Presidential debate 101: Does Romney’s tax math add up?
Here’s a closer look at the tax reform proposals that Mitt Romney discussed during Tuesday night's debate. Do President Obama and others have a point in challenging the math?
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That is, the Bush rates are "current policy," even though they are scheduled to expire. Obama's own budget counts eliminating Bush rates for the rich as an action that reduces the deficit.Skip to next paragraph
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On the military spending, that's a legitimate fiscal issue for Obama to raise, but it's on the spending side of the ledger. If Romney's stated goal is to be deficit-neutral on the tax revenue front, then his defense spending isn't part of the equation. (The real question is whether, on the spending side, Romney can achieve his called-for deficit reduction while keeping military spending so high.)
That still leaves $5 trillion in lost tax revenue to pay for. Independent tax experts say it's very hard to fully offset that by reducing tax breaks – especially if the middle class needs to come out with a net tax cut.
Romney's defenders have argued that, depending on how aggressively the plan chops tax breaks, the math can work out. The size of all "tax expenditures" (things like deductions and credits) in the individual income tax is huge – an estimated $1.1 trillion in 2014, for example. And a large share of them go to wealthy taxpayers.
Romney's allies also argue that his critics don't give enough allowance for the plan's positive impacts on economic growth, which could result in added tax revenue that's missed in traditional forecasting.
But his critics say it's politically very hard to have the elimination or reduction of various tax breaks add up to $5 trillion – all while having the rich pay the same share of overall US taxes that they do now. Critics also note that when you reduce tax rates, the value of "tax expenditures" goes down. So it's wrong to think of that $1.1 trillion, for example, as a pool of money that can all be tapped to pay for tax rate reductions.
Some final points:
• The $25,000 figure may not be etched in stone. Romney's "I'll pick a number" phrasing could be understood to mean the number is notional for now. But the fact that he mentioned the figure at all, in front of millions of TV viewers, says something.
• Relatively few households have deductions that total more than $25,000. The average deduction for tax filers with incomes in the $60,000 to $100,000 range, for example, is $20,169, according to research by the Tax Foundation.
• A deduction cap would create winners and losers. For example, even if Romney plan delivered a net tax break to the average middle-class family, some households might end up paying more because of the deduction limit.
• The economic-growth side of tax reform is important. If reform is revenue-neutral, the big rationale for doing it has to do with job creation. Romney emphasized this point during the debate.
"Why do I want to bring rates down and at the same time lower exemptions and deductions, particularly for people at the high end? Because if you bring rates down, it makes it easier for small business to keep more of their capital and hire people," Romney said. "And for me, this is about jobs."
It's a matter of debate among economists whether the impacts would be large or modest, but even Obama has embraced the general idea of "lower rates, broaden the base," which in his case is to blend growth and deficit reduction.
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