This post is part one of a three part series debunking a few central claims that have been made by the Romney campaign this year. The first part deals with Romnay's tax policies, the recent Tax Policy Center study, and Romney's response to that study. The second part deals with the white paper Romney's advisers wrote to attempt to justify his plan. Finally, the third part deals with Romney's recent Medicare claims, as well as his impossible promises on the subject.
Although the Obama campaign
is no stranger to inaccurate campaign videos, this one was different. This one was
actually accurate,
receiving a rare "Geppetto" from the Washington Post Fact Checker, indicating its accuracy
(note that this is the same Fact Checker Romney has relied upon to call out Obama in the past):
"The rest of the ad concerns the new study by the Tax Policy Center, which examines whether the numbers add up in Romney’s tax plan as described on his Web site. As we have noted, Romney has not detailed how he would cut tax rates by 20 percent and yet eliminate enough tax loopholes to keep the plan revenue neutral.
The study essentially concludes that, no matter what choices are made, taxes will be lower for the very wealthy while raised for most middle and lower income taxpayers. That’s because there are not enough loopholes to close for the rich — and the real money available to boost revenue would come from getting rid of tax credits that mostly benefit middle-income taxpayers, such as the home mortgage deduction. The study came to this conclusion even after trying to grant every positive assumption to the Romney plan.
The ad accurately describes the main points of the study, using headlines such as from The Wall Street Journal to underline its points: “Study: Romney’s Tax Plan Hits Middle Class.”" (emphasis mine)
The study by the non partisan Tax Policy Center really hurt Romney's campaign message. It showed that Romney's promise to cut individual income tax rates without either favoring the wealthy or losing revenue is not mathematically possible. FactCheck
also agreed:
Romney has proposed very specific tax cuts. He would make the Bush-era income tax cuts and capital gains tax cuts permanent, then cut all income tax rates by an additional 20 percent across the board, repeal the Alternative Minimum Tax (which hits primarily upper-income taxpayers), and permanently repeal the estate tax (which currently applies only to estates valued at $5 million or more).
Romney has said he would offset the loss of personal income tax revenue (estimated at $360 billion a year by the Tax Policy Center) by reducing tax deductions and credits. And he has said he would do this while making sure that those at the top keep paying the “same share of the tax burden they’re paying now.”
But he has steadfastly refused to say which tax preferences would be cut or reduced. He has pointed to the revenue-neutral proposals for rate-cutting put forth by the deficit commission as evidence that what he proposes is possible in theory, but those proposals pay for the cuts largely by taxing capital gains at the higher rates that apply to ordinary income, a measure Romney has specifically ruled out.
So Romney has failed to produce evidence that what he promises is possible. And we judge that the weight of evidence and expert opinion is clear — it’s not possible. (emphasis mine)
The FactCheck article also does a good job detailing the history of Romney's plan, as well as the study by the TPC. It is well worth a read.
Romney has predictably rejected the study. The Washington Post Fact checker notes:
"The Romney campaign has emphatically rejected the study on several grounds. First, it claims the paper is “biased” because of the involvement of an economist (Adam Looney) who worked on the staff of Obama’s Council of Economic Advisers. Second, it says it ignores “pro-growth elements” of Romney’s plan, such as corporate tax reform and reduced deficits. Finally, it says the study admits it is not really examining Romney’s plan."
We will look at each of these justifications for rejection to see if they hold any water.
Is the paper biased?
The Washington Post Fact Checker calls this claim ridiculous:
"The charge of bias is pretty ridiculous. Looney, the third name on the paper, was an economist, not a principal, on the CEA and spent six years as an economist at the Federal Reserve Board. The economist positions at the CEA, in fact, are nonpartisan. Indeed, another co-author of the study, William Gale, was an economist for the CEA during the George H.W. Bush administration. (emphasis mine)
Ezra Klein of The Washington Post continues:
But
the Tax Policy Center is directed by Donald Marron, who was one of the
principals on George W. Bush’s Council of Economic Advisers. (emphasis mine)
As the Fact Checker notes, there is also a bit of hypocrisy here:
The Romney campaign would have more credibility to claim bias if it had not approvingly cited the Tax Policy Center as providing “an objective, third-party analysis” when the group critically examined the tax plan of Texas Gov. Rick Perry."
Readers of this column know that we have frequently cited the Tax Policy Center’s work. In a town full of partisans, the group is about as even-handed and nonpartisan as possible. The staff roster consists of serious and credible analysts with experience working in the administrations of both parties. (emphasis mine)
So not only are there economists from both political parties involved in the study, but Romney wants to have it both ways. He wants to cite this think tank when it backs him up, but poison the well when it doesn't.
In addition, as FactCheck points out, the TPC is not alone in its conclusions:
"it’s also the conclusion of an expert from the pro-business Tax Foundation, who states that the Tax Policy Center analysis “correctly identified the Romney plan as a tax cut, at least in static terms, that accrues mainly to high-income earners.”"
Does the paper ignore Romney's pro-growth elements of his plan?
Ezra Klein elaborates on this point:
There’s a reason the study ignores those “positive benefits”: Romney has called for a revenue-neutral corporate tax plan that brings the rate down from 35 percent to 25 percent while also promising to balance the budget. He has not said how he will achieve either goal. Until he does, those positive benefits — if they exist — are impossible to calculate.
If Romney tries to pay for his tax cuts by reducing spending, the results, as the Tax Policy Center notes, would be even more regressive. Romney has promised to increase defense spending and hold benefits steady for the current generation of seniors. The only remaining big spending programs are those that help the poor; that’s where Romney’s cuts would have to be concentrated. Paying for tax cuts for the rich by curtailing programs for the poor is even more of a reverse-Robin Hood act than paying for tax cuts for the rich by cutting the tax expenditures (deductions and the like) of the middle class. (emphasis mine)
Ezra Klein also points out the implausibility of Romney paying for some of his tax cuts with spending cuts:
The Center on Budget and Policy Priorities produced its own analysis of Romney’s plan, based on an assumption that Romney pays for half of his tax cuts through spending cuts. The conclusion: By 2022, Romney would need to cut all non-defense, non-Social Security programs by 49 percent. That is not plausible, to say the least. (emphasis mine)
Indeed at least one person who agreed with the TPC study argued there would be growth. FactCheck notes:
"William McBride of the Tax Foundation, a pro-business nonprofit, writes that reducing the corporate tax rate will spur 1 percent to 2 percent more economic growth.
But McBride also writes that TPC “correctly identified the Romney plan as a tax cut, at least in static terms, that accrues mainly to high-income earners.” That’s not a bad thing, he argues, because the U.S. already has “the most progressive income tax system in the industrialized world,” and it is “well past time to consider the costs and benefits of such an extremely progressive system.”
So the
conservative Tax Foundation argues that making the tax system less progressive will spur growth. However, there is reason to doubt this. Yes the
federal income tax is very progressive. But it is
not the only tax faced by US tax payers. When you include
all federal, state, and local taxes (which are
often regressive), taxes are actually
just barely progressive. This means that, if Romney were to make the federal income tax less progressive, US taxes as a whole may lose their progressiveness altogether!
In fact, one of the authors of the TPC study points out just how improbable such growth would be under the Romney plan. FactCheck notes:
"Looney, one of the authors of the Tax Policy Center study, calls that “an implausibly large estimate,” but nevertheless ran the study again assuming that growth rate and an additional 12 million jobs. The result, he told ABC News, is that it would offset only about 15 percent of Romney’s revenue loss from individual tax cuts.
“Even in that case, there’s still a shift in the tax burden from high-income taxpayers to low- and or middle-income taxpayers,” Looney told ABC News. “It’s smaller, but it would require a net tax increase on the middle class.”" (emphasis mine)
And Looney wasn't alone, Brad DeLong also
explained how assuming the growth would make up for the shortfall is actually bad arithmetic:
1% extra of GDP--if you could get it--taxed at an average rate of 20% is an extra $32 billion/year of tax revenue. $32 billion/year < $85 billion/year. $32 billion/year is less than 2/5 of $85 billion/year.
This is an arithmetic fail.
And, of course, if you bust open the long-run deficit further--which Romney does, not just through this tax-cut-for-the-upper-class plan but through the repeal of the efficiency-promoting portions of the Affordable Care Act--you don't boost but slow long-run growth. You increase uncertainty about the future: somebody is ultimately going to pay taxes to pay for government spending, we just don't know who. And in the long-run in which we get out of the slump government borrowing does crowd out private investment and slow growth.1
In all likelihood we don't get a growth boost from this plan, we get a growth slowdown. And so the gap that must be closed is not $85 billion/year, but rather more. (emphasis mine)
More on this in Part 2...
1Note: Notice DeLong is talking about long-term deficits, not short term. This is not expansionary austerity it is Keynesian economics.
Is the paper not really examining Romney's Plan?
The Washington Post Fact Checker notes how odd this accusation really is:
"It is also a bit rich for the Romney plan to complain that the paper does not really examine Romney’s plan — or is missing key elements — when the major problem with the plan is that Romney has released precious few details about it. The Tax Policy Center analysis makes clear that a full review is not possible because “certain components of his plan are not specified in sufficient detail.” In other words, if Romney would actually spell out those details, then a full review would be possible." (emphasis mine)
So Romney's only justification for this criticism is that he has made his plan UN-judgeable. Special pleading?
In addition, as Ezra Klein reminds us, the TPC chose the most unrealistically charitable assumptions for Romney's plan:
To help Romney, the center did so under the most favorable conditions, which also happen to be wildly unrealistic. The analysts assumed that any cuts to deductions or loopholes would begin with top earners, and that no one earning less than $200,000 would have their deductions reduced until all those earning more than $200,000 had lost all of their deductions and tax preferences first. They assumed, as Romney has promised, that the reforms would spare the portions of the tax code that privilege saving and investment. They even ran a simulation in which they used a model developed, in part, by Greg Mankiw, one of Romney’s economic advisers, that posits “implausibly large growth effects” from tax cuts.
The numbers never worked out. No matter how hard the Tax Policy Center labored to make Romney’s promises add up, every simulation ended the same way: with a tax increase on the middle class. (emphasis mine)
So it sounds like none of Romney's excuses work to discredit the TPC paper and its implications for Romney's tax policies. You would think this would be a good time to revisit the drawing board. Sadly, Romney instead doubled down on the argument when his economic advisers released a
white paper attempting to justify his plan. I take a look at this plan in n Part 2.
Update 8/18/12: Mitt Romney further responded to the TPC study in an interview in
Fortune:
I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today. And second, that there would be a reduction in taxes paid by middle-income taxpayers. Those are the key principles of my plan that the Tax Policy Center chose to ignore. (emphasis mine)
Ezra Klein
debunks this assertion:
"No, the Tax Policy Center didn’t “ignore” those principles. It tried to test them. And the principles failed.
What’s more, they failed for a comically simple reason. “The total value of the available tax expenditures (once tax expenditures for capital income are excluded) going to high-income taxpayers is smaller than the tax cuts that would accrue to high-income taxpayers, high-income taxpayers must necessarily face a lower net tax burden.”
That is to say, the tax cuts Romney is promising the rich are larger than the available storehouse of tax breaks Romney can close to pay for them. As such, if the plan is going to be revenue neutral, as Romney has pledged, it is mathematically impossible for it to do anything but shift the tax burden away from the rich." (emphasis mine)
Romney continues:
Instead they made various assumptions about what they thought I would do which are not in fact accurate. They made an assumption that I would reduce the home mortgage-interest deduction. I will not do that for middle-income taxpayers, as I have already indicated.
However, we have seen that the TPC already took the most favorable assumptions for Romney in its analysis, getting rid of all upper-class tax expenditures before touching middle class ones. So Romney seems to have missed the point. If they take the middle-class home mortgage interest-deduction off the table in their analysis, they will have to replace it with some other middle class tax increase. As we have seen throughout this article, there is simply no other way to make the budget revenue neutral.
Ezra Klein also notes just this further reinforces the fact that Romney's budget a fantasy:
"So let me get this straight. Mitt Romney, who has refused to officially name even one offset for his tax cut, has taken the bulk of the mortgage-interest deduction off the table. In his 10-year deficit-reduction plan, he has refused to name the spending cuts necessary to hit his targets, but he has taken Social Security, Medicare and defense off the table for cuts.
Tell me again why I’m supposed to believe that this presidential candidate who is systematically ruling out cuts to the most popular spending programs and tax breaks is going to be able to make incredibly unpopular spending cuts and tax changes once in office?"
In a
previous article (to be covered more in depth in part 3), Ezra Klein already explained why Romney's decision to take Social Security, Medicare, and defense spending off the table for cuts makes his budget promises practically impossible. Taking the mortgage-interest deduction for middle class taxpayers off the table makes it even worse.
In addition, Romney has
attempted to play the "but you are doing it too" game with Obama.
"Now, interestingly, the same center did an analysis of President Obama’s
tax plan and concluded that he’s raising taxes on the middle-class." (emphasis mine)
I consider myself something of a connoisseur of the Tax Policy
Center’s reports, and I didn’t remember any showing that result. So I
asked the Romney campaign: What analysis were they referring to? They
pointed me to Table T12-0045, which analyzes President Obama’s 2013 budget request against current policy. Here’s the relevant section:
I
know, lots of numbers. But my fellow TPC-ophiles will notice something
off the bat: Those numbers do not appear to show a middle-class tax
increase. Here’s where to look:
The
highlighted boxes show the net tax change for different income
quintiles. For the bottom four quintiles — the bottom 80 percent of the
country — there is, on average, a tax cut, not a tax increase. And I
don’t know where you find the middle class if not in the bottom 80
percent of the income distribution.
But the Romney campaign clarified that they weren’t looking at those columns. They were looking at these columns:
Those
columns show the percentage of tax units (a technical term, but think
“households” and you’re close enough for our purposes) in a given income
group that will see a tax increase under the new plan. As it happens,
under Obama’s plan, a majority of the bottom 80 percent sees no tax
change. A minority of tax units see a small increase. A somewhat smaller
minority see a somewhat larger tax cut. And so, while there’s a tax cut
overall, some households see a tax increase.
Because any tax change has winners or losers, we tend to look at
averages when assessing whether a tax plan raises or lowers taxes on an
individual group. The Romney campaign is asking whether anyone in the
group that could be called “the middle class” sees a tax increase, and
some do. If I were Politifact, I’d rate Romney’s claim “mostly false,”
but you can decide for yourself.
Now, there’s a separate tax policy table (T12-0049,
for those keeping track) that looks at Obama’s budget a few years down
the road and finds a small tax increase for the fourth quintile. I think
you can fairly say that the 60-80th percentile includes at least some
of “the middle class,” and so if the Romney campaign was pointing to
that table, which perhaps they’ll start doing, I’d say their claim is
mostly true. (emphasis mine)
So Romney may be on to something here
(Is it safe to say he has also dropped the pathetic "biased" accusation towards the TPC?). Down the road, the highest middle class taxpayers may see a
small increase. But, as the Obama campaign noted to Ezra Klein, this is only because of the inclusion of corporate taxes in the TPC analysis. In additionr, these pale in comparison to the increases middle and lower-income taxpayers will see under Romney's plan. If we ignore the revenue neutral aspects of Romney's plan, we get this TPC table:
Romney’s plan is a net tax increase on poorest Americans, as it
permits certain stimulus-related tax breaks to expire. But even in this
version of the plan, which doesn’t include any offsets and increases the
deficit by trillions of dollars, some tax units see an increase. (emphasis mine)
So even without the revenue neutrality, Romney's plan still contains a tax increase on the poorest of Americans. As the TPC points out, once you include attempts to make the plan revenue neutral, you definitely get middle class tax increases, even under the most favorable conditions for Romney. In addition, it should be noted that these "most favorable conditions" are almost completely politically impossible. They include popular tax expenditures
Republicans have generally never shown even the slightest interest in repealing. So, in order to keep Romney's plan revenue neutral under realistic political conditions, you would need an even larger tax increase on the middle and lower classes. Maybe Romney should remember the old saying "He who lives in a glass house shouldn't throw stones."
