Mitt Romney’s campaign swiftly responded to the Tax Policy Center’s damning analysis of his tax plan by arguing that it was woefully incomplete. By only analyzing his reforms for individual tax rates, it said, the study didn’t take into account the corporate tax reform that Romney is proposing or the economic boost that would accompany those changes. “These glaring gaps invalidate the report’s conclusions,” Lanhee Chen, Romney’s policy director, said in a statement.
But even if the corporate piece of Romney’s tax plan were included, it wouldn’t drastically change the Tax Policy Center’s conclusion that Romney’s proposal would burden lower-income Americans while cutting rates for the top 5 percent, or else would increase the deficit, according to William Gale, the Brookings Institution economist who co-authored the study.
As with individual rates, Romney wants to close corporate tax breaks—i.e. “broaden the base”—to pay for lowering rates to 25 percent. The problem, Gale says, is that even closing corporate loopholes can only get you part of the way there, according to Congress’s own nonpartisan tax office. “The Joint Committee on Taxation recently suggested that 28 percent is the lowest possible corporate tax in a revenue-neutral tax reform that paid for lower rates by eliminating business tax breaks,” Gale points out.
What’s more, the JCT assumed that would mean getting rid of a tax break that allows multinational corporations to defer U.S. taxes until the profits are brought home—a tax break that Romney actually wants to expand. So according to the JCT, you can’t simply rely on closing tax breaks to pay for lower corporate tax rates as much as Romney promises to do, and it would be even harder if you include the tax break for deferral that Romney wants to expand.
As a result, you would need to find additional revenue to pay for Romney’s big corporate tax cut if you want the tax plan to remain revenue-neutral and avoid increasing the deficit, as Romney has also promised.
One source that the Romney campaign seems to suggest is the economic growth that would result from lower taxes, which would in turn increase revenue, as I wrote about yesterday. “The study ignores the positive benefits to economic growth from both the corporate tax plan and the deficit reduction called for in the Romney plan,” said Chen, of Romney’s campaign. (I contacted the Romney campaign for further elaboration but had received no response as of this afternoon.)
But the dynamic effects of Romney’s corporate tax reform don’t look that significant, either. As my colleague Dylan Matthews explains, the potential economic growth from just cutting corporate rates is weakened when you close corporate tax breaks at the same time to pay for it, as Romney also prescribes. During the George W. Bush administration, for instance, the Treasury Department found that “the combined policy of base broadening and lowering the business tax rate to 28 percent might well have little or no effect on the level of real output in the long run because the economic gain from the lower corporate tax rate may well be largely offset by the economic cost of eliminating accelerated depreciation.” So it’s unlikely that there would much more revenue generated from economic growth stemming from Romney’s corporate rate cut to 25 percent.
In other words, Romney’s corporate tax reform proposal still falls short of paying for itself, based on the statements that his campaign has made so far. For the entire tax plan to remain revenue-neutral, even more tax breaks would have to be eliminated for American households. If the corporate reform proposals are taken into account, as Romney’s campaign advocates, it becomes apparent that the plan actually makes it harder to bring everyone’s individual tax rates down, not easier.