Last year, Mitt Romney released a budget plan that achieved a remarkable trifecta: massive cuts to the social safety net, higher taxes on low-income households, and a roughly $2 trillion increase in debt over 10 years relative to a continuation of current policies. He pulled this off by boosting defense spending by $1.6 trillion and cutting taxes (mostly for high-income taxpayers) by $1.4 trillion, which together were so costly that they consumed all of the aforementioned savings and then some.
Last month, he revised this proposal. Did he pull back on his tax cuts, realizing that they’re too expensive and unfair in light of the huge sacrifices that he’s demanding of middle- and lower-income Americans? Or perhaps he reversed his defense build-up, now cognizant of the fact that the international challenges of tomorrow will have more to do with economic competitiveness than the size of the Seventh Fleet?
Hahahaha… no. Instead, he concluded that his tax cuts for high earners weren’t enough. So he doubled down—actually, tripled down—by proposing another $3.4 trillion tax cut, reducing marginal income rates by 20 percent (the top rate would fall from 35 percent to 28 percent) and eliminating the Alternative Minimum Tax, which is mainly paid by high earners.
His campaign states that this new tax cut will be fully paid for with a combination of tax expenditure limitations on high earners, spending cuts, and economic growth. We don’t know the details of the tax expenditure limitations, but we do know that the Feldstein proposal—popular in conservative circles—would only cover about 15 percent of the cost of these new tax cuts, and likely less. His spending cuts are already more than offset by his previous tax cuts, so that’s out. That leaves economic growth.
Problem is, there’s no way his tax cuts can generate enough additional economic growth (and associated revenue) to cover anywhere near 85 percent of these tax cuts’ price tag. Even the most favorable studies, with the most favorable assumptions, find that economic growth effects may offset a maximum of 10-20 percent of tax cuts’ static cost. Under the George W. Bush administration, the Treasury Department found that the Bush-era tax cuts recouped only 7-10 percent of their cost through macroeconomic effects. The Congressional Budget Office, under noted Republican and supply-sider Douglas Holtz-Eakin, found that the economic impact of a hypothetical across-the-board tax cut could only cover 19 percent at best (more if it were financed by tax increases after 10 years, but Romney’s anti-tax pledge rules that out) and -3 percent at worst (in this case, the tax cut would be a net drag on the economy). Most tellingly, Romney’s own economic advisor, Greg Mankiw, found that a hypothetical cut to ordinary income rates would offset less than 15 percent of its own cost over 10 years.
And each of those estimates assumes that households have unlimited foresight (likely false) and ignore the long-run impact of budget deficits on the economy by magically assuming that the deficit is stabilized. Estimates using more realistic assumptions often find that permanent, deficit-financed tax cuts skewed to high-income taxpayers actually slow long-run growth.
In Romney’s Wall Street Journal editorial accompanying his tax plan revisions, he stated that “offering gimmicky proposals that rely on implausible levels of economic growth and blow huge holes in the budget is easy. Fixing our very serious problems is not.” Clearly, he’s taken the easy route.