The truth about Romney’s ‘six studies’

October 16, 2012

Mitt Romney says that “six studies" prove that his tax plan adds up. They don't.

(Jim Young/Reuters)

Some of them reveal how Romney’s tax plan could conceivably achieve what he’s promised, under certain conditions — or at least come closer to it. 

But others contradict the stated objectives of Romney’s tax plan and make questionable assertions about how he’d pay for his rate cuts, leaving some central questions about Romney’s tax plan unanswered and fueling the ongoing calls for more specifics.

Not all of the “six studies” are formal quantitative research: Three are online articles and one is an op-ed. But all try to answer the essential conundrum that the Tax Policy Center described in its original analysis: Romney wants to pay for $5 trillion in tax cuts by getting rid of tax deductions and exclusions that benefit Americans earning more than $200,000.

But getting rid of those upper-income tax breaks doesn’t fully pay for the rate cuts, the Tax Policy Center says: The only way to do this without increasing the deficit would be to raise taxes on lower-income Americans by an average of $2,000 to make up for a $86 billion annual shortfall — a finding that the Obama campaign now routinely cites in its attack ads.

Two of the “studies” the Romney campaign has cited are an op-ed and a blog post by Harvard economist Martin Feldstein. He says it’s possible to finance Romney’s tax cuts fully by closing loopholes and deductions, but only if you raise taxes on those households with incomes between $100,000 and $200,000.

But by Romney’s own definition these households would count as middle-class. “Middle income is $200,000 to $250,000 and less,” he told ABC in September. So Feldstein essentially comes to the same conclusion as the Tax Policy Center: To make his tax plan add up, closing loopholes on those Romney defines as wealthy won’t be enough.

Finding savings elsewhere

Two researchers at the American Enterprise Institute argue there’s another way to make the Romney plan work without additionally burdening middle-income households. Alex Brill and Matt Jensen point out that the Tax Policy Center took two major sources of revenue off the table that would be key targets in a Romney tax overhaul, as they predominantly benefit high-income taxpayers.

According to Jensen, repealing tax exclusions for life-insurance savings and state and local municipal bonds would “net upwards of $90 billion” — more than enough to fill the shortfall to avoid hitting the middle-class or raising the deficit.

But independent tax experts and economists say the savings are only likely to be a fraction of that amount, and that mining these sources for more revenue could also have adverse consequences for ordinary Americans.

Most of the subsidy for municipal bonds goes to state and local governments that finance them, with only 20 percent going to wealthy investors, according to analysts cited by the Congressional Budget Office. In 2011, for instance, bond issuers got $24.4 billion, but wealthy bondholders received just a $6 billion subsidy — a drop in the bucket in terms of paying for Romney’s tax cuts.

Taking away the tax exemption for state and local governments would go significantly farther in financing Romney’s tax cuts. But that would also risk punishing ordinary, middle-income Americans due to the hit to state and local governments. “It would put taxpayers more on the hook,” says Matt Fabian, managing director of Municipal Market Advisors, who speculates that “state and local taxes would need to rise to pay for higher financing costs.”

Romney’s defenders have a more straightforward case when it comes to the tax-exemption for investing life-insurance savings, which the Tax Policy Center says would raise between $13 and $20 billion a year. “Most policy analysts would say this exclusion doesn’t make sense,” says Daniel Shaviro, a tax law professor at New York University. “There is no particular reason to exclude the investment component of life insurance savings.”

Shaviro points out, however, that including this would be contrary to Romney’s stated goal of “promoting savings and investment,” which is another major plank of his tax reform plan and why the Tax Policy Center originally excluded that provision, along with the municipal bond exclusion, from its original analysis.

Finally, the Tax Policy Center assumed that Romney’s tax plan would pay for the repeal of $29 billion in Obamacare tax hikes, given his vow to junk the entire health reform law. AEI points out that Romney has never promised to include health reform as part of his tax overhaul, so it shouldn’t be factored in. Together with the life insurance exclusion, the change would shrink the shortfall in Romney’s plan to $37 billion.

In a similar vein, Curtis Dubay, an analyst at the Heritage Foundation, argues that there’s yet another pot of money available: Romney’s repeal of the estate tax would produce an additional $19 billion in revenue, because it would change the way that capital gains on inherited assets are taxed.

In reality, Shaviro says, that pool of money is also smaller than it may seem: $19 billion is the accumulated value of these assets — the difference between the price at purchase and the inheritance — if they were all taxed immediately after the owner’s death. That’s something that neither Dubay nor recent proponents of estate-tax repeal want to do, he explains.

Is growth the answer?

Finally, Romney and his defenders revive a familiar pillar of Republican tax policy: They argue that his across-the-board tax cuts will generate far more economic growth than his critics are accounting for, helping the cuts pay for themselves. The primary source is Princeton economist Harvey Rosen, who calculates that Romney’s across-the-board tax cuts would increase economic growth by at least 3 percentage points each year, producing enough revenue to offset the cost of the rate cuts.

But other economists believe Rosen’s growth projections are too rosy: They point out that the Bush tax cuts weren’t great at fueling short- or medium-term growth, for example, and that Romney would need rapid short-term growth to keep his cuts from running up a huge deficit.

“It’s certainly right to talk about growth as a factor that might affect tax revenues. But this model isn’t that useful for estimating the effects in five to 10 years,” says Alan Auerbach, an economist at the University of California-Berkeley, who points out that one of the models that Rosen uses to guide his work assumes growth under full unemployment, with Romney’s tax cuts already fully paid for.

Under mounting pressure to explain how his plan holds up, Romney has recently floated another tax reform idea, which would cap individual deductions anywhere between $17,000 and $50,000 rather than close specific loopholes.

But the deduction cap runs into some of the same problems. A deduction cap at the lower level could raise taxes for middle-class homeowners who use the mortgage interest deduction in areas where real-estate values are high. And a cap at the higher level wouldn’t be likely to raise enough revenue to pay for the rate cuts.

Why, then, did this approach work for Reagan and Congressional Democrats in 1986, if it’s so challenging to pull off now? While the overarching principle of base-broadening, rate-lowering reform is similar, there are some key differences: The reformers behind the 1986 plan were willing and able to find more ways to pay for their rate cuts: They raised the capital gains tax rather than lowering it, as Romney proposes, and they were able to close major tax shelters than no longer exist.

William Gale, who co-authored the Tax Policy Center study, says that the new details that Romney has offered are a step in the right direction. But he maintains that they still fall short of paying for all $5 trillion in tax cuts and that his original conclusion still stands. “The message was that he’s overpromised,” says Gale. “He’s overpromised even further now.”

The Romney campaign did not respond to requests for comment.

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