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.