In his Democratic National Convention speech last week, former President Bill Clinton joked about conservatives’ struggle between professed concern about public debt, proposed tax cuts, and arithmetic:
“Somebody says, ‘Oh, we’ve got a big debt problem. We’ve got to reduce the debt.’ So what’s the first thing [Republican presidential nominee Mitt Romney] says we’re going to do? ‘Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts, heavily weighted to upper-income people. So we’ll make the debt hole bigger before we start to get out of it.’”
There are plenty of holes in Romney’s plan, which would translate to somewhere between $2.7 trillion and $6.1 trillion in deficit-financed tax cuts over the next decade, relative to current tax policies.1 Within this range, their impact is difficult to quantify because the Romney plan suffers from serious sins of omission.
Romney initially proposed repealing the estate tax; eliminating capital gains, dividends, and interest taxation for households with adjusted gross income under $100,000 ($200,000 for married taxpayers filing jointly); cutting the corporate income tax rate from 35 percent to 25 percent; eliminating the corporate alternative minimum tax (AMT); and repealing new taxes from the Affordable Care Act (ACA). This $2.7 trillion package of tax cuts would be entirely deficit-financed.
Romney subsequently proposed reducing all individual income marginal tax rates by 20 percent (e.g., the top income tax rate would fall to 28 percent from 35 percent under current policy) and fully eliminating the AMT, claiming that this round of tax cuts would be both revenue-neutral (i.e., financed with “base-broadening”) and distributionally neutral. But here’s the kicker: Romney didn’t identify a single base-broadening offset, and instead firewalled preferential tax treatment of investment income from elimination—which necessarily means that his plan cannot be both revenue-neutral and distributionally neutral (see this Tax Policy Center analysis). So one objective (or both objectives) will have to be dropped—and if fully deficit-financed, the cost of Romney’s tax plan would increase by $3.4 trillion.
Within this hefty range of uncertainty, it’s nonetheless instructive to model what Romney’s tax plan might mean for the trajectory of public debt—which requires a lower- and upper-bound for plausible federal spending. The lower-bound assumes that Romney’s proposal to cap federal spending at 20 percent of GDP is phased into full effect by fiscal 2016, and any associated debt service from tax cuts crowds out non-interest domestic spending to keep total spending at 20 percent of GDP.2 The second path layers the tax cuts’ associated debt service on top of current policy outlays (i.e., the scenario in which Romney’s tax cuts, but no net spending cuts, make it through Congress). The lower- and upper-bounds for federal spending are coupled with the lower- and upper-bounds for revenue (i.e., fully deficit-financed and partially deficit-financed tax cuts).
- Under the 20 percent spending cap and partially deficit-financed tax cuts, debt would decrease by $1.4 trillion relative to current policy, lowering public debt-to-GDP to 80.1 percent of GDP by fiscal 2022.
- Under the 20 percent spending cap and fully deficit-financed tax cuts, debt would increase by $2.0 trillion relative to current policy, pushing debt-to-GDP up to 93.7 percent of GDP by fiscal 2022.
- Under partially deficit-financed tax cuts and no net spending cuts, debt would increase by $3.1 trillion relative to current policy, raising debt-to-GDP to 98.4 percent of GDP by fiscal 2022.
- Under fully deficit-financed tax cuts and no net spending cuts, $7.1 trillion would be added to the debt relative to current policy, forcing debt-to-GDP to 114.4 percent of GDP by fiscal 2022.
At bare minimum, Romney is proposing to exacerbate the fiscal outlook by $7.1 trillion before he starts axing tax expenditures and/or domestic spending. The one scenario in which the Romney tax and budget plan would lower public debt relative to current policy would necessitate $4.0 trillion in non-interest spending cuts over the decade, again relative to current policy. As Clinton duly noted, Romney’s concerns about fiscal profligacy are also belied by a defense build-up of over $2 trillion, which would effectively bump the requisite primary spending cut to $6.2 trillion (-15.3 percent).3 And under none of these scenarios would Romney achieve a lower debt-to-GDP ratio than the president’s 2013 budget request, which would reduce debt by $3.0 trillion relative to current policy, lowering public debt to 73.4 percent of GDP by fiscal 2022.4 Indeed, it is much easier to reduce debt if you increase taxes rather than slash them by trillions of dollars; it’s a matter of basic arithmetic.
1. These endpoint revenue estimates are extrapolated from the Tax Policy Center’s analysis of two versions of Romney’s tax plan (T12-0004 and T12-0041) scored relative to current policy. Imputed revenue loss for calendar year 2015 is held constant as a share of nominal GDP and subtracted from the current policy revenue baseline. Our calculations assume the tax cuts would be retroactively enacted to Jan. 1, 2013. We additionally adjust the imputed revenue loss for ACA tax provisions that would be repealed net of the upper-income Medicare Hospital Insurance surcharges, which appear to be the only ACA provision included in TPC’s analysis of Romney’s tax plan (see TPC’s discussion of the Romney tax plan).
2. The somewhat quantifiable spending cuts Romney has proposed do not come close to the primary spending cuts needed to meet a global spending cap of 20 percent of GDP. We ignore his plan for a balanced budget amendment because at the revenue levels he has proposed (somewhere between 14.9 percent and 16.6 percent of GDP in fiscal 2016), it is not tenable policy for economic recovery or the public finances of an aging population.
3. Assuming the increase in base defense spending to 4 percent of GDP is fully phased in by fiscal 2016, defense outlays would increase by $2.155 trillion over fiscal 2013–2022, relative to current policy.
4. For an apples-to-apples comparison with the Romney budget (modeled from CBO’s August 2012 budget and economic baseline), the Congressional Budget Office’s independent analysis of the president’s fiscal 2013 budget (from the March 2012 budget baseline) has been adjusted for legislative, technical, and economic changes in current-law deficit projections between the March and August 2012 baselines. See Table A1.