Five Things You Should Know about Mitt Romney’s “$5 Trillion Tax Cut”
You’ve probably heard claims that Mitt Romney wants to cut taxes by $5 trillion. Here are five things you should know about that figure:
1. $5 trillion is the gross amount of tax cuts he has proposed, not the net impact of all his intended tax reforms.
Governor Romney has been very specific about the taxes he would cut. Most notably, he would reduce today’s individual income tax rates by one-fifth (so the 10 percent bracket would fall to 8 percent, the 35 percent to 28 percent, etc.) and reduce the corporate income tax rate from 35 percent to 25 percent. In addition, he would eliminate the alternative minimum tax (AMT), the estate tax, the taxes created in 2010’s health reform act, and taxes on capital gains, dividends, and interest for incomes up to $200,000 ($100,000 for singles). The $5 trillion figure reflects the revenue impact of all those cuts.
But Romney has also said that he intends his reforms to be revenue-neutral, with the specified revenue losses being offset by a combination of economic growth and unspecified cuts in deductions and other tax preferences. The net impact of his reforms would undoubtedly be less than $5 trillion, perhaps much less if he’s aggressive in going after tax breaks or willing to compromise on some of his other tax reform goals (e.g., not raising taxes on investment income). Without any details about what he would do, however, we can’t measure the net revenue impact of his ideas.
2. $5 trillion is a 10-year extrapolation from a TPC estimate for 2015.
TPC has estimated that the gross tax cuts proposed by Romney would amount to $456 billion in 2015. Budget debates in Washington often focus on ten-year periods, so commentators have coalesced around a natural, if imprecise, extrapolation: multiply by 10 and round up because of a growing economy. Result: $5 trillion over ten years.
3. $5 trillion does not include the impact of permanently extending many expiring tax cuts, including those from 2001 and 2003.
In budget parlance, the $5 trillion is measured against a current policy baseline, not a current law one. TPC’s current policy baseline assumes that many expiring tax cuts, including the 2001 and 2003 cuts, the AMT patch, the current version of the estate tax, and the tax credits enacted or expanded in 2009 will all be extended permanently. Romney proposes to extend all of these except the 2009 credits. Because it is measured against current policy, the $5 trillion figure does not include the revenue impact of any of those extensions (but does include a small revenue increase from expiration of the credits).
The current law baseline assumes all tax cuts expire as scheduled yielding almost $5 trillion more revenue than does current policy. Relative to current law, Romney’s tax proposal would thus be roughly a $10 trillion gross tax cut. (The same issue arises with President Obama’s tax proposals, which we estimate amount to a $2.1 trillion net tax increase relative to current policy, but a $2.8 trillion net tax cut relative to current law.)
4. $5 trillion includes more than $1 trillion in gross tax cuts for families earning $200,000 or less.
Governor Romney’s specified tax cuts would go primarily to high-income taxpayers for a simple reason: they pay a large share of taxes and thus get a large benefit from a proportional reduction in tax rates. But that doesn’t mean that all the tax cuts go to top earners. Middle- and upper-middle income taxpayers would also get a gross tax reduction because of the reduction in tax rates, the elimination of taxes on capital gains, dividends, and interest for low and middle incomes, and, for some, the elimination of the AMT. Those gross tax cuts amount to more than $1 trillion over ten years.
5. $5 trillion includes around $1 trillion in gross tax cuts for corporations.
Cutting the corporate income tax rate from 35 percent to 25 percent would lower corporate tax revenues by roughly $1 trillion over the next decade. Little-discussed in the current debate is whether and how Governor Romney would offset this revenue loss.
As he has rightly noted, corporate taxes are ultimately borne by people, including workers and shareholders. Most of the corporate rate reductions would ultimately benefit high-income taxpayers since they own more investment assets and earn higher labor income. But about two-fifths of the benefit would go to low-, middle-, and upper-middle income workers and investors.
Bottom line: Governor Romney has proposed about $5 trillion in specific, gross tax cuts over the next decade relative to current policy, most but not all of which would go to high-income taxpayers. He has also promised to offset a substantial portion of those cuts—presumably in the trillions of dollars—by reducing deductions and other tax breaks, primarily for high-income households. Lacking any specifics, however, we can’t know what net tax cut, if any, he proposes.