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Could Romney’s plan actually cut revenue?

October 28, 2012

By ALAN REYNOLDS

The Obama-Biden team continues to insist that Romney’s plan to cut tax rates and cap deductions would reduce federal revenue by $5 trillion over 10 years. Where did that number come from?

Most media “fact checkers” pretend the $5 trillion is not just another phony number made-up by politicians, but the result of solemn scholarship that only biased partisans could possibly question. The Associated Press, for example, said, “The Tax Policy Center, a Washington research group, says in a study that the tax cuts proposed by Romney would reduce federal tax revenues by about $5 trillion over 10 years. Romney’s campaign cites studies by conservative academics and... the conservative American Enterprise Institute (AEI)” Both the AEI and TPC are Washington research groups, and both are nonpartisan and nonprofit, yet the media habitually dismiss critics of the Tax Policy Center as conservative while never even hinting that the Brookings Institution and Urban Institute (who run the TPC) might be liberal. Nonpartisan or not, the $5 trillion figure is a total fraud.

The TPC critique of Romney’s tax reform was co-authored by Adam Looney, a member of Obama’s Council of Economic Advisers in 2009-2010. Bill Gale, another author, was an adviser to Bush 41, who enacted the 1991 phase-out of deductions and exemptions at higher incomes, which Obama now hopes to restore. They may be nonpartisan, but they are not non-ideological. And they made big mistakes.

FactCheck.org repeated that, “By themselves, those cuts [proposed by Romney] would, according to the nonpartisan Tax Policy Center, lower federal tax liability by ‘about $480 billion in calendar year 2015’ compared with current tax policy, with Bush cuts left in place. The Obama campaign has extrapolated that figure out over 10 years, coming up with a $5 trillion figure over a decade.” The TPC never issued any 10-year estimate, and never explained how they came up with their 1-year estimate except to admit it was “completely static.”

Amazingly, FactCheck went on to say, “The center determined that Romney’s proposals for individual and estate taxes would cost about $360 billion a year, beginning in 2015.” Well, which is it — $480 billion or $360 billion? The correct answer is neither.

The $480 billion figure from a March 1 study was revised to $456 billion on August 1, but neither figure has the slightest plausibility because they include at least $123 billion from repealing Obamacare’s 3.8 percent surtax on investment income. Since Romney would stop the added spending in the Affordable Care Act, he would not need the added taxes.

When the TCP study wrongly claimed the entire $456 billion would have to offset by lower deductions, that may have been “nonpartisan” but it was also nonsensical. The 3.8 percent surtax was earmarked to help pay for a vast expansion of Medicaid and gigantic subsidies to the health insurance industry. Fans of ObamaCare claim the plan’s taxes (not counting fees and fines) amount to “only” 0.49 percent of GDP. But that is as large as all the taxes Bill Clinton added in 1993 (0.5 percent of GDP), including a higher gasoline tax and higher taxes on Social Security benefits. For the TPC to suggest that blocking both the huge extra taxes and extra spending of ObamaCare adds up to a net tax cut is either incompetent or dishonest.

Putting aside the obvious deception of counting repeal of Obamacare as a net tax cut, the Tax Policy Center actually estimated that Romney’s plan of cutting individual tax rates by 20 percent and eliminating the Alternative Minimum Tax, “would collect about $320 billion less in individual income taxes in 2015 than under today’s tax rules.” Another $40 billion is apparently attributed to repeal of the estate tax, but that is much too high because estate planning currently reduces income tax receipts (by transferring assets to heirs in lower brackets).

The more-relevant $320 billion estimate, like the others, is a static estimate, which means it too is wildly exaggerated. Static estimates assume lower marginal tax rates would have no effect on taxpayer behavior, not even through reduced tax avoidance. That is a particularly bizarre assumption in this case because Romney’s $25-$50,000 cap on deductions would shut down a major channel used to shrink the amount of income subjected to top tax brackets — namely, padding tax deductions, credits and adjustments. The potential revenue from very affluent taxpayers who now deduct millions in charitable deductions (including Messrs. Romney, Buffett, Gates and Soros) is likely to be huge, making actual tax rates more progressive at the top.

At least 30 studies estimate that taxpayer response to lower tax rates (aka “elasticity of taxable income”) would raise the amount of income reported by enough to trim that $320 billion by about 40 percent, to $192 billion. However, a lowball estimate from the TPC claims Romney’s $25,000 cap on deductions would raise only $103 billion in 2015, which (if true) could still leave revenues $89 billion lower than under current tax law.

Multiplying that $89 figure by 10, adopting the Obama campaign’s makeshift technique, implies a 10-year shortfall of $890 billion (just 17.8 percent of that $5 trillion figure the Obama campaign concocted). That would be small change compared with the difference in spending, and even a tiny improvement in economic growth would turn the static loss into a dynamic gain. Romney pledges to bring spending back down to 20 percent of GDP (Clinton got it closer to 18 percent), while Obama insists on keeping it near 23 percent. That is, spending would be $4.1 trillion higher under Obama’s budget than under Romney’s.

My rough estimate does not pretend to be precise. Yet the TPC’s untenable assumption that the elasticity of taxable income is zero means their estimates cannot be taken more seriously. And it is flatly false to claim, as the TPC does, that repealing taxes earmarked to finance Obamacare would increase the budget deficit if not offset by fewer loopholes.

Next time you hear anyone say the Romney tax reform would add $5 trillion to deficits over the next 10 years, just say, “with all due respect, that’s a bunch of malarkey.”

Alan Reynolds is a senior fellow at the Cato Institute.

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