Jeff Gelles: Skepticism surrounds Romney's tax cuts, base-broadening plans

Bill Locke watches the debate at the United Steelworkers Union Hall in Henderson, Nev.
Bill Locke watches the debate at the United Steelworkers Union Hall in Henderson, Nev. (JULIE JACOBSON / AP)
Posted: October 08, 2012

Nothing in the world is certain except death and taxes, Benjamin Franklin suggested more than 220 years ago. What Franklin didn't say, but probably knew, is that political dogfights over taxes are almost as predictable, a point illustrated yet again at last week's presidential debate.

President Obama repeatedly said GOP nominee Mitt Romney has proposed $5 trillion in tax cuts "skewed toward the wealthy" on top of extending the Bush-era tax cuts, which the president wants to end for upper-income families. Obama warned that the result would be deep cuts in spending on things such as education, science, and research - the only way to pay for such a large cut, he said, "without either burdening the middle class or blowing up our deficit."

Romney repeatedly challenged Obama's assertions. "So you may keep referring to it as a $5 trillion tax cut, but that's not my plan," the former Massachusetts governor said. Romney went on to promise that his plan would simultaneously "lower taxes on middle-income families" and "not reduce the taxes paid by high-income Americans," all without the stain of more red ink. "I want to underline that: no tax cut that adds to the deficit," he said.

It doesn't take a Franklin to know why people everywhere fight over taxes. Even if we agree on how the money is used - and we rarely do - any tax is money from someone's pocket. Who pays how much is one of the perennial battles of politics and governance.

Still, the back-and-forth was disturbing to anyone simply trying to understand Romney's tax proposals and his assurances about their effects on revenue and relative tax burdens - a set of assertions Obama said were impossible to reconcile on the basis of plain math.

Later on in the debate, Romney said: "Mr. President, you're entitled as the president to your own airplane and to your own house, but not to your own facts."

It's a good point - for any candidate. So let's forget for a moment who people think won or lost Wednesday, and focus on what we know about the facts.

First of all, this isn't just a fight over how our tax burden is shared and our money spent, even if those are hot buttons in today's campaign, thanks to Ayn Rand-style Republican rhetoric about "makers and takers." Any way they're sliced, taxes can have economic effects. It's no surprise that as Romney and Obama talked taxes, each referred repeatedly to a common goal: spurring an economy stuck in low gear since the 2008 financial crisis.

Since he proposed his tax plan in February, Romney has touted its chief feature - an across-the-board 20 percent rate cut, which would drop the top marginal rate to 28 percent - as a boon to the economy.

The plan also would make other key changes, including eliminating the federal estate tax and the Alternative Minimum Tax, designed decades ago to limit high-income taxpayers' ability to shield income from IRS reach. Reliable outside experts put a price tag on those changes at close at $5 trillion over 10 years.

Tax-cutting is familiar territory for a GOP candidate - it's been party gospel since the Reagan era - but Romney's comes with an unusual twist. Since he is proposing cuts at a time when the country already faces deep deficits, along with growing distrust of claims that tax cuts reliably "pay for themselves" by spurring growth, he included a call for base-broadening - increasing the portion of income subject to taxation.

"Higher-income Americans in particular will see limits placed on deductions, exemptions, and credits that are currently available," the campaign said. "The result will be a pro-growth tax code that still raises the necessary revenue, retains the existing progressivity, and ensures that middle-income Americans see real tax relief."

Romney has now made a remarkable set of promises: to reduce all rates by 20 percent; to cut taxes on the middle class; to not cut taxes on the wealthy; and to not blow up the deficit. The question is: Can they all be reconciled?

A study this summer by the nonpartisan Tax Policy Center - one that Romney disputed Wednesday, though not by name - basically says they can't, if Romney sticks to his promise of "revenue neutrality" and doesn't resort to wishful assumptions about growth.

The study's authors estimate, for instance, that the average taxpayer earning more than $1 million a year would see a net tax cut of about $87,100, despite having a higher taxable income because of base-broadening. Taxpayers earning between $100,000 and $200,000 a year would pay an extra $1,300 a year despite the lower marginal rates, the center said.

Overall, families earning less than $200,000 would face an average tax increase of about $2,000, the study said.

Romney challenged the study at last week's debate, saying that "there are six other studies that looked at the study you describe and say it's completely wrong." But at least one of the analyses the Romney campaign has identified to outside fact-checkers - an analysis by Harvard economist Martin Feldstein published in August by the Wall Street Journal - isn't as supportive as he made it sound.

Looking at 2009 IRS data, Feldstein wrote that the government could capture enough revenue, about $191 billion, to offset Romney's tax cuts by limiting the value of deductions to taxpayers earning down to $100,000 a year. The trouble is, that's a threshold many would consider "middle income."

Romney has unusual room to dispute outside analyses because he has refused to provide details of his proposal, such as which deductions, credits, and loopholes he would target. But he has limited options, especially since he has vowed to maintain the current tax code's preference for capital gains - the reduced rate that enabled the Romneys to pay an effective rate of just 14.1 percent last year on about $13.7 million in taxable income.

One obvious target is the mortgage-interest deduction, which is already limited in value for wealthy taxpayers - interest is deductible only on mortgages, or the portion of a mortgage, less than about $1.1 million. Another is the deduction for state and local taxes. Other possibilities include further limiting charitable-giving deductions and starting to tax the cost of employer-sponsored health insurance.

Would Romney's proposed cuts spur economic growth? That's the hope voiced by Princeton economist Harvey S. Rosen, whose work was also cited by Romney's campaign: When taxpayers have less incentive to avoid taxes, he says, they'll act in more productive ways.

There are reasons to be skeptical about such hopes, whose advocates often point to the base-broadening tax reform of 1986. That bipartisan plan lowered top rates from 50 percent to 28 percent and eliminated the capital-gains preference, plus a wide variety of deductions and loopholes.

But before that reform, there was lots of low-hanging fruit, such as passive real estate investments that provided fictional losses to high-income taxpayers. Most such deals are long gone, and Romney isn't likely to end other controversial preferences, such as the ability of hedge-fund managers to be paid in capital gains.

Another reason for skepticism is that tax cuts are a classic form of Keynesian stimulus, only likely to work if they actually put more money to spend in people's pockets. That won't happen, at least on average, if Romney keeps to his promise of revenue neutrality. The likeliest result may be a large tax cut for the truly wealthy, who stand to benefit the most from the cut in the top marginal rate, offset by higher effective rates for those in the $100,000- to $250,000-a-year range, who lose valuable credits and deductions.

It's hard to argue with Rosen's conclusion: that "economic growth should take center stage in the ongoing national conversation over tax policy."

But to get there by Nov. 6, Romney needs to provide a few more details.


Contact Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.

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