How Heritage made Mitt Romney’s tax plan add up…sort of

September 26, 2012

Mitt Romney's tax plan is "mathematically impossible," according to analysts at the Tax Policy Center, who calculated that Romney would have to raise taxes on lower- and middle-income Americans by $86 billion for the numbers to add up. Curtis Dubay of the Heritage Foundation says they're wrong.


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In a new paper, Dubay says that the Tax Policy Center has made flawed assumptions, and that Romney's tax plan comes far closer to adding up once these errors have been corrected. The problem is, the inherent vagueness of Romney's tax plan makes it hard to tell which interpretation is correct.

Romney continues to avoid describing the specific tax loopholes and exemptions that he'd eliminate in order to lower all individual rates by 20 percent while not adding to the deficit. As such, the Tax Policy Center made certain assumptions about which exemptions would be protected based on other principles that he laid out in his tax plan: Namely, that Romney would prioritize closing loopholes that benefit high-income taxpayers, as well as promote incentives for savings and incentives. 

Dubay argues that the Tax Policy Center took certain tax exemptions off the table for no good reason—in other words, he believes that Romney would be willing to eliminate tax breaks that TPC deemed off-limits, making it far more feasible for the plan to work without putting the burden on lower-income Americans.

First, Dubay faults the Tax Policy Center for deeming tax exclusions of interest on life insurance savings and municipal bond interest off limits. These provisions tend to benefit high-income taxpayers the most, Dubay says. Since Romney has promised to go after these kinds of tax breaks first, they shouldn't be "pre-emptively" ruled out. Eliminating these two exemptions alone would save "a minimum of $45 billion," Dubay concludes.

Secondly, Dubay faults the Tax Policy Center for declining to eliminate a provision that typically allows the people to pay lower capital-gains taxes on estates they inherit. Currently, if people sell property they inherit, they pay capital gains tax on the difference between the property's value when it's sold and its value when they inherit it. Dubay argues that if you got rid of the estate tax, that policy should change. Instead, heirs should pay taxes on the difference between a property's sale price and its value when it was bought by their ancestor, not at inheritance. Eliminating this capital-gains provision of the estate tax would save another $19 billion, he states.

In addition, at least $22 billion could come from "phasing out personal exemptions for high-income taxpayers or capping their itemized deductions," he adds. Romney hasn't proposed this specifically; In fact, it's part of Obama's own platform, and Dubay admits that he's not a fan of it. But the change basically falls in line with Romney's overall tax strategy. Dubay argues that all three changes would make up enough revenue from high earners to negate the tax increase on low- and middle-income Americans that the Tax Policy Center believes is inevitable.

In its defense, the Tax Policy Center says that its analysis is entirely consistent with Romney's tax plan and that Dubay's proposed changes wouldn't bring in enough revenue to avoid a tax hike on lower-income Americans. 

William Gale, a co-author of the TPC study, points out that Romney's tax plan promises to promote savings and investment. So the study assumed that Romney would preserve tax exclusions like those for municipal bond interest and life insurance savings, as well as the current pro-savings estate tax rules, to avoid penalizing such activities.

Adam Looney, another co-author, adds that Dubay exaggerates how much revenue one could raise through an estate tax change. The $19 billion figure is how less the current system takes in than if all assets were taxed at capital gains rates at death. That's a much more dramatic change than the one Dubay is proposing, so Dubay's change will likely bring in "much less revenue than implied by the tax expenditure estimate," Looney says. If the change brings in less than $19 billion, then avoiding tax cuts on the middle-class is harder than Heritage thinks it is.

So who is ultimately right, Heritage or the Tax Policy Center? On the one hand, Romney does specify in his platform that he wants to reform the tax code to promote savings and investment, as the TPC claims. But in his economic plan, Romney says he wants to achieve that boost in savings and investment through eliminating capital gains taxes for lower- and middle-income Americans.

Does he believe that savings and investment tax exemptions should be protected, too? Since Romney has given so few specifics, it's unclear. So for right now, both Heritage and the Tax Policy Center could be making assumptions that hold true.

Dylan Matthews contributed to this report.

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