut by as much as 65 percent for Romney’s plan to add up.

While their numbers are slightly different, their basic conclusion is the same as my TPC colleagues Eric Toder, Jim Nunns, Bob Williams, and Hang Nguyen reached in their own paper a couple of weeks ago: You just can’t cut rates this deeply without either adding to the deficit or making steep, exceedingly painful cuts in tax preferences.

Of course, Romney doesn’t have to raise taxes on the middle-class. He could fix this problem with less ambitious rate cuts on ordinary income, or by raising taxes on capital income. He could pay for his initiative outside of the individual income tax system by increasing corporate taxes—though he says he’d cut them. He could cut spending even more deeply than he’s already promised, though that would hurt low- and middle-income households too. Or he could just add to the deficit.

Thus, the right question to ask Romney is not whether he wants to raise taxes on the middle-class. The right question to ask is which of his campaign promises he will abandon.

21Comments

  1. Ralph H  ::  8:06 pm on August 2nd, 2012:

    It will be interesting to see how he gets around these promises. Mr Obama has pretty much been boxed in by his 08 campaign promises. Except for the Obamacare taxes he has lived up to his word, to the detriment of the deficit. Romney will perhaps face a GHWBush “read my lips” moment.

  2. Nancy Kaplan  ::  8:21 pm on August 2nd, 2012:

    I watched Bill Gale being interviewed on the Newshour tonight and was thought he did an excellent job of explaining and defending the new report. But I was surprised and disappointed that he did not respond to the other guy’s very misleading assertion that half of the people in the US do not pay taxes – equating not paying INCOME tax with not paying ANY tax. In fact those folks pay plenty in taxes – sales tax, payroll tax, etc. Neither Bill Gale nor Judy Woodruff challenged the speaker’s premise, which is a major misleading talking point of the political right.

  3. Michael Bindner  ::  8:52 pm on August 2nd, 2012:

    While Mittens is mentioned specifically, much of this analysis could apply to the Fiscal Commission and the Bipartisan Policy Center plans – with the exception that these plans propose raising revenue from increasing taxes on the wealthy while Romney does not. If Romney were smart, he would be more radical with his tax plan and adopt something like Michael Graetz’s value added tax plan with progressive income taxation for the wealthy or Lawrence B. Lindsey’s net business receipts tax, which replaces all other taxation with a multi-rate VAT-like tax that allows for the distribution of subsidies to families and higher rates for higher earners and investors. Both of these plans eliminate the requirement that most families file – which is libertarian for the middle class but goes against the Dick Armey/Tea Party approach of making taxation onerous in order to decrease spending.

  4. Michael Bindner  ::  8:59 pm on August 2nd, 2012:

    The question is now whether the dueling tax bills will lead to negotiations during the August recess and heat from donors about doing something to prevent falling off the fiscal cliff. I suspect this will all be held in what Romney calls hidden quiet rooms (or something like that), so it is time for the rest of us to go to the beach.

  5. Ralph H  ::  8:33 am on August 3rd, 2012:

    Sorry Nancy I can not let you pass on this distortion. Sales tax and state income tax are local. Payroll tax is dedicated to SSI and Medicare and are great bargains for lower income workers. Income taxes are the main funding source for the Federal government, so if half of the US citizens do not pay (and in fact get EITC rebates it most certainly is a problem.

  6. Tax Roundup, 8/3/2012: Sales tax holidays, $5 billion in refund fraud, and smoked pot clinic deductions. « Roth & Company, P.C  ::  9:50 am on August 3rd, 2012:

    […] Gleckman, Why Romney’s Tax Agenda Doesn’t Add Up, Even if it Isn’t a Middle-Class Tax Hike. Not that the system we have exactly adds up either. […]

  7. manapp99  ::  11:07 am on August 3rd, 2012:

    So I would be curious if the same people did an in depth study of Candidate Obama’s economic plan in 08 as he ran for President? If so how did it score and if not why not. This is the only apples to apples comparison that makes any sense. We all know, as Obama found out, that Romney cannot not truly make any kind of detailed plan until he knows all the facts. He needs to actually BE president before we can know wha t he will do as president. We also need to know the makeup of congress. Will he have the massive majorities that Obama did? Will the Democrats out of power work to obstruct? Etc.

  8. beowulf  ::  9:07 pm on August 3rd, 2012:

    So how much revenue is raised by taxing capital gains at ordinary rates?. Or, to take things to the next level, what if Romney reveals himself a secret disciple of liberal economists like, err, Arthur Laffer and adds unrealized capital gains to the tax base (whether annually or with a retrospective interest charge)?

    Counter-intuitive Laffer link—
    http://www.books.google.com/books?id=QzGAPcjf6ksC&pg=PA182&lpg=PA182

  9. James  ::  12:13 pm on August 4th, 2012:

    I have to disagree with your premise that income tax is the main funding source for the Federal Government.

    As you should realize that most of us pay some form of taxes throughout the year before we file the returns where the preferences are utilized to reduce the taxes owed. As you should note that we pay variety of taxes and fees not necessarily income tax. An example would be going to the natural park we pay entrance fee which is set by Congress.

  10. James  ::  12:18 pm on August 4th, 2012:

    Politicians always box themselves in making too many promises just to get elected until someone tells them that they are wrong which they resort to theater chest thumping.

  11. jp  ::  7:33 pm on August 4th, 2012:

    Luckily you can find those right here:

    http://www.taxpolicycenter.org/library/listpubs.cfm?ListByDate=true&PublicationYear=2008

  12. Actually, ‘game changer’ tax report doesn’t say Romney wants to raise taxes on middle class | AEIdeas  ::  10:36 am on August 9th, 2012:

    […] the Brookings Institution — says Team Obama is distorting the study’s findings. First, Howard Gleckman:  … the real question is not whether Romney is proposing a huge middle-class tax increase […]

  13. Los golpes bajos de Harry Reid a Romney  ::  5:26 am on August 10th, 2012:

    […] las cifras siguiendo los principios marcados por Romney en su plan. Su conclusión: es básicamente imposible hacerlo, incluso si la eliminación de deducciones acaba por convertirse en una subida de impuestos […]

  14. J. Morales  ::  1:13 pm on August 20th, 2012:

    I’m not a tax expert here, but this is my two cents. One, I can certainly see the sense in saying Romney may not be able to keep all his promises. No President ever has to my knowledge, Obama certainly hasn’t.

    However, I do take slight issue with this language of “hurting” the middle class. If Romney has to make some deep spending cuts, I don’t see how this is guaranteed to “hurt” the middle class. There was a time in this country when we got by on very little gov’t spending. We don’t need to go back to those days, but I don’t necessarily think that cutting some money that is spent on the middle class is guaranteed to “hurt” it. It might, it might not. It’s just not a foregone conclusion.

  15. ThatNateGuy  ::  2:26 pm on August 20th, 2012:

    The problem is that Gov. Romney has not presented us (the voting population) with any of the spending cuts that would supposedly benefit the nation as a whole. Unless the middle class has an income tax increase, he wouldn’t be able to make his numbers work unless he cut all non defense and non Social Security spending by 49% by 2022. Those sort of cuts just aren’t going to happen. I hope this sufficiently addresses your points, sir. :-)

  16. Eric  ::  5:23 pm on August 23rd, 2012:

    The Fiscal and tax policy by Romney is so ridiculous. To lower rates and not find a place to equalize even with all the “cuts” he’s proposing is not happening. The only way to dig us out is ta tax the highest net worth people at a higher rate, unless those people are more willing to spend their money freely. It’s simple economics of 20%(in this case less than 10%) control 80% of the wealth of the country. If they cease/slow down to spend due to “tax policy” which everyone knows is BS then the economy won’t pick up anyway and the deficit will increase unless we just totally slash a crap load governmental projects. Cash must FLOW in order for the economy to pick up, as long as rich people are sitting on their money under their mattresses doing nothing with it there is no cash flow. Therefore tax policy must find a way to make that cash flow either by creating a NET WORTH TAX or by having these ultra billionaires spend more money freely.

  17. Romney, What He Won’t Tell Us | Pancake Landing  ::  12:40 am on September 25th, 2012:

    […] The most interesting, and one of the most important, critiques of Mitt Romney is that of his tax plan, or lack of a really specific one. The memes of his flip flopping and two-facedness are detrimental, but this criticism is most important I believe because it portrays how the conservative agenda of cutting debt and taxes, especially for the rich, doesn’t mathematically work. […]

  18. Bill Price  ::  5:22 pm on September 28th, 2012:

    Nobody thought to mention that if you cut the corporate tax rate, giving business an incentive to grow, you would reduce the number of people who pay no taxes by putting them back to work. You get a double benefit. They now have income, pay taxes and no longer live off of the government

  19. The morning after | charles' log  ::  10:03 am on October 4th, 2012:

    […] has said he would offset those cuts by closing loopholes. The Tax Policy Centerhas analyzed that promise and found that it is mathematically impossible, unless Romney raises taxes […]

  20. Quora  ::  4:59 pm on October 15th, 2012:

    Do you think President Obama truly wants a second term, or is he just running because he feels like it’s his duty to keep the presidency in Democratic hands?…

    Yeah, everyone is repeating those numbers. Don’t take my word for it. I’m no expert; I just read what the reporters aren’t reading, I guess: You could glance through the original paper, where Brookings/Urban’s joint “Tax Policy Center” sets out a…

  21. portemonnaielongchamps  ::  4:43 pm on March 21st, 2013:

    Its just well thought out and really fantastic to see someone who knows how to put these thoughts down so well