Mitt Romney's shape-shifting tax plan

It relieves him of the burden of explaining details now, since he can wave away objections by saying he'll make the numbers add up when the time comes.

By MSN Money Partner Oct 5, 2012 7:50AM
US News logoMitt Romney's tax plan gets curiouser and curiouser.

The basic concept behind the plan is pretty simple. The Republican presidential nominee wants to cut each of the six federal income-tax rates by one fifth, so those in the 15 percent bracket would pay 12 percent, those in the 25 percent bracket would pay 20 percent, and so on. He'd also eliminate the estate tax and kill or reduce other levies. President Obama, by contrast, would leave most rates where they are, while raising the rate for top earners by roughly 9 to 13 percent, depending on income.

The problem with Romney's plan, of course, is that the federal government is already drowning in debt and can't take on more to finance sizable tax cuts. The nonpartisan Tax Policy Center estimates that Romney's cuts would reduce federal revenue by $480 billion per year, which Obama has characterized as a $5 trillion tax cut (over 10 years, a rounded-up qualifier that Obama doesn't usually mention). Romney has addressed that, sort of, by saying he'd offset lost revenue by cutting or reducing a bunch of tax credits, deductions, and other loopholes, with one idea being to put a limit of $17,000 on the amount of deductions any taxpayer could claim in a given year. That would help a bit with the accounting, since some wealthy taxpayers claim deductions that help them avoid thousands or even millions of dollars in taxes.

But new limits on deductions still wouldn't be nearly enough to fill the hole left by those big cuts in tax rates. So in his first debate with President Obama, Romney made a new pledge: He will approve no tax cut that adds to the deficit.

This sounds like a guarantee that Romney's tax plan, if ever enacted, would do nothing to harm the government's finances or the overall economy and would only help. It also relieves Romney of the burden of explaining all the details now, since he can wave away objections that his numbers don't add up by simply saying he'll make them add up when the time comes.

But the irony is that a plan to cut taxes that doesn't raise the deficit may have even less chance of ever becoming law than tax cuts that would require more borrowing. That's because markets and even some politicians may no longer tolerate the kind of legerdemain that it takes to cut taxes today while supposedly paying for them tomorrow.

The only way Romney would be able to cut taxes as deeply as he wants, without adding to the deficit or simply offsetting a tax cut in one place with a tax hike in another, is to boost the economy so much that total tax payments would actually go up, despite lower rates. The idea that lower taxes stimulate growth is a core belief of many "supply-side" conservatives, even though there's plenty of evidence to the contrary. The federal tax burden today is the lowest in modern times, for instance, yet over the last decade that has corresponded with slowing growth rates and falling median income rather than the kind of boom that supply-side theory predicts.

But let's say Romney is right and lower taxes really will trigger an impressive economic revival. Under the best scenario, it wouldn't happen for a few years, yet tax cuts would reduce the federal government's revenue immediately. So the deficit would have to rise in the short term, at a minimum.

The only way Romney can claim that tax cuts wouldn't add to the deficit is to do "dynamic scoring," which relies on projections of falling deficits predicated on much higher growth rates than at present.

That's not so different from the just-trust-me growth rates that the Obama White House predicted in 2009 to justify its huge stimulus bill. The yawning gap between those White House predictions and reality is now one of Obama's biggest liabilities.

In the past, Washington was able to hike up the deficit, despite dubious predictions about the lugubrious outcome, because there was wiggle room in the government's finances. That wiggle room is now nearly gone. Standard & Poor's cut the U.S. credit rating for the first time ever last summer because the national debt, now $16 trillion, is getting too big, and Washington has made no serious effort to do anything about it. Moody's has now said that it may also cut the U.S. credit rating before long. Eventually, those dings will raise Washington's borrowing costs, which could quickly become a very big problem that forces bigger tax hikes and spending cuts than Americans are prepared for.

So if Romney were elected and he enacted a tax plan that made deficits even bigger, the global investors who finance America's debt would have to decide if promises of declining deficits in the future seemed plausible. No doubt they'd study the administration of George W. Bush, who made basically the same promises in 2001 and 2003 when he passed his own tax cuts. Alas, there's almost no way to argue that those tax cuts boosted growth and improved the government's finances. On the contrary, the national debt rose by about $3.5 trillion under Bush, who left office, as we know, amid a Depression-style financial meltdown.

Some serious economists back Romney's claim that he can cut taxes without raising the deficit, including Glenn Hubbard of Columbia, Greg Mankiw of Harvard, and John Taylor of Stanford. But markets won't react to such a plan by listening to what economists say. They'll look to history to predict the future and turn the screws when rosy projections don't materialize. It's a wonder that hasn't happened yet.


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8Comments
Oct 5, 2012 9:30AM
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Thank you.

"No doubt they'd study the administration of George W. Bush, who made basically the same promises in 2001 and 2003 when he passed his own tax cuts. Alas, there's almost no way to argue that those tax cuts boosted growth and improved the government's finances. On the contrary, the national debt rose by about $3.5 trillion under Bush, who left office, as we know, amid a Depression-style financial meltdown."
Oct 5, 2012 11:01AM
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Looking at Romney's numbers, I applied them to my in-laws, both retired and in their 80s (I do their taxes for them). They have about $40K/yr income (SS & some annuity investments). Currently for 2012, they would get a standard deduction of 11,900, plus 2,300 for being over age 65. Their 2 personal exemptions would be 7,600. So, their total deductions would be 21,800, and their tax liability would be 1,860 (if Romney considers them in his 47%, he missed the boat, they do pay taxes). Under Romney's plan, their total deductions are capped at $17K, so they lose $4,800 in deductions, which drives their taxable income up by the same amount from 18,200 to 23,000, and their tax liability goes up to 2,064, an increase of $204. Calculations from 2012 tax table, with Romneys rate adjustment:

17,400 X 8% (dropped from 10%) = 1,392

5,600 X 12% (dropped from 15%) = 672

-------

Total Tax Liability = 2,064

So Romney happily tells us in the debate, with his plastic TV preacher smile, that his tax plan won't raise taxes on the Middle Class, but rather will reduce them. Well, this doesn't seem to be the case for my in-laws, now does it? Now an increase of $204 isn't a backbreaking amount, but when compared to the whopping big savings many wealthy will get, something doesn't add up. It seems as if Romney doesn't really think his plans through, simply doesn't understand the numbers, or is just throwing stuff out to make it to like he knows what he is talking about, but then again, this is the Romney we all know and love.

Also, he proposes dropping the top rates for the wealthiest by 10 percentage points (35% to 25%), but dropping the Middle Class rate by only 5 percentage points (25% to 20%). Who gets the better deal, especially when you consider that the top rate applies to a higher level of income, resulting in a much greater dollar savings AND because we have a graduated system, the wealthy will have part of their income getting the Middle Class savings as well as their own. Spin it anyway you like, but it's pretty obvious whose butts Romney is kissing.

Oct 6, 2012 9:27PM
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how many of you out there voting for Romney really think he's going to closed loop holes on himself and the other rich people. When they haven't done it in thirty years.They do the tax cuts but not the other. How many times do you need to be fooled.
Oct 6, 2012 5:53PM
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Roadhouse Blues, I like the way you laid it out that  your in-laws will definitely not benefit from Romney's tax plan.  But then, Romney only claimed that the Middle Class would not end up paying more.  And Romney's middle class is anybody (or, as his staff later claimed, any household) with an income of up to $200-250,000.  Sorry, your in-laws (just like most everyone else I know) do not qualify to be even considered in the Romney's plans.  I guess, for him they do fall in the 47%.
Oct 5, 2012 12:15PM
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This writter mentions Glen Hubbard.He was the guy that advised GWB on economics.We know

how that worked out.We can thank Hubbard and Larry Lindsay for the 2008 mess.

Oct 8, 2012 8:55AM
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Agree with Bushnot.  How many times can folks be fooled?  The GOP is just out to serve themselves more money and power, they are trying to get citizens to believe that their approach will benefit the average citizen, but what they really try to do is to build an even better moat around their castles, to make themselves a permanent elite and the rest of the populance be damned.  Wake up!
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