Romney Makes His Tax Promises Even Harder to Keep
In my column last week, I discussed the dispute over whether Mitt Romney's tax plan, which he has not spelled out in detail, can meet the goals he has set: 1) reduce income tax rates by 20 percent, 2) abolish the estate tax, 3) repeal the Alternative Minimum Tax, and 4) eliminate taxes on interest, dividends, and capital gains for taxpayers earning less than $200,000 without 5) reducing revenue, 6) increasing the burden on "middle-income familes," or 7) reducing the share of taxes paid by "high-income" households. During last night's presidential debate, Romney added another requirement: "I want middle-income taxpayers to have lower taxes." Or as he also put it, "I want to get some relief to middle-income families." Did he merely mean lower rates, the financial benefit of which could be eliminated by cutting credits and deductions? No:
I am not going to have people at the high end pay less than they're paying now. The top 5 percent of taxpayers will continue to pay 60 percent of the income tax the nation collects. So that'll stay the same. Middle-income people are going to get a tax break.
I don't see how Romney can reconcile all of these promises. Even if the tax reform he proposes (lower rates combined with fewer loopholes) substantially boosts economic growth, thereby yielding more revenue, it is not arithmetically possible for the share of taxes paid by the rich to "stay the same" while the nonrich pay less. If the total sum paid by "middle-income people" goes down but revenue remains the same, the share paid by "the top 5 percent of taxpayers" has to go up, not "stay the same." The Laffer Curve won't get Romney out of that.
Maybe Romney assumes his tax changes will boost incomes among the nonrich, so their effective tax rates will be lower even if their tax bills remain the same. In fact, assuming a big enough payoff in economic growth, "middle-income people" (almost the entire population, according to Romney's definition) could end up paying more in taxes yet still a smaller percentage of their incomes. But bigger tax bills are probably not what most people imagine when they hear him promising "lower taxes." In any case, he really needs to define his terms and explain the degree to which his projections depend on assumptions about how tax reform will affect economic growth.
Addendum: A commenter says, "Of course he was talking about rates." But the question is how he intends to achieve lower effective rates. Romney wants to reduce marginal rates while limiting credits and deductions. Last night he said one approach would be to cap total credits and deductions, suggesting a possible ceiling of $25,000. The implication is that the nonrich will continue to claim all or nearly all of the credits and deductions to which they are accustomed while their rates go down, meaning they will see a net tax cut. That seems to me the most natural interpretation of Romney's promise, and it does not hinge on economic growth projections. But it does reduce revenue, meaning the share of taxes paid by the rich will have to go up to keep revenue the same. Alternatively, optimistic enough projections of economic growth could give "middle-income people" lower effective tax rates even if they lose most of their credits and deductions when the marginal rates come down.
