The Five Trillion Dollar Question

Most everyone is sick of the topic, but lots of post debate debate about the “five trillion dollar Romney tax cut.” I have heard from many of my Republican friends that this is not true, and even Ted Panos on WCAP pointed to some “fact checking” that debunks the claim of a Romney $5 trillion dollar tax plan. Both campaigns have dueling ads on the subject. So what is the truth?

There, as always, is some gaming going on, so let us look at the plan, and point to where the confusion has been deliberately created.

So what did Mitt Romney propose for tax cuts? Lets look at what EVERYONE agrees on, and go from there. Romney proposes the following:

1) A reduction in ALL marginal tax rates of 20%

2) The elimination of the Alternative Minimum Tax

3) The elimination of the estate tax.

4) Making permanent the Bush tax cuts for all brackets.

To be clear the Romney tax cut of 20% would be on top of the Bush tax cuts. Now everyone agrees that is what has been proposed, even Mitt Romney. So there is no argument there.

When tax cuts are proposed the Congressional Budget Office will “score” them, as obviously there is a reduction in revenue when rates are lowered, or taxes eliminated. On that there is also agreement. So Romney’s proposal has been scored by the independent Tax Policy Center, and the “lost revenue” will be $480 billion per year, or $4.8 trillion over ten years. ($5 trillion).

Mitt Romney has also said, quite specifically, that his plan WILL NOT raise the overall tax burden on the middle class (although there is a disagreement on what constitutes the “middle class”), will not reduce
the overall tax burden for the nations wealthiest people, and will not increase the deficit. He has said that the plan will be revenue neutral. Governor Romney says that he will achieve this “revenue neutrality” by closing “tax loopholes” on the wealthiest taxpayers. He is refusing however to say which loopholes will be closed.

Now lets start the arguing. In fact the Romney proposal is a $5 trillion tax cut which needs to be “paid for”. So when someone asks whether Mitt Romney has a proposal for a $5 trillion tax cut my answer is yes. The Romney folks say that it is not a “tax cut” but a change or reform of the tax code that “broadens” the tax base, simplifies the code, and pays for itself. So when you hear the question asked and answered differently, and when you look at both ads attached to this post, that is what the dispute is about.

The denial by Romney might have some merit, but he has a problem. Since he refuses to say exactly how the $5 trillion in lost revenue would be paid for by identifying tax deductions that would be eliminated the non-partisan Tax Policy Center looked at the principles he enunciated, and then began the process of eliminating deductions for upper income folks to see if the $5 trillion could be covered. They found that the cost of $5 trillion could not be covered simply by eliminating deductions for upper earners. If the goal is revenue neutrality then, in lay terms, the Center found that you must eliminate deductions utilized by the “middle class”. From the TPC Report:

We found that a tax reform plan that simultaneously met the first four goals would imply reduced
tax burdens on families with income above $200,000. Meeting the fifth goal – revenue neutrality – would then imply increased tax burdens on other taxpayers, a necessary but perhaps unintended consequence. This was true even though we made the financing of the plan via tax expenditure reductions as progressive as possible by assuming that tax expenditures would be eliminated from the top down: first, we eliminated all available tax expenditures for those with income above $200,000; only if those revenues were insufficient to achieve revenue neutrality (which in fact they were) did we reduce tax expenditures for households with incomes below that
level. The basic logic of our central finding is captured in Figure 2 from our paper (attached here as
well). The graph shows that cutting individual income tax rates by 20 percent from today’s levels
would reduce tax burdens by $251 billion per year (in 2015) among households with income above $200,000. But, if we assume a strict interpretation of the second goal – preserving and enhancing incentives for saving and investment (see footnote 2) – there are only $165 billion of available tax expenditures to close in that group if tax rates are cut). As a result, to achieve revenue neutrality, the resulting $86 billion annual shortfall must be made up by raising taxes on the rest of the population. We showed, in addition, that the same qualitative conclusions arise even when we added in feedback effects of tax changes on economic growth and revenues, using estimates of those effects that were developed by Harvard professor, and economic advisor to the Romney campaign, Greg Mankiw.

Essentially the TPC is saying that the Romney math does not work. Romney is taking pains to deny this, and say that his stated goal of revenue neutrality, along with no additional tax reductions for top earners, can in fact be met as he stated. Romney could end all of this by simply producing a specific list of deductions he would eliminate, but he refuses to do so.

When you put aside the partisan bickering what is the truth? The Romney folks, in a couple of unguarded moments, have said that if the math in fact does not work they might scale back the proposed tax cuts. The campaign, however, refuses to make that statement, and is sticking with the plan. But the reality is two-fold. The first is that if you wiped out all tax preferences for upper earners you cannot make the math work. The second is that how do you expect to wipe out ALL tax preferences from a political standpoint?

The truth is that:

1) Romney has proposed reducing revenues by $4.8 trillion over ten years.
2) He has not specifically said how he would finance that lost revenue
3) The budgetary impact would either be an expansion of the deficit, or a tax hike on the middle class through the loss of tax preferences that would increase total tax liability in that income group. Or Romney can change the tax cut to make the math work.
4) Romney has said that “dynamic scoring” (increased growth through lower marginal rates) would pay for some of the $5 trillion, but so far has refused to say what number he assigns to that category. That is an argument that needs another post, but the Romney argument is the direct descendant of what George H.W. Bush called “voodoo economics”
5) The total impact, to either the deficit, or to middle income taxpayers, would be much less than $5 trillion, since you can pay for “some” of the tax cut through the Romney methodology.
6) Romney says that impact to the budget is “neutral” because he says it is.

The last word on this goes to Romney defender Robert Samuelson, who said this:

The TPC report was widely interpreted as saying Romney would have to raise taxes on the middle class. It didn’t, says the TPC’s Howard Gleckman. It simply pointed out that he couldn’t keep all “his ambitious campaign promises.” He’d have to make choices and modifications. So what else is new?

Politicians exaggerate and simplify. They make more promises than can be kept. They take inconsistent positions. Romney is guilty of this, but so is Obama.

Samuelson essentially pleads guilty, but wants mitigation because the other guy is guilty too. They all do it. The one point that Samuelson makes that is correct is the one I made above. The net impact must be less than $5 trillion, because you must give some allowance for recouping some of those dollars through the Romney methodology.

I hope that makes it all clearer.

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