Mathematically and politically, the GOP presidential hopeful's tax plan doesn't seem to work
Nothing is as simple as campaign commercials or candidate sound bites make it sound, especially not tax reform, and certainly not tax reform with very few details revealed. Just ask the economist Mitt Romney is holding up as a shield against attacks on his tax plan.
Specifically, ask John W. Diamond if he thinks it is possible, politically, to pass the sort of Romneyesque tax plan that Diamond predicts would create an additional 7 million jobs over the next decade.
"Absolutely not," the Rice University economist replied, in an interview this week. Even under a Romney presidency, he added, "I don't think there's any chance."
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Diamond also said he "can't argue" with the basic conclusions reached by an independent group of economists who found - to much derision from the Romney camp but to the delight of President Obama and his campaign ad-makers - that Romney's plan would necessarily cut taxes on the wealthy but raise them on lower-income Americans.
But Diamond also said that the conclusions paint an incomplete picture of the benefits that lower-income Americans would receive from the Romney plan, such as greater employment opportunities and lower lifetime tax burdens.
"If we're going to make all of our policy decisions based off simple analysis like that," he said, "I think that's bad for America."
Diamond has built a body of research advancing the theory that simplifying the tax code - eliminating tax breaks and reducing marginal rates - will unleash growth, by cutting down on economic distortions in the code. About a month ago, the Romney campaign asked Diamond to apply his analytical model to Romney's tax plan, to estimate its job-creation potential.
Romney wants to cut income tax rates by 20 percent across the board. He wants to make the cuts "revenue neutral," eliminating enough tax breaks to offset the lost revenues from lowered rates. He and the campaign have refused to say thus far which loopholes he'd close, but Romney insists that his reform would maintain the current progressivity of the tax code - meaning that a tax cut for the wealthy would not be offset by higher taxes for the poor and middle class.
It is that progressivity goal that three economists at the Tax Policy Center, including one who served on President Obama's Council of Economic Advisers and one who served on the council under Republican President George H.W. Bush, judged earlier this month to be more or less impossible to reach under Romney's plan. Even allowing for enhanced growth from reforming the code, they wrote, there simply are not enough tax exemptions for the wealthy available for elimination to finance lower rates at the top.
As a result, the economists concluded, lower-income taxpayers would see their tax bills rise, on average.
On Friday, Romney ripped the Tax Policy Center study and touted Diamond's analysis of his proposal. "Rice University looked at my plan," Romney said, "and said, 'Mitt Romney's tax plan will create millions of jobs.' "
This is where things get tricky, economically and politically.
Diamond is not an adviser to the Romney campaign. He couldn't model the full Romney plan, because the Republican's campaign refuses to identify, even to him, which tax deductions and credits they would cut to make the plan revenue-neutral. "They didn't give me a whole lot of guidance," he said.
So Diamond filled in the blanks with largely generic assumptions and noted in his analysis that the specifics could change his results. He also assumed that Romney - contrary to his stated campaign position - would allow the Bush tax cuts to expire and then impose his 20 percent across the board rate reduction from there.
Diamond's final conclusion was that Romney's reform would add 5.4 percentage points to projected gross domestic product growth over the next decade and would result in 6.8 million new jobs.
Diamond didn't analyze how the plan would affect the distribution of the tax burden across income levels. In the interview, after cautioning that he had not run the numbers, Diamond considered whether it would be possible to maintain the existing progressivity of the code under Romney's plan.
If you don't estimate the growth effects of reform, he said, "no, it's not possible," to maintain current progressivity. "And I think even with substantial economic growth, it will be difficult."
The question of distribution changes over time horizons, Diamond added. Currently, wealthy taxpayers aren't likely to benefit from 6.8 million new jobs nearly as much as middle-class and poor taxpayers would. For those lower-income taxpayers, increased earnings over time could more than make up for higher tax bills today. You don't see those possible effects mentioned in Obama's ads attacking Romney for wanting to raise middle-class taxes, of course.
But as even Diamond says, this is all nothing more than an academic exercise.
The rub is in all those details that Romney refuses to release about which tax breaks he would scrap. There's a reason he doesn't want to talk about them: The choices are ugly. You have only a few big targets to finance a big income-tax cut. They include credits and deductions that are extremely popular with swing voters, such as the child tax credit and deductions for mortgage interest, health care benefits, and charitable contributions.
The only way a big tax-overhaul will pass, Diamond said, is if a president takes hold of a bunch of those popular credits and tries to sell voters on why they should give them up.
"This type of reform will never happen if there's not presidential leadership and the president's not fully committed, and there's not some bipartisan agreements," he said, adding: "I just don't see any way that's going to happen right now. I don't see [Senate Majority Leader] Harry Reid or [House Speaker] John Boehner agreeing on anything - I don't care if it's now, or after the election, or six months from now, or 10 years from now."
The odds of such a tax plan passing would increase, Diamond said, if a presidential candidate would lay out and own the tough details on the campaign trail. He doesn't expect that to happen. Nor would he advise it, politically.
"To be honest," Diamond said, "I don't understand why Romney's put out as much information as he has. I would have put a lot less."
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