There are only two possible outcomes of the candidate's proposal to cut taxes by 20 percent: Either the deficit explodes or the rich pay much more.
Poor Mitt Romney. First it turned out that he couldn't even put away Rick Santorum -- Rick Santorum! -- by late February. Now it turns out he can't do arithmetic.
Romney has failed to wrap up the nomination, despite an overwhelming financial advantage and the backing of the GOP establishment, because he can't show that he is "severely conservative" enough to satisfy the Republican base. This forced him to veer to the right on taxes to keep up with the rest of the field, which has been competing to put forward the looniest tax plan. Before yesterday's release of his new tax plan, Romney actually proposed keeping income tax rates at George W. Bush levels, as shown by a page on his website that hadn't been updated as of last night:
Most likely Romney didn't want to chase Cain, Perry, and Gingrich to the right on taxes because it would make him vulnerable in the general election. Now, however, he has to show how much money he can shower on the rich just to win the nomination.
According to yesterday's bullet points, Romney wants to cut all tax rates by 20 percent, meaning that the top income tax rate, which is currently scheduled to rise from 35 percent (George W. Bush, 2001) to 39.6 percent (Bill Clinton, 1993), would instead fall to 28 percent.
There are several things about this plan that are either loony or deeply misleading. One is the claim that it would "address the debt crisis" because it will be paid for by $500 billion in spending cuts by 2016. But the only proposals mentioned would (a) repeal the Affordable Care Act (increasing deficits, since the ACA has been scored as deficit-reducing); (b) convert Medicaid to a block grant (no deficit impact); (c) increase government efficiency (yawn); and (d) cut Social Security and Medicare benefits for "younger generations" (no impact until well after 2016). In other words, it's a complete fantasy.
But I'm going to focus on Romney's bizarre claim to be tough on the 1%: "for middle income families, the deductibility of home mortgage interest and charitable contributions, those things will continue, but for high income folks, we are going to cut back on that so we make sure the top 1% keeps paying, paying the current share they're paying or more."
In theory, one could maintain the effective tax rate on the super-rich while lowering rates by reducing their deductions and other tax expenditures. But do the numbers add up?
Under current law, which includes the Bush tax cuts, the top 1% in 2011 paid an effective income tax rate of 20.3 percent of their total cash income. Repealing the alternative minimum tax (a Romney proposal) would reduce their effective rate by at least 0.4 percentage points.* A 20 percent cut in income tax rates would knock another 4 percentage points off their tax rate. Repealing the estate tax is worth another 0.3 percentage points of cash income, for a total tax cut of 4.7 percentage points. That works out to a 6.8 percent increase in after-tax income.**
What about eliminating exclusions and deductions? There just aren't enough of them to balance those tax cuts. According to Burman, Geissler, and Toder (2008), eliminating every tax expenditure other than the tax preferences for investment income (which Romney specifically wants to keep) would reduce after-tax income for the top 1% by 6.2 percent. Because Romney would lower tax rates by 20 percent, killing all those tax expenditures -- state and local tax deduction, mortgage interest deduction, employer health plan exclusion, deduction for charitable contributions, everything -- would only reduce after-tax income for the top 1% by 5 percent.*
That's a lot of numbers. The bottom line is that if, like Mitt Romney, you want to cut tax rates by 20 percent, eliminate the estate tax, and eliminate the AMT, it is arithmetically impossible for the top 1% to pay anything close to their current effective tax rate.
I'm all in favor of killing tax expenditures. In our forthcoming book, White House Burning, Simon Johnson and I propose reducing a boatload of them, including the employer health plan exclusion, the mortgage interest deduction, the deduction for charitable contributions, tax preferences for investment income, and the deduction for state and local taxes.
If Romney wants to eliminate every tax expenditure for the top 1%, that's fine with me. But he's still cutting taxes on the rich. Not only that, he's cutting taxes on the rich relative to the 2001 Bush tax cuts, which were already a massive giveaway to the rich.
Tax cuts for the rich are good -- if you want to win the Republican nomination, that is.
*The true impact would be higher, since the Tax Policy Center analysis cited here is relative to a baseline in which the Bush tax cuts expire. No Bush tax cuts means higher tax under the ordinary income tax means less AMT. So if you're comparing things to current (2011-2012) tax rates, 0.4 percentage points is an underestimate.
** The 2011 total federal tax rate for the top 1% was 30.4 percent. Reducing that by 4.7 percentage points means that their after-tax income grows from 69.6 percent of cash income to 74.3 percent of cash income.
* The 6.2 percent figure excludes interactions. With interactions, it would be slightly higher; even then, after reducing it by 20 percent to account for lower tax rates, it would be smaller than the 6.8 percent increase in after-tax income caused by Romney's tax cuts.