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Romney Declares Corporate Loopholes Off the Table in Tax Reform
Romney Declares Corporate Loopholes Off the Table in Tax Reform
$1 trillion in corporate tax cuts would be paid for by reducing middle-class tax breaks, not corporate tax breaks, under Romney’s plan.
New details from the Romney campaign about the Republican presidential candidate’s tax plan reveal not only that middle-class families will shoulder the burden for tax cuts for wealthy individuals but also that they’ll have to pay for about $1 trillion in tax cuts for corporations.
Independent analyses of the former Massachusetts governor’s tax proposals already show that they would inevitably raise middle-class taxes to pay for a massive tax cut for high-income households. Earlier this month, researchers at the nonpartisan Tax Policy Center crunched the numbers behind Gov. Romney’s plan and found that the magnitude of his tax cuts for high-income households would necessitate a tax increase of at least $2,000 on middle-class families, and at least $500 on all taxpayers with incomes under $200,000.
But Gov. Romney had been somewhat vague about how he would pay for corporate tax cuts. Now, though, the campaign has clarified that none of the cost of his proposal to cut corporate taxes by about $1 trillion would be paid for by eliminating corporate tax breaks or tax loopholes. That trillion-dollar revenue loss can only be made up by further tax increases on the middle-class. Here are the details.
The Romney tax increase on the middle class
First, some background. Gov. Romney’s tax plan would lower income tax rates for individuals by 20 percent (dropping the top rate from 35 percent to 28 percent) and lower the corporate rate from the current 35 percent to 25 percent. Though these rate cuts and other Romney tax policies would cost nearly $5 trillion over 10 years, Gov. Romney’s advisors continue to claim that his tax plan is “revenue neutral” compared to current tax policies. The campaign says that the lost revenue will be made up by “broadening the tax base” by eliminating tax deductions, credits, and other such tax breaks, and by counting on additional economic growth.
Yet with very few exceptions, Gov. Romney has not specified which tax breaks he would eliminate. And his plan specifically protects the biggest tax breaks for high-income households – the preferential rates on capital gains and dividends.
Earlier this month, economists at the nonpartisan Tax Policy Center took a close look at the hidden part of Gov. Romney’s tax plan—how it could fill the nearly $5 trillion revenue hole by eliminating unspecified tax breaks. The center’s researchers went out of their way to be kind to Gov. Romney, filling in the blanks of his plan to make it as progressive as possible. They assumed, for example, that his plan would eliminate all tax breaks for high-income households before reducing any for middle-income or low-income households. They also assumed that its proposed corporate tax cuts would be fully paid for with reductions in tax breaks for corporations or other businesses.
Even with these very generous assumptions, the nonpartisan Tax Policy Center found that Gov. Romney’s plan does not add up without a significant net tax increase on households earning less than $200,000. The center concluded that in a single year, 2015, his plan would necessitate “a shift in the tax burden of roughly $86 billion from those making over $200,000 to those making less than that amount.” That translates into an average tax increase of about $2,000 for middle-class families and $500 for all taxpayers with incomes under $200,000. Even with 20 percent lower rates, these families would pay higher taxes overall because of the elimination of tax deductions and credits.
Romney campaign says corporate tax breaks are off the table in tax reform
But it gets worse. Last week, the Romney campaign clarified that their corporate tax rate cuts would not be fully paid for by closing corporate tax breaks. In fact, the Romney campaign revealed to the Tax Policy Center that none of the nearly $1 trillion in lost revenue from reducing the corporate rate to 25 percent would be paid for by eliminating corporate tax breaks. The campaign also clarified that another of Gov. Romney’s other corporate tax proposals—a tax “holiday” for overseas corporate profits, which has been estimated to cost $80 billion over 10 years—also would not be paid for by closing corporate tax breaks.
The authors of the Tax Policy Center analysis write in a follow-up report:
Governor Romney’s tax advisors told TPC that the (then, as now, unspecified) cuts in corporate tax preferences were not meant to finance the initial rate cut to 25 percent but instead would pay for a subsequent revenue-neutral set of proposals that would reduce corporate rates further and enact a territorial system.
In other words, Gov. Romney plans to give corporations a $1 trillion tax cut and an $80 billion tax holiday before asking them to sacrifice a single tax break. Any reductions in corporate tax breaks—if they ever happen—would go toward financing a second round of corporate rate cuts. This second round of tax cuts would reduce corporate rates below 25 percent and enact a “territorial” tax system, which is essentially a permanent holiday for overseas profits. (see Table 1 for a nonexclusive list of tax breaks that would be on the table and off the table under Romney’s proposals for tax reform)
The Romney campaign continues to maintain that their overall tax plan is revenue neutral. So the fact that corporate tax breaks are off the table (reserved for a second round of corporate tax cuts) can only mean one thing: The nearly $1 trillion corporate tax cut and $80 billion holiday has to be paid for with even bigger reductions in tax breaks for individuals.
Under the contours of the Romney plan, the only tax breaks that would be available to pay for this additional $1 trillion are those benefitting individuals and families with incomes under $200,000. That’s because, as the Tax Policy Center found in its original study, entirely eliminating tax breaks benefitting high-income households isn’t even enough to pay for Romney’s tax rate cuts for those households, let alone tax cuts for corporations.
The authors of the report confirm that accounting for Gov. Romney’s unpaid-for corporate tax cuts would necessitate “even larger cuts to tax expenditures [i.e. tax breaks], and correspondingly larger increases in taxes on middle- and/or lower-income taxpayers,” than their original study found.
How big? The original Tax Policy Center study found that in a single year, 2015, Gov. Romney’s plan would shift at least $86 billion of the tax burden from households with incomes over $200,000 to households with incomes below that level. The center estimates that in the same year, Gov. Romney’s unpaid-for corporate tax cuts would cost $96 billion. Therefore, the tax increases on the middle class that the center originally estimated—at least $2,000 for families and $500 for all taxpayers with incomes under $200,000—would likely be around twice as much if Gov. Romney’s unpaid-for corporate tax cuts are taken into account.
But what about the Romney plan’s promised effects on economic growth? As the Tax Policy Center writes in its original report, “the effects of tax rate reductions on the macroeconomy are likely to be small or even negative, at least, over the typical 10-year budget window.” Looking at Gov. Romney’s tax plan for individuals, those researchers found that even under extremely optimistic estimates—using an approach developed by Romney economic advisor Greg Mankiw—Gov. Romney’s tax rate cuts would not come close to paying for themselves: Middle-class families would still get a significant tax increase, albeit a smaller one. Cuts in corporate tax rates are estimated to have a similarly small impact on economic growth—not nearly enough to finance themselves.
The bottom line is this—Gov. Romney’s tax plan raises middle-class families’ taxes to pay for tax cuts for high-income households, and now we know that it will raise middle-class families’ taxes even more to pay for tax cuts for corporations.
Seth Hanlon is Director of Fiscal Reform at the Center for American Progress Action Fund.
 “Tax,” MittRomeny.com, available at http://www.mittromney.com/issues/tax; Glenn Hubbard, “The Romney Plan for Economic Recovery,” Wall St. Journal, http://professional.wsj.com/article/SB10000872396390443687504577562842656362660.html?mg=reno-wsj; Michael Linden and others, “The Romney Economic Agenda and Its Effect on the Middle Class and Growth” (Washington: Center for American Progress Action Fund, 2012), available at http://www.americanprogressaction.org/issues/economy/report/2012/07/31/11884/the-romney-economic-agenda-and-its-effect-on-the-middle-class-and-growth/.
 Romney would eliminate several provisions enacted under President Obama in 2009, including the American opportunity tax credit for higher education costs and improvements to the child tax credit and earned income tax credit for low-income families. These changes would result in a net tax increase on 18 million households even before Romney’s other, unspecified reductions in tax breaks. For further explanation, see Linden and others, “The Romney Economic Agenda and Its Effect on the Middle Class and Growth.” Romney would also apparently allow the production tax credit for wind energy to expire.
 Samuel Brown, William Gale, and Adam Looney, “On the Distributional Effects of Base Broadening Income Tax Reform” (Washington: Urban-Brookings Tax Policy Center, 2012), available at http://www.taxpolicycenter.org/UploadedPDF/1001628-Base-Broadening-Tax-Reform.pdf, p. 10, note 16.This was an extremely generous assumption because candidate Romney had called for an “immediate” corporate tax cut before even laying out his tax reform plan–and because it might not even be possible for such a large corporate rate cut to be paid for with cuts in corporate tax breaks.
 Tax Policy Center, “Table T11-0088,” available at http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2969&DocTypeID=5. The campaign also stated that Gov. Romney’s proposals to permanently extend the tax credit for corporate research and to allow businesses to write off the costs of all capital investments for one year would similarly not be paid for by closing corporate loopholes. Samuel Brown, William Gale, and Adam Looney, “Implications of Governor Romney’s Tax Proposals: FAQs and Responses” (Washington: Urban-Brookings Tax Policy Center, 2012), available at http://www.taxpolicycenter.org/UploadedPDF/1001631-FAQ-Romney-plan.pdf, p. 5.
 Steven Sloan and Richard Rubin, “Repatriation Tax Holiday Google Backs Raises Cost Concerns,” Bloomberg, May 12, 2011, available at http://www.bloomberg.com/news/2011-05-12/repatriation-tax-holiday-supported-by-google-stirs-cost-concerns.html.
 Brown, Gale, and Looney, “Implications of Governor Romney’s Tax Proposals.”
 High-income households would indirectly receive the vast majority of the benefit of a corporate tax cut even under the assumption that labor bears some of the burden of the tax. See Benjamin H. Harris, “Corporate Tax Incidence and its Implications for Progressivity” (Washington: Tax Policy Center, 2009), available at http://www.urban.org/UploadedPDF/1001349_corporate_tax_incidence.pdf.
 Brown, Gale, and Looney, “On the Distributional Effects of Base Broadening Income Tax Reform,” p. 14.
 See Nicholas Bull, Tim Dowd, and Pamela Moomau, “Corporate Tax Reform: A Macroeconomic Perspective,” National Tax Journal 2011, 64 (4) (2011): 923–942; Joint Tax Committee, “Macroeconomic Analysis of Various Proposals to Provide $500 Billion in Tax Relief” (2005), available at http://www.jct.gov/x-4-05.pdf.
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Former Acting Vice President, Economy