Romney tax plan: Is it 'mathematically impossible' or not?
One study said Mitt Romney's tax-reform numbers don't add up. Another says they do. The reality: It depends a lot on the assumptions made about how deeply Romney is willing to cut tax breaks for the rich, including incentives for investment.
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In effect, the report raised the prospect of higher taxes on the middle class. In stark language, it said achieving Romney's goals is "not possible" without shifting a higher share of the tax burden onto middle- or lower-income households.
Soon the phrase "mathematically impossible" was a favorite with Romney's political foes. Romney's supporters have issued several challenges to the report, but the Tax Policy Center has stuck to its conclusion.
The new counteranalysis from the Heritage Foundation accuses the Tax Policy Center, which is funded by the Urban Institute and Brookings Institution, of "skewed analysis." Author Curtis Dubay argues that the Romney math can work if different assumptions are used.
Separately this week, Romney-camp economist Kevin Hassett called the Tax Policy Center report "the most partisan thing that's come out of a think tank in my lifetime."
But beyond the hyperbole and the testy politics, the dueling views actually share a lot of common ground. Policy experts on both sides generally agree on some important basics: The concept of "lower rates, broader base" can be good for the economy, but the ways to broaden the base aren't infinitely large. And on Romney's plan, while the two sides may debate what's "possible," neither views it as easy to achieve all the candidate's goals simultaneously.
William Gale, co-director of the Tax Policy Center, says the report he co-wrote didn't mean to imply that that Romney would seek to raise middle-class taxes. Rather, the main point was that tax reform along the lines Romney proposes would require tradeoffs.
Similarly, Mr. Dubay's report says that eliminating tax deductions to balance the Romney math would be "politically difficult."
The Heritage Foundation study uses the Tax Policy Center analysis as a starting point, but then argues that the $86 billion gap it cites in Romney's plan can be closed, mainly through a more aggressive elimination of deductions that are used heavily by upper-income households. Those deductions, including the one for municipal-bond interest and one for life-insurance interest, are ones that the Tax Policy Center figured would be protected under Romney's espoused goal of preserving incentives for investment.
So a core element of the debate is over what incentives for investment Romney would preserve or expand. The Tax Policy Center assumes a broad definition. The Heritage Foundation assumes Romney would take a narrower view. Both agree that Romney hasn't spelled out the details.
The broader question is: How aggressive does Romney intend to be in reducing or eliminating various deductions, credits, and exemptions in the tax code? Many of them, such as ones for charitable giving and home mortgage interest, are popular with voters.
Dubay argues that other steps, which the Tax Policy Center did not consider, could help close that $86 billion gap. He mentions phasing out personal exemptions for high-income taxpayers, and eliminating the "step up" in investment costs (for measuring capital-gains taxes) as the estate tax is repealed.
Conservative critics of the Tax Policy Center also say its report may underestimate the potential of Romney-style tax reform to modestly boost the pace of economic growth.
As arcane as the details sound, they carry political import: Romney supporters are eager to defuse the "mathematically impossible" issue as a Democratic talking point. If they can't, it puts pressure on Romney either to lay out more details of his plan, or to backpedal and revise it.
The math debate prompted the most emotionally charged moment in a televised forum this week that pitted Mr. Hassett (a Romney economic adviser) against an Obama adviser.
When Jeffrey Liebman of Harvard University cited the Tax Policy Center study in support of Obama, Hassett blasted the report and the way Democrats have used it against Romney.
"The notion that anything that Governor Romney has said would support the view that he's going to increase taxes by $2,000 on low-income people – it' s just a lie," said Hassett, a senior fellow at the American Enterprise Institute. While not predicting that Romney would need to change his plan, Hassett said that if the math didn't work out, the answer wouldn't involve boosting the tax burden on the middle class. Instead, he said, the logical move would be to scale back the overall reduction in tax rates.
Dubay also lashed out at the Tax Policy Center, writing in his critique that the center "conspicuously chose to ignore the [Romney] requirement" that the tax code's progressive posture be preserved. The center's report started with the premise of trying to keep five Romney goals, but then bent that sixth one when illustrating the alleged math problem.
Mr. Gale, responding to this concern via e-mail, says he was not aware Romney had stated that sixth goal before "all of the kerfuffle started."
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