Election 2012

Does Mitt Romney's Tax Plan Math Add Up?

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Mitt Romney and Paul Ryan want you to know their presidential ticket has a tax reform plan. But they don't want you to know what it is. Which may be because it's impossible.

Oh sure, they are both happy to talk about it in it broadest contours. The idea is to broaden the tax base by closing loopholes, then cut income tax rates by 20 percent.

But they don't want to say which loopholes they want to close. And they don't even want to speculate on which tax carve outs might conceivably be on the chopping block in order to make their proposed tax cut revenue neutral.

That's going to be tough, politically. And even if the politics work, it's not clear that the simple math behind the plan does either. Making rate cuts of that size revenue neutral will substantially broadening the base—perhaps doing away with large and popular tax deductions. And even they may not balance out the rate cuts that Romney has proposed.

Yet Rep. Paul Ryan has insisted that it's possible to have it all. Indeed, he has boxed in the campaign somewhat further. On Fox News last month, he declined to lay out the details, but insisted that it could all add up—and without touching some of the most popular deductions.  "It would take me too long to go through all the math," he said. "But let me say it this way, you can lower tax rates by 20 percent across the board by closing loopholes and still have preferences for the middle class for things like charitable deductions, for home purchases, for health care." And he appealed to authority to argue this was true. "We've run the numbers. I've run them in Congress," he said. "We've got five other studies that show you can do this."

Romney, for his part, has been equally evasive about naming deductions. But he has also pointed to independent analyses in order to justify the plausibility of his tax plan. At the first presidential debate, he noted that six independent studies verified the basic idea behind his tax plan.

The problem is that those studies (several of which are really more like detailed blog posts) don't quite show how this can be done—at least not without giving up on some promise that Romney has made.

A study by Princeton's Harvey Rosen assumes that the rate cuts will spur dramatic economic growth that will help bolster revenues. But as The Washington Post's Dylan Matthews has noted, the growth assumptions used in that study assume that Romney's tax plan is revenue neutral prior to increasing growth—and that the growth stems in part from the fact that the rate reductions are paid for. You can't rely on the growth to flow from already-revenue-neutral rate reductions and also rely on growth to make the rate reductions revenue neutral.

Other analyses make different assumptions about how Romney might achieve his tax goals—by, say, changing Romney's definition of middle class so that the plan raises more money from people making $100,000-$200,000 a year, or by eliminating tax exemptions that Romney's critics failed to identity but that still don't quite raise enough revenue. The best Romney's defenders can do is insist that his promises are technically possible but will be extremely difficult.

Given the dicey politics of tax reform, in which the biggest and most valuable deductions are also the most popular, that's practically an admission that it really is impossible, even assuming that the basic math works.

And it may not. A letter to Congress last week from the congressional Joint Center on Taxation reported that ditching a slew of tax carve outs – by getting rid of most deductions, and adding new taxes and fees on muni bonds and some other investments would only raise enough additional tax revenue to cut rates by 4 percent and remain revenue neutral. The JCT report didn't look at Romney's plan specifically. But it does highlight how hard it will be to make it work.

There are some legitimate criticisms of the JCT's assumptions from base-broadening, deficit-hawk heavyweights Alan Simpson, Erskine Bowles, Pete Domenici and Alice Rivlin, who, Politico reports, released the following statement in response:

"There is a growing bipartisan consensus for an approach that broadens the base, lowers rates and raises revenue as part of a comprehensive fiscal plan," they said in a joint statement. "The JCT study looks at only a subset of the tax expenditures we reformed or eliminated, thereby leaving out a substantial amount of savings that were included in our proposals. Most notably, the JCT study does not address the employer health exclusion, the largest tax expenditure in the code, as our plans would."

But of course, if Rep. Ryan's Fox News statement is to be believed, the Romney tax plan wouldn't touch the health care exclusion either.

All of which is to say that no one has shown an obvious way for this to work. The math is difficult at best. The same goes for the politics. The combination certainly makes the plan's combo of promises implausible, and probably effectively impossible. 

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    1. Clearly a terrorist. Seize him!

  1. Does Mitt Romney’s Tax Plan Math Add Up?

    Does it need to?

      1. Even if tax rates only drop 3 or 4% across the board and only a similar dollar amount of loopholes get closed, it would still be a major legislative accomplishment.

        1. The only problem is he wants to spend trillions more on Defense, start new wars, keep the farm program as is, etc etc etc….so spending cuts won’t make up for the revenue losses. The only cnadidate who really has an honest plan is the libertarian…but we wouldn’t want to waste our vote on a third party!

  2. I, for one, eagerly await the list of spending cuts* Mittens plans to employ to get to revenue-neutrality.

    *Actual reductions in “cash” outlays by the federal government.

  3. six independent studies verified the basic idea behind his tax plan.

    IF PIGS HAD WINGS, THEY’D BE EAGLES.

    1. If pigs had wings, cars would need heftier windshield wipers.

  4. If anything the tax-base needs to be narrower. Like, to the point that only people receiving gov’t services are paying taxes. Then we relabel that “gov’t” as a business. Oh, that business model wouldn’t work. Guess they’d go out of business soon after. What a shame.

    1. A tax cut is a tax cut, and only paying 5% federal income tax compared to my 25% I pay now, would make me one happy puppy.

  5. Hey, it’s good to question and press for specifics but don’t forget that POTUS doesn’t get to simply change tax law all by himself, Congress needs to go along and approve the details of any proposed plan.

    I suggest the better question is can Romney get the GOP House and Democrat Senate to agree to a tax system modification plan that is revenue neutral?

  6. Milton Friedman was all for lowering taxes, at any time, for any reason. So CUT AWAY! CUT AWAY! (said the dying mother in Shamalalalama’s Signs)

    1. I like tax cuts too, but I would much rather see cuts in spending attached. Otherwise, the tax cuts will likely lead to more inflation of the money supply and a less obvious tax on the populous. When John Q public sees the price of milk going up, they are more likely to blame the greedy milk cows than the government.

    2. When the Fed is the primary purchaser of federal debt, I don’t know that it really matters which way you get taxed.

  7. I spotted via United Liberty, a clip made by a girl nicknamed Ryan Girl titled “Let’s get fiscal”, a parody of Olivia Newton-Jones’s “Let’s get physical”.
    http://www.youtube.com/watch?v=yyrN17jAiDw

  8. When Romney is pressed for tax plan details, he should respond thusly:

    Well, let’s look at the details of the President’s plan. Oh, wait, he doesn’t have a plan except to raise taxes on high earners. What economic theory says raising tax rates on high earners will help economic growth?

    1. I don’t know how new taxes will result in economic prosperity, either. What’s to prevent Congress from spending 140% of the projected new revenue on the usual boondoggles and pork?

      1. Indeed, we should lower tax rates in order to cut revenue, not because we can keep the same revenue in order to pay for inefficient government programs.

  9. It’s a lot more realistic than pretending that raising taxes for millionaires will pay for everything.

    Does Suderman really think they would be stupid enough to detail every cut and closed loophole to be picked apart by the opposition, when any actual plan has to go through Congress first anyway?

    1. Coming up with a vague tax plan is a lot easier to do than telling people, “If we want to be budget neutral, the economy’s GDP is going to have to retract at least 8-10%, since that’s the percentage of GDP we’re running in deficits.”

      No one ever got elected telling people that the economy will have to naturally retract on their watch in order to bring the government to solvency again.

      1. That doesn’t really apply here. “Budget neutral” assumes no change in the deficit.

        The math for Romney’s plan works because the tax cuts are limited to the number of loopholes closed. What makes it hard is politics. Nobody wants their particular loopholes closed.

        1. The math for Romney’s plan works because the tax cuts are limited to the number of loopholes closed.

          Which particular loopholes? Unless Romney and Ryan are willing to show their work, I have no reason to trust that their claims are accurate.

          What makes it hard is politics. Nobody wants their particular loopholes closed.

          Which is why it’s a lot more likely that the size of government will retract organically rather than voluntarily. And it’s going to get ugly when it happens, because the progressives have spent the last 100+ years promising that the Central State, and not communities, families, or the market, was the only institution that could provide social and economic stability.

  10. But they don’t want to say which loopholes they want to close. And they don’t even want to speculate on which tax carve outs might conceivably be on the chopping block in order to make their proposed tax cut revenue neutral.

    That makes it a non-starter right there. Predicting future revenues following cuts and loophole closures is a dicey propostion in and of itself, just because the current LFP rate is so low (if people aren’t working, they aren’t paying income taxes). But if you aren’t even going to say where the loophole closures are coming from, how can anyone verify the math behind your claims?

  11. Mitt Romney doesn’t seem to make much sense at all. Isn’t this the same guy that said anyone under 250k/yr is middle class? According to him you’re middle class whether you’re making 12k/yr flipping burgers or sitting in a cushy analyst job making 225k/yr. Despite this we expect his tax plan to make sense?

    1. Location based purchasing power plays a role on that “middle class” definition.

      1. Inconvenient to the narrative though, so forget about that.

  12. Who cares about specifics. The principle is all that matters, and in this case Romney is saying that he wants to reform the tax code by reducing rates, and eliminating loopholes to offset the tax rate cut. More importantly, he has stated that first and foremost, his tax reform plan needs to be deficit neutral. In the debate he acknowledged that the tax cut may need to be smaller in order to achieve that.

    Of course, the best answer to the question of which credits and deductions will be eliminated is “all of them”. Flat tax, no deductions.

  13. Suderman, why do you love Obama so much. Leave Mittney alone!

  14. I don’t know why RR doesn’t simply say that we’ll cut the mortgage deduction on interest over, say, $200,000…..or whatever 75% of the homes in Ohio sell for (or really the mortgage amount that incorporates 75% of the mortgages in the state). Target Ohio and you also pick up, I’d guess, Florida, Iowa, Nevada, Michigan, Pennsylvania, Minnesota and Wisconsin. Maybe you give up Colorado, New Hampshire, and Virginia (and maybe not this one – rural Virginia may be enough to win it for Romney). Essentially the message is: we’ll balance the budget on the blue states with high home values: Illinois, California, and New York. Three states Romney won’t win anyway. The media will scream but the math will play out on the TV screens of these states.

    Pretty cynical, I’d agree, but when your political opponents case is pretty much ‘they’re liars’ are there really any lines left to cross? And this may be the ‘plan’ anyway, but RR figure the media outrage can’t be isolated to the blue states with high home values.

  15. Since the government will always increase spending, and they are spending twice what they take in, why bother worrying about taxes? Just cut them to zero for everyone and fund the difference with whatever they are using to pay for the deficit spending. Seems to be working just fine.

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