Even if Romney's hot mic moment is a preview of the loopholes he would close, his tax plan creates a lot of red ink.
The last time we checked in on Mitt Romney's tax plan, the numbers didn't add up. Actually, there weren't any numbers to add up. Instead, there was a not very plausible promise to make the numbers add up at a later date. At stake was that Romney only spelled out the taxes and not the tax deductions that he wanted to cut. Basically, he told us what was for dessert, but not for dinner. Because he promised that his plan would be "revenue neutral," these numbers had to offset each other. But if Romney's recent hot mic moment is any indication, they don't. Not even close.
Let's start with a quick four-step recap of Romney's tax plan. First, he extends all of the Bush tax cuts. Second, he cuts income tax rates an additional 20 percent. Third, he undoes the tax hikes and credits from Obamacare and the stimulus. Finally, he eliminates the capital gains tax for all but the richest households. The first three parts of this plan shower high-earners with most of the money. The last part is a bit of a fig leaf for the rest of us. After all, the top 0.1% of households earn half of all capital gains. Exempting middle-class households from this tax certainly helps them, but there's just not that much money there.
There are two important numbers to keep in mind when it comes to Romney's tax plan: $480 billion and $900 billion. The former is how much the nonpartisan Tax Policy Center reckons his plan would add to the deficit in 2015 alone in a world where the Bush tax cuts continue; the latter is the same for a world where the Bush tax cuts expire. Since Romney has pledged that his plan will be revenue neutral over the current baseline -- that is, with the Bush tax cuts -- that leaves him with a $480 billion hole to fill by closing loopholes or cutting spending.
Which brings us back to Romney's recent run-in with a hot mic. During a more candid moment at a fundraising event, reporters overheard Romney lay out at least two loopholes he would consider closing: the mortgage interest deduction on second homes for high-earners and state income and property tax deductions. Let's consider these in turn.
The mortgage-deduction on second homes is about the lowest of low-hanging fruit when it comes to tax reform. Everybody agrees that the mortgage deduction on first homes, let alone second homes, is bad policy. For one, it incentivizes people to take on more debt. For another, it's doubly regressive. Not only do the rich get bigger deductions due to their higher brackets, but they also have bigger mortgages to deduct. Getting rid of this loophole is a potential cash cow that would go a long way towards making our tax code saner. Unfortunately, Romney only wants to close it for a small sliver of a small sliver of buyers. According to Loren Adler of the Bipartisan Policy Center, Romney's proposal would only raise about $15 billion over 10 years. In other words, about a third of the revenue the Buffett Rule would generate in a world where the Bush tax cuts for high-earners expire.
There is real money, though, in Romney's proposed end to state and local deductions. According to Chuck Marr of the left-leaning Center on Budget and Policy Priorities, axing this loophole would yield roughly $860 billion in new revenue over a decade. That deserves serious plaudits. Of course, there's a problem. Romney's tax cuts are so deep that this only fills about 20 percent of the fiscal hole he creates.
The below chart compares how much Mitt Romney's tax cuts cost versus how much his loophole-closing saves, on an annual basis. (Note: "Revenue Lost: Law" shows how much Romney's tax cuts costs if the Bush tax cuts expire; "Revenue Lost: Policy" shows how much Romney's tax cuts costs if the Bush tax cuts do not expire; "Revenue Gained: Romney" shows how much new revenue he generates from closing loopholes).
Even relying on the usual Republican bromides about "dynamic" scoring -- that is, tax cuts in part paying for themselves* -- there is still a massive gap for Romney to close. Fully eliminating the Department of Education and the Department of Housing and Urban Development (HUD), as Romney suggested, would barely get him a quarter of the way there.
Red ink is the likely result of the Romney tax plan. Lots of it. That's just math. Romney would either have to cut discretionary spending to Paul Ryan levels or take on even more budget-busting tax expenditures to square his numbers. Neither seems particularly likely. Indeed, Romney's proposal to only eliminate the mortgage interest deduction on second homes shows how unwilling he is to throw out the whole thing. And that's the third-biggest loophole in our loophole-laden tax code! Unless he's considering scrapping the employer healthcare or pension contribution deductions, there's not too many ways for him to make up for the revenue shortfall he'd bring about.
And that's why tax reform is so hard. It means upsetting big constituencies. The loopholes that cost the most are the ones that benefit the most people. So far, Romney has only shown a willingness to upset a small group: rich people in blue states. After all, state income and property taxes are generally higher in Democratic states than in Republican ones. Ditching the deductibility of these taxes will mostly hurt a minority of voters in states Romney isn't going to win anyway. The politics of it are genius. The economics, not so much.
Budgets are, of course, more political than economic documents. But the economics gives us a clue into a candidate's political priorities. Romney's tax plan sends one clear message. He doesn't really care about deficits.
* Tax cuts certainly do "pay for themselves" to some degree. The trouble is it's not at all clear how much they do. That's why the CBO prefers to be conservative and use "static" scoring instead.