3 Holes in Mitt Romney's Tax Plan

Original Link: http://www.usnews.com/news/blogs/rick-newman/2012/02/23/3-holes-in-mitt-romneys-tax-plan

By Rick Newman

Mitt Romney likes to say that if he were running a company and somebody presented him with a cockamamie idea—like the half-baked schemes that fly around Washington all the time—he'd fire the offending lackey.

But Romney might be the one out on the street if his new tax plan had to pass through corporate accounting.
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Romney has freshened his plan for reviving the economy with a new call to lower the tax rates everybody pays, along with cuts in corporate tax rates and other reforms that he has already proposed. Romney wants to lower the current rates on personal income by 20 percent, in every bracket, which means the lowest rate would fall to 8 percent and the highest would fall to 28 percent.
Romney invokes the familiar, if dubious, supply-side argument that lower taxes will make the economy grow faster and help create more jobs. In theory, that would bring in more tax revenue to help offset the revenue the government would lose by lowering taxes. Romney also says he'd make deep cuts in federal spending, so that the government needs less money in the first place.

It's a pleasing idea. But Romney must be hoping that nobody with a calculator is paying attention, because cutting taxes so abruptly, at a time when the U.S. government is severely in debt, would either push Washington's annual deficits to new heights or force draconian cuts in services that many Americans depend on. Here are three specific problems with Romney's tax plan:

It would make the national debt far worse.

Robertson Williams of the nonpartisan 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 the national debt in the other direction.
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Conservatives who claim that lower taxes boost economic growth have a high hurdle to clear, since George W. Bush basically followed that script with the tax cuts he signed into law in 2001 and 2003. The result was real economic growth, after inflation, that averaged a measly 1.4 percent per year between 2001 and 2009. Even if you factor out the recession year of 2009, growth averaged just 2 percent. From 1980 through 2000, by contrast, real GDP growth averaged 3.2 percent per year, including three recessionary years in which real growth was negative. So there's no evidence that the lower tax rates of the last decade have helped boost economic growth.

They've sure added to the national debt, however. The Bush administration ran a deficit every year after Bush first started cutting taxes, following four years when Washington ran a surplus. Overall, the Bush-era budgets added about $3.5 trillion to the national debt. President Obama will have added to the debt by another $4.8 trillion or so by the end of his first term, which is certainly no endorsement of Obama's economic policies. But any proposal to cut taxes further without first addressing the debt simply ignores the real-world evidence on how lower taxes affect the government's ledgers.
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It would require much bigger spending cuts than Romney has acknowledged.

In a Wall Street Journal op-ed explaining his tax plan, Romney said he'd make "deep cuts in federal spending" that he has "previously outlined." Well, he may have outlined those cuts, but he hasn't detailed whose programs or benefits would get the ax. That conveniently allows Romney to ignore the intense political pushback that would most likely make deep cuts in federal spending extremely difficult or impossible.

Here's what Romney has said: He'd cap federal spending at 20 percent of GDP by the end of 2016; he'd put a floor on defense spending, which would most likely translate into more spending on national security, not less; and at some point, he'd balance the budget. Again, it sounds nice, but running the numbers yields scenarios so alarming as to be implausible.

If Romney's spending cap applied to all federal programs except defense, then government spending on everything—including Medicare and Social Security—would have to fall by about 20 percent, according to analysis by the left-leaning Center on Budget and Policy Priorities. If Medicare and Social Security were fenced off, then "nondiscretionary" programs that provide funding for roads, NASA, education, foreign aid, health, workplace safety, environmental protection, and many other things would have to be cut by an average of 38 percent. The cuts would be even deeper if Romney insisted on a balanced budget at any point over the next decade.
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Americans may like the idea of smaller government in general, but there would most likely be a nationwide revolt if funding for hundreds of programs that provide services and improve living standards for millions of Americans were suddenly cut. Maybe that's why Romney's willing to outline his cuts, but not willing to offer specifics.

It would favor the rich.

Romney's tax plan makes him even more vulnerable to charges of aristocratic elitism. It would lower tax rates for the highest earners by seven percentage points, for example, while only lowering rates for the lowest earners by two points. It would also leave intact the 15 percent tax rate on capital gains and other types of investment income, which allows the superwealthy—including Romney himself—to pay lower tax rates than many middle-class workers, since wages for most people are taxed at higher rates.

Romney has demonstrated a tin ear before, and his tax plan adds to the impression that he's out of touch with the inclinations of ordinary Americans. Polls consistently show, for instance, that a majority of Americans support higher taxes on the wealthy. The release of Romney's own returns, which show that his tax rate is a mere 14 percent or so, has intensified the belief that the tax code favors the rich.

[See why the GOP has a Gloomy-Gus problem.]
To even things out, Romney says he'd limit certain tax deductions for the wealthy, though he hasn't said which deductions. And he'd eliminate the capital gains tax completely for people with less than $200,000 in income. But that's likely to bring little comfort to the majority of middle-class workers who rarely have a capital gain to report.

If elected, perhaps Romney would flesh out the deep spending cuts and other unpopular measures that would be required to make his tax plan work. But for now, the wealthiest candidate in the race seems to be testing just how gullible voters really are, with an incomplete proposal that he himself would probably reject if politics were anything like business.