What do we know about Romney’s tax and budget plans?

The first Obama/Romney debate on Wednesday had a playground quality to it: One contestant would say “You did X”, the other would say “No I didn’t”, and then either Obama would let it drop or Romney would repeat “Yes you did!”. Jim Lehrer refused to play teacher, so it was left to fact-checkers and other pundits to determine the truth afterwards.

On no subject was the truth less obvious than on Romney’s budget plans. President Obama laid it out like this:

Governor Romney’s central economic plan calls for a $5 trillion tax cut — on top of the extension of the Bush tax cuts — that’s another trillion dollars — and $2 trillion in additional military spending that the military hasn’t asked for. That’s $8 trillion. How we pay for that, reduce the deficit, and make the investments that we need to make, without dumping those costs onto middle-class Americans, I think is one of the central questions of this campaign.

And Governor Romney flatly denied it:

I don’t have a $5 trillion tax cut. I don’t have a tax cut of a scale that you’re talking about. My view is that we ought to provide tax relief to people in the middle class. But I’m not going to reduce the share of taxes paid by high-income people.

Fact-checkers tried to apply their usual categories — true, false, misleading — but often they just added to the confusion. CNN, for example, said Obama’s charge was false, but graded Romney’s denial as “incomplete”, whatever that means.

Here’s what’s going on: The press is afraid of bias accusations, so it hides behind rules of objectivity that have gotten increasingly technical. Campaigns have gotten good at manipulating those rules, so the objective press has a hard time announcing simple judgments. Judgments, then, are left to the partisan voices, who just increase the noise.

The Weekly Sift makes a lesser claim: I’m not objective, I just try to be honest and give you enough links to check my accuracy. So let’s see if some common sense can cut through the confusion.

The $5 trillion tax cut. Mitt Romney has proposed a tax plan, sort of. On his web site, the full plan to “create 12 million new jobs” has four “economic pillars”, one of which is:

Reform The Nation’s Tax Code To Increase Growth And Job Creation.

o Reduce individual marginal income tax rates across-the-board by 20 percent, while keeping current low tax rates on dividends and capital gains. Reduce the corporate income tax rate – the highest in the world – to 25 percent.
o Broaden the tax base to ensure that tax reform is revenue-neutral.

The idea is that people pay a lower tax rate, but that more income gets taxed (“broaden the tax base”), so the government winds up with the same amount of money (“revenue neutral”).

There’s no reason that can’t work in theory, but notice that the marginal-tax-rate cut (the attractive part of the plan) is specified at 20%, while “broaden the tax base” (the unattractive part) is left vague. Elsewhere, Romney promises to eliminate the alternate minimum tax (which falls almost entirely on the wealthy) and the federal estate tax (which only applies to multi-million-dollar estates).

So if you evaluate Romney’s plan by what he has specified — the tax cuts — it’s a $5 trillion tax cut over the next ten years. Now, that’s not entirely fair, because whatever plan he eventually proposes to Congress would also specify the base-broadening part. The rate-cut is part of a “revenue neutral” tax plan in the same way that Cocoa Puffs are “part of this complete breakfast”.

So Romney is technically correct in saying “I don’t have a $5 trillion tax cut.” But let me flesh that out by putting true words in Romney’s mouth: “I don’t have a plan to cut government revenue by $5 trillion. I have a revenue-neutral plan, but the only part of it I’m willing to spell out before the election cuts federal revenue by $5 trillion.”

So he still needs to specify what currently untaxed income will be taxed in order to raise the $5 trillion that his plan needs to fulfill his revenue-neutral pledge.

Growth or funny money? If you read the details on the web site, a big chunk of that previously untaxed income is money that just wouldn’t exist otherwise. Romney’s plan estimates that the economy will grow at a 2.5% rate with the current tax system, but that under his plan (including his similarly vague plan to de-regulate business and other plans he considers growth-inducing) the economy will grow at a 4% rate.

When you compound that over ten years, the difference is huge. Current GDP is around $15 trillion per year. Ten years of 2.5% growth get you to $19 trillion, but ten years of 4% growth get you to $22 trillion, which is almost 16% bigger. So in the tenth year, the 20% rate cut is almost balanced by the growth alone. The extra income you need to broaden the tax base is almost entirely manna that fell from Heaven.

The question is whether you believe any of that. The idea that tax cuts create growth is dogma among conservatives, but recent history doesn’t bear them out. We were promised the cornucopia of growth when Bush cut taxes in 2001 and 2003, but it didn’t arrive. Even with a bubble-based illusion of growth, median household income declined. Atlantic’s Ronald Brownstein reports:

When Bill Clinton left office after 2000, the median income — the income line around which half of households come in above, and half fall below — stood at $52,500 (measured in inflation-adjusted 2008 dollars). When Bush left office after 2008, the median income had fallen to $50,303. That’s a decline of 4.2 per cent. That leaves Bush with the dubious distinction of becoming the only president in recent history to preside over an income decline through two presidential terms, notes Lawrence Mishel, president of the left-leaning Economic Policy Institute.

In the debate, Romney refused any historical comparison. (“My plan is not like anything that’s been tried before.”) But his web site justifies the growth assumptions by looking at the recovery from the 1981-82 recession during the Reagan administration. The problem is that this recession (like the one before it) looks nothing like the 1981-82 recession. The Reagan recession was brought on by the high interest rates (over 20%!) that the Fed imposed to kill off the inflation plague of the 1970s. As the Fed cut rates back to more normal levels, the economy could resume a normal growth pattern, plus make up for lost time.

The last two recessions were set off by popping bubbles: the dot-com bubble of the late 90s and the housing bubble of the Bush years. Recoveries from bubbles are slower, because the previous level was illusory. Let me repeat that: The Obama Recovery is slower than Reagan’s because the level we are trying to recover to was a mirage.

Even if we grant Romney’s 4% growth assumption, the difference in the first year would be small, while the tax-cut hit would be as large as ever. Would the Tea Party types in Congress really accept a budget where the deficit continued to climb for several years while we waited for growth to catch up?

I personally have no confidence in Romney’s growth assumptions. If he’s really going to broaden the tax base, he’s going to have to extend taxes to real income, not imaginary income from the growth fairy.

Deductions. The one real base-broadening idea Romney has floated is to cap deductions. In the debate he said:

But in order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions, so that we keep taking in the same money when you also account for growth.

One trial balloon suggested that deductions be capped at $17,000, though in the debate Romney refused to be pinned down to any specific number:

what are the various ways we could bring down deductions, for instance? One way, for instance, would be to have a single number. Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people.

That approach has a problem: If you don’t accept Romney’s growth assumption, eliminating all deductions for upper-income people doesn’t replace the $5 trillion in revenue. So he’s forced to break his pledge not to raise taxes on middle-income people — not all middle-income people, but quite a few. When you add up mortgage interest, state and local taxes, medical expenses, and so on, it’s not hard for a household of slightly-above-average income to hit a $17,000 cap, and even easier to hit some much-lower cap that would really raise $5 trillion.

I know because I did my parents’ taxes last year. In 2011, my parents were in “the 47%” of people who paid no federal income tax. My mother died that year, and both parents spent time in nursing homes, so their medical expenses wiped out their $50,000 of income. Under the Romney plan, with a $17K deduction cap, they’d have owed thousands.

So Al Sharpton is right: “This election isn’t about Obama, it’s about your momma.”

Tax fairness. Romney’s pledge not to favor the rich in his tax plan is very carefully worded: “I’m not going to reduce the share of taxes paid by high-income people.”

This echoes a common conservative framing of taxes. Over the last 30 years, the share of the national income that has gone to the very rich has skyrocketed. Under Romney’s policies, it would presumably continue to skyrocket, because of de-regulation, non-enforcement of antitrust laws, and so on. But all he pledges is to keep their share of taxes the same.

Think about it this way: Imagine a two-person economy that makes $10, with $6 going to the richer guy and $4 to the poorer guy. Imagine their government collects $2 in taxes; let’s say $1.50 from the richer guy and 50 cents from the poorer guy, so that their after-tax incomes are $5.50 and $4.50.

Now imagine that inequality increases, so that the rich guy makes $8 and the poor guy $2. But suppose the government keeps their taxes the same: The rich guy still pays $1.50 and the poor guy 50 cents, so that their after-tax incomes are $6.50 and $1.50.

That system would fulfill Romney’s tax-fairness pledge: the rich guy still pays 75% of the taxes.  But it isn’t fair at all. The rich guy’s tax rate goes down from 25% to 18.75%. The poor guy’s goes up from 12.5% to 25%.

In short: When the rich make more of the money, their share of the taxes should increase, not stay the same.

Spending cuts. The situation on the spending side of Romney’s plan is similar: He has spelled out his spending increasesdefense, mostly. And he has pledged not to cut Medicare of Social Security benefits for anyone currently over 55. In other words, even if he serves eight years, he will never submit a budget that shows a spending cut in either of those two giant entitlements.

But he also pledges to get federal spending down to 20% of GDP by 2016, which (even with his optimistic 4% growth assumption) means $500 billion of annual cuts. The only sizable cut he identifies on his web site is $95 billion by repealing ObamaCare. But repealing ObamaCare also repeals the cost savings and tax increases it contains, and so increases the deficit rather than decreasing it. And “I want to take that $716 billion you’ve cut and put it back into Medicare.” not use it to decrease the deficit. And he was open to retaining the improved drug benefits ObamaCare adds to Medicare.

So the ObamaCare cut is illusion. It won’t cut the deficit.

Romney’s other specified cuts are Amtrak; the national endowments for art, humanities, and public broadcasting (bye-bye, Big Bird); the Legal Services Corporation; family planning; and foreign aid. By Romney’s own account, the total savings (other than ObamaCare) is only $2.6 billion of the $500 billion he says he needs.

So he has specified about half a percent of the cuts his budget needs under his optimistic assumptions. And the biggest parts of the budget — defense, Social Security, Medicare — are off limits. The non-ObamaCare cuts he has specified are insufficient even to cover the increase he wants in defense spending.

That’s why Obama accused him of “gutting our investments in schools and education”, and how Romney was able to deny it: “I reject the idea that I don’t believe in great teachers or more teachers. … I’m not going to cut education funding. I don’t have any plan to cut education funding and — and grants that go to people going to college.”

“I don’t have any plan to cut …” is a universal dodge for Romney. Because he doesn’t have any plan to cut spending, Romney can deny any specific thing you imagine must be cut to plug the huge hole in his budget. The Ryan budget is a little more specific about cuts, but Romney disclaims that as well. His campaign says “as president he will be putting together his own plan.” And Romney has emphasized that he, not Ryan, is “the guy running for president.”

In short, what Romney has given us is a lot of specifics that cut taxes and raise spending, coupled with vague promises to make it all come out right somehow. So electing Romney is sort of like hiring a trainer who promises you can eat more and lose weight. He has pictures of the lavish meals his plan will let you eat, and a graph of how your weight will go down.

How does it work? “Exercise” he says. What exercise? When? How much? “We can work all that out later.”

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  • David Wiegleb  On October 8, 2012 at 12:59 pm

    Thank you so much for this breakdown. It did an excellent job of separating the wheat from the chaff in a neutral way. This should be distributed everywhere. I’ll certainly be reposting it.

    One small typo: in the “Spending Cuts” section, I believe the phrase “means $500 of annual cuts” should read “means $500 billion of annual cuts”.

    • weeklysift  On October 11, 2012 at 10:58 am

      You are correct about the $500 billion. I have made the change. I suppose I could have made the change and then told you I had no idea what you were talking about. But what kind of a guy would shake the Etch-a-Sketch that way?

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