The TPC's detailed calculations showed that - before any reduction of tax deductions - Romney's plan would result in 99.97 percent of those making $1 million a year or more getting a tax cut (compared with what they pay now) and that the cuts would average $256,603 each. But further down the income scale, the benefit would be considerably less. For those making between $50,000 and $75,000, for example, 94 percent would see a tax cut, and it would average $1,226, before any loss of deductions or credits. These cuts are all in addition to those enacted during the Bush administration, and Romney would not allow those to expire as scheduled.
We should add here that TPC's analyses are generated using the same sort of computer modeling of the tax system used by the U.S. Treasury and the Congressional Budget Office. We haven't seen Romney dispute these figures. In fact, when the TPC issued findings on Texas Gov. Rick Perry's tax plan earlier in the GOP nomination fight, Romney issued a press release calling the analysis "objective."
Nevertheless, Romney has insisted that under his tax plan - once he releases the rest of it - the wealthy would pay the same share of the tax burden that they do at present. "I'm not looking for a tax cut for the very wealthiest," Romney told Bob Schieffer on June 17 on CBS' "Face the Nation."
Romney, June 17: … my view is the right way to do that is to limit them [tax preferences] for high-income individuals because I want to keep the progressivity of the code. One– one of the absolute requirements of any tax reform that I have in mind is that people who are at the high end, whether you call them the 1 percent or 2 percent or half a percent, that people at the high end will still pay the same share of the tax burden they're paying now. I'm not looking for a tax cut for the very wealthiest. I'm looking to bring tax rates down for everyone, and, also, to make sure that we stimulate growth by doing so and jobs.
But, when pressed for specifics, Romney told Schieffer that he will "go through that process with Congress as to which of all the different deductions and exemptions" will be eliminated or reduced. In that interview, he said the National Commission on Fiscal Responsibility and Reform issued a report in December 2010 that proved it is "mathematically … possible" to reduce tax rates and reduce the deficit.
That's true - but Romney failed to note that the commission's illustrative tax-reform proposal "taxes capital gains and dividends as ordinary income" (see footnote on page 29), eliminating a tax break that benefits mostly those with high incomes. But Romney's tax plan would "[m]aintain current tax rates on interest, dividends, and capital gains," taking that option off the table. Under current law, capital gains (profits on sale of stock or real estate, for example) are generally taxed at a top rate of 15 percent, while ordinary earnings from salaries or business are taxed at a top rate of 35 percent of income over $388,350. (If the Bush-era tax cuts are allowed to expire, the rate would return to 20 percent.)
So how can Romney design a revenue-neutral plan that would cut income tax rates without disproportionately benefiting the wealthiest, and still maintain the current low rates on capital gains and dividends? That was the subject of the Tax Policy Center's latest report, which immediately renewed the debate over who would benefit - and who would not - under Romney's tax plan.
A Tax Debate, Renewed
The Tax Policy Center issued its report Aug. 1. It's called "On the Distributional Effects of Base-Broadening Income Tax Reform." The report was co-authored by William G. Gale, a former staff economist in President George H.W. Bush's White House in 1991-1992, and Adam Looney, a former senior economist in the Obama White House.
TPC makes clear that the report is not an analysis of "Governor Romney's plan directly, as certain components of his plan are not specified in sufficient detail, nor do we make assumptions regarding what those components might be."
Rather, the center studied the impact of "a revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed." The center determined that Romney's proposals for individual and estate taxes would cost about $360 billion a year, beginning in 2015. Offsetting such steep revenue losses by curbing tax preferences "would require deep reductions in many popular tax benefits," TPC said.
Tax Policy Center, Aug. 1: Offsetting the $360 billion in revenue losses necessitates a reduction of roughly 65 percent of available tax expenditures. Such a reduction by itself would be unprecedented, and would require deep reductions in many popular tax benefits ranging from the mortgage interest deduction, the exclusion for employer-provided health insurance, the deduction for charitable contributions, and benefits for low- and middle-income families and children like the EITC and child tax credit.
The center concluded it is not mathematically possible to design a revenue-neutral plan without providing "large tax cuts" to high-income households.
Tax Policy Center, Aug. 1: Our major conclusion is that a revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed – including reducing marginal tax rates substantially, eliminating the individual alternative minimum tax (AMT) and maintaining all tax breaks for saving and investment – would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.
That was true even though the TPC eliminated or reduced tax expenditures "starting at the top" in an attempt to maintain the progressive nature of the tax code - one of Romney's stated goals. "Even after eliminating all available tax expenditures for households earning more than $200,000, this group still faces a net tax break."
On the day of the report's release, President Obama renewed his attack on Romney's plan in a speechin Ohio.
Obama, Aug. 1: The bulk of this [tax cut] would go to the wealthiest Americans. A lot of it would go to the top 1 percent. Pay attention here - folks making more than $3 million a year - the top one-tenth of 1 percent - they would get a tax cut under Mr. Romney's plan that is worth almost a quarter of a million dollars - $250,000 they would save under his plan.
It's true that the report (page 19) said that those in the top 0.1 percent of taxpayers would receive a $246,652 net tax break. But, as we noted earlier, it's not "under Romney's plan," as the president said. It's under a set of assumptions used by the Tax Policy Center to raise $360 billion a year in revenue by eliminating or reducing tax expenditures.
The report, however, does support Obama's larger point that Romney's plan would likely disproportionately benefit the wealthy.
The Romney campaign dismissed the Tax Policy Center report as "biased," saying it "ignores the positive benefits to economic growth" that would come from other parts of his tax plan - such as reducing the corporate tax rate from 35 percent to 25 percent and broadening the base. In announcing his revised plan in February, Romney said that his entire tax plan - including the corporate tax cuts - will be paid for through a combination of cutting spending, broadening the corporate tax base, and placing "some curbs on personal tax deductions, exemptions and credits."
It is true that the center's report did not consider the impact of the corporate tax changes. The report said: "Any reductions in revenue due to the lower corporate rate would be offset by reducing corporate tax preferences. As a result, we examine only changes to the individual income tax, alternative minimum tax, payroll tax, and estate tax. We ignore the effect of the proposal to reduce the corporate rate to 25 percent."
William McBride of the Tax Foundation, a pro-business nonprofit, writes that reducing the corporate tax rate will spur 1 percent to 2 percent more economic growth.
But McBride also writes that TPC "correctly identified the Romney plan as a tax cut, at least in static terms, that accrues mainly to high-income earners." That's not a bad thing, he argues, because the U.S. already has "the most progressive income tax system in the industrialized world," and it is "well past time to consider the costs and benefits of such an extremely progressive system."
But there's reason to doubt that Romney's corporate tax-rate cut would produce the growth that Romney and McBride predict. McBride cited an economic study from 2004, which looked at data from 70 countries and cited estimates suggesting that cutting the corporate tax rate by 10 percentage points can increase the annual growth rate by around 1.1 percent or 1.8 percent, depending on the method used.
But Romney would offset his rate cut by eliminating corporate tax preferences in order to bring in the same amount of revenue. When the Treasury Department's Office of Tax Policy looked at such a plan in 2007 (under President George W. Bush), it concluded that it was possible to cut the top corporate rate to 28 percent without losing revenue through various base-broadening provisions. But it also warned that "little or no" economic growth might result (see page 48):
U.S. Treasury, Dec. 20, 2007: [T]he Treasury Department estimates 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.
If accelerated depreciation is maintained, Treasury estimated that the top corporate rate could be cut only to 31 percent without losing revenue. That would result in a long-run increase of 0.5 percent in economic output, Treasury said.
The Romney campaign insists that economic growth will somehow make its tax plan work as promised, but we've seen nothing to support that. Romney's experts predict about a 1 percent increase in growth. Looney, one of the authors of the Tax Policy Center study, calls that "an implausibly large estimate," but nevertheless ran the study again assuming that growth rate and an additional 12 million jobs. The result, he told ABC News, is that it would offset only about 15 percent of Romney's revenue loss from individual tax cuts.
"Even in that case, there's still a shift in the tax burden from high-income taxpayers to low- and or middle-income taxpayers," Looney told ABC News. "It's smaller, but it would require a net tax increase on the middle class."
The Tax Foundation's McBride argues that a less progressive income tax system is still a good trade-off for increased economic growth. "[L]ower rates combined with a broader tax base should lead to significant economic growth," McBride writes. "The benefits of such growth will benefit some more than others, but arguably the currently unemployed will receive the greatest benefit in the form of a job."
Here we should note that the study McBride cites to support his prediction of a 1 percent to 2 percent increase in growth refers only to the effect of a corporate rate cut, not a cut in individual rates. That study, using data from 70 countries, concluded that tax rates on individual labor - whether it's the average rate or the top marginal rate - "are not significantly associated with economic growth."
But Romney is not arguing that more jobs and growth should compensate for a tax system that puts a greater burden, or a larger share of a reduced burden, on middle-income taxpayers. He's promising that the share of taxes won't change. He has failed to prove that's possible. And based on available evidence, we don't see that it is.
– by Eugene Kiely and Brooks Jackson
Correction, Aug. 6: Our original story stated that the Tax Foundation, as an institution, "supports" the Romney tax plan. In a formal sense, it does not, and we have removed that statement. We also note here that the foundation's expert, William McBride, awarded a grade of "C-plus" to the Romney plan in a posting on the organization's official blog on Feb. 24, just below the B-minus rating given to Ron Paul's plan. "Ron Paul still receives the highest grade, mainly because his plan eliminates taxes on capital gains and dividends and lowers the corporate rate to 15 percent," McBride wrote.
In addition, the Tax Foundation's general counsel, Joseph Henchman, has sent us word that he objects to our description of the Tax Foundation as "pro-business" (a description we have used in the past) and asks that we refer to it instead as "non-partisan." He states, "[W]e are an independent organization guided not by business demands but by the principles of good tax policy."
We are happy to note the objection, and we don't question the foundation's lack of direct ties to political parties. We agree that it is "nonpartisan" in that sense. But it is not neutral in the tax policies for which it has long advocated. So we will stand with our "pro-business" description, which we believe is obvious and justified.
Here's why: The organization states that it was founded by "a small group of business executives" in 1937, during President Franklin D. Roosevelt's presidency, out of concern for rising federal taxation and spending. The current board chairman is David P. Lewis of Eli Lilly and Company, the pharmaceutical giant. It states that one-third of its funding comes in the form of corporate donations, which make up the largest single category of revenues. Past winners of its annual "distinguished service awards" have included the CEOs of Honeywell, Eli Lilly, Exxon Mobil, Delphi Corp., Verizon, Texaco, Hewlett-Packard, Alcoa, General Electric and Koch Industries. Its president, Scott Hodge, has written: "Progressively higher income tax rates – ‘taxing the rich' – cause many productive people to work less and retire earlier, draining the economy and destroying jobs."
[h=2]Sources[/h]Parker, Ashley and Rich, Motoko. "Romney Lays Out His Economic Plan." The New York Times. 16 Sep 2011.
"Believe in America: Mitt Romney's Plan for Jobs and Economic Growth." Romney for President. 6 Sep 2011.
"Mitt Romney's 59 Economic Flavors." The Wall Street Journal. 7 Sep 2011.
Press release. "Restore America's Promise: More Jobs, Less Debt, Smaller Government." Romney for President. 22 Feb 2012.
O'Connor, Patrick and Murray, Sara. "Romney Tax Plan Sets Stage for fight." The Wall Street Journal. 23 Feb 2012.
Bailey, Holly. "Mitt Romney's tax musings suggest he wants the rich to pay more." ABC News. 16 Apr 2012.
Youngman, Sam and Donna Smith. "Romney's remarks on limiting tax deductions draw fire." Reuters. 16 Apr 2012.
Tax Policy Center. "The Romney Plan (Updated)." 1 Mar 2012.
Tax Policy Center. "Overview of the Tax Policy Center Microsimulation Model." 12 Aug 2008.
Sarlin, Benjy. "Romney Camp Cited Same Think Tank They Now Denounce As ‘Liberal'." Talking Points Memo. 1 Aug 2012.
"Face the Nation." Transcript. CBS News. 17 Jun 2012.
The National Commission on Fiscal Responsibility and Reform. "The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform." Dec 2010.
"Bush tax cuts set to expire; big changes coming for U.S. taxpayers." Indianapolis Star. 30 Jun 2012.
Brown, Samuel et al. "On the Distributional Effects of Base-Broadening Income Tax Reform." Tax Policy Center. 1 Aug 2012.
Brookings Institution. William G. Gale. Undated, accessed 3 Aug 2012.
Brookings Institution. Adam Looney. Undated, accessed 3 Aug 2012.
White House. "Remarks by the President at Campaign Event." 1 Aug 2012.
Press release. "Romney Campaign: Glaring Gaps Invalidate Tax Analysis." Romney for President. 1 Aug 2012.
Romney, Mitt. "A Tax Reform to Restore America's Prosperity." The Wall Street Journal. 23 Feb 2012.
McBride, William. "TPC's Analysis of Romney's Plan Misses the Point." Tax Foundation. 1 Aug 2012.
Lee, Young and Roger H. Gordon. "Tax structure and economic growth." Journal of Public Economies. 25 Sep 2004.
Bingham, Amy. "How Romney's Tax Plan Could Raise Middle-Class Taxes." ABC News. 3 Aug 2012.
