The Revenue and Budget Implications of Romney’s New Tax Plan
Republican presidential hopeful Mitt Romney released yesterday the outlines of his new plan to cut taxes. Though he promises to reveal more details later, the proposals described today would reduce federal tax revenues by more than $10.7 trillion from 2013 through 2022, compared to what the government would raise under current laws. Compared to current tax policies (i.e. extending the Bush tax cuts), Romney’s proposals would cost about $6.2 trillion more over that same time period.
The magnitude of revenue loss is such that, even with the draconian cuts required by Romney’s proposed spending cap, deficits would remain high—at about 5 percent of gross domestic product—and debt, as a share of GDP, would continue to rise, surpassing 90 percent by 2022.
Romney’s proposals and their revenue implications
Extend all the Bush tax cuts. Romney’s tax proposal starts from the assumption that the Bush tax cuts—currently set to expire at the end of this year—are permanently extended. Maintaining those rates and other cuts would cost the federal government $2.8 trillion over the next 10 years.
Repeal the alternative minimum tax. The alternative minimum tax is supposed to prevent high-income individuals from using deductions and special tax breaks to reduce their taxable income too much. But because the tax’s income thresholds are not indexed to inflation, it is scheduled to affect more and more middle-class families over time. Most tax reform proposals include a fix for the alternative minimum tax that would index it to inflation and thus restore the tax to its original purpose. Romney’s proposal, however, is to eliminate the tax entirely. According to the Tax Policy Center, abolishing the tax will cost $2.5 trillion between 2013 and 2022.
Cut income tax rates by 20 percent across the board. After cutting revenues by more than $5 trillion, Romney would add another massive cut by reducing income tax rates across the board. The top income tax rate would be reduced by 7 percentage points. The lowest income tax rate would be reduced by 2 percentage points. As with most of Romney’s proposals, this cut would disproportionately benefit the wealthy. It would also cost approximately $3.3 trillion in lost revenue through 2022.
Repeal the estate tax. As with his original proposal, Romney’s new tax plan would eliminate the estate tax entirely. This costs about $200 billion more than the cost of extending the weaker version of the estate tax embedded in the Bush tax cuts.
Repeal the Affordable Care Act. Contrary to conservative rhetoric, the Affordable Care Act does not add to the deficit. The reason it does not add to the deficit is because it was paid for, in part, by higher taxes on wealthy individuals and by fees from health care providers. Romney’s plan is to repeal these taxes and fees at a cost of more than $900 billion from 2012 through 2022.
Reduce the corporate income tax rate to 25 percent. This proposal is also a holdover from Romney’s previous plan. Reducing the corporate rate in isolation would reduce federal revenues by more than $900 billion.
Altogether, these changes would reduce federal revenues by $10.7 trillion over the next 10 years. Many analysts prefer to measure tax changes against a future in which we maintain all current policies—extend all the Bush tax cuts and index the alternative minimum tax to inflation. Against that baseline, the new Romney tax provisions would reduce revenues by $6.2 trillion. Regardless of which baseline one chooses to use, however, the provisions detailed above would result in overall tax revenues at about 15 percent of gross domestic product.
Of course, Romney has promised to offset some of these massive cuts with measures to “broaden the base.” But as of yet, he has not identified a single change to the tax code that would increase revenues to pay for any of his proposed tax cuts.
The budget implications of these proposals
Mitt Romney argues that these massive tax cuts would be fiscally responsible because he has proposed major spending cuts. But although his fiscal plan implies enormous cuts to nearly all parts of the federal budget, the tax cuts he has proposed are so huge that even unrealistically large spending cuts will not be enough to produce sustainable budgets.
Assuming that Romney is able to make his proposed 20 percent of GDP cap on federal spending stick—a dubious proposition given our aging population and rising health care costs—with revenue at just 15 percent of GDP, deficits would remain at around 5 percent of GDP throughout the next decade. Debt as a share of GDP would rise from 68 percent in 2011 to more than 90 percent by 2022. All told, even with his spending cap, the United States would add more than $10 trillion to the national debt by 2022.
Michael Linden is the Director for Tax and Budget Policy at the Center for American Progress Action Fund.
. Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2012 to 2022” (2012).
. Author’s calculations. After extending the Bush tax cuts and repealing the alternative minimum tax, individual income tax revenues are projected to total about $16 trillion from 2013 through 2022. A 20 percent cut in rates across the board would translate into a 20 percent cut in revenues—suggesting a $3.2 trillion loss. That estimate, however, does not account for the fact that the 20 percent cut will actually be applied to income tax owed before the application of tax credits. Over the past several years, tax credits have reduced income tax liability by an average of about 8 percent, though that average is somewhat inflated due to the Making Work Pay credit of 2009. Assuming that income tax before credits is about 6 percent higher than income tax actually collected, the revenue loss from Romney’s rate cuts would be closer to $3.4 trillion. Romney’s proposal, however, explicitly excludes the capital gains and dividend rate from the 20 percent cut, whereas the $3.4 trillion estimate implicitly includes the assumption that those rates are reduced from 15 percent to 12 percent. Adding back in the additional revenue gained from going back to 15 percent rates on capital gains—using CBO revenue estimates—we arrive at the final estimate of just under $3.3 trillion.
. Author’s calculations based on the most recent CBO budget and economic outlook. Calculations assume that total federal spending declines to 20 percent of GDP by 2016, and remains there for the rest of the period.
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Managing Director, Economic Policy