POSTED: 1:30 a.m. HST, Sep 10, 2012
WASHINGTON >> If any single question can be said to dominate the presidential campaign, it is whether the conservative policies advocated by Mitt Romney would help or hurt the middle class. And no single issue goes more to the heart of that question than taxes.
Romney says no middle-income Americans will have their tax bill go up if he becomes president. President Barack Obama says the average middle-class family would pay as much as $2,000 a year more under the Romney plan.
It is a conflict that grew in prominence during the party conventions over the last two weeks and that both sides intend to push from now until Election Day. And it has focused sharper attention on what many experts agree is one of the tax code’s biggest problems: an array of tax breaks totaling more than $1 trillion a year.
The breaks cover activities as varied as cutting timber, providing health insurance to employees, selling stock and buying a home, making them popular with powerful constituencies and many voters. But many economists say the tax breaks are inefficient and even distort the economy.
Romney has pledged to cut individual income tax rates for everyone, and to do it without increasing the federal budget deficit or putting new tax burdens on middle-income people to make up for the lost revenues from the rate cuts. But he has provided no further specifics, confounding analysts and leaving himself open to attack from Democrats.
Asked on the NBC program “Meet the Press” on Sunday which tax deductions he would eliminate, he did not answer directly, saying only that he would target “some of the loopholes and deductions at the high end” while lowering the “burden on middle-income people.”
Democrats — as well as a broad range of economists from the left, right and center — say that the natural consequence of ending tax breaks substantial enough to offset the lost revenue from income tax rate cuts would be to hurt middle-class Americans.
Many independent analysts contend that the only way to raise the revenue Romney is talking about would be to eliminate breaks like the preferential treatment of investment income or the mortgage-interest deduction.
Their position is central to the Democrats’ argument that eliminating tax breaks — called tax expenditures because they often function like government spending programs — would hit the middle class the hardest.
The partisan election-season battle underscores a wide consensus among economists and policy experts that no matter who wins the presidency, tax reform will be near the top of the national agenda before the end of the year, when the Bush-era tax cuts, worth $100 billion a year, are set to expire and lawmakers turn again to addressing the government’s budget problems.
“Scaling back the tax expenditures in the tax code will be incredibly difficult,” said Mark Zandi, the chief economist at Moody’s Analytics. “There is some constituency ready to go to war for every deduction and credit in the code. They’re ready to go on jihad. It will be very, very hard.”
Romney’s tax proposal is built on three central pillars. He has pledged that he will cut all of the marginal tax rates by 20 percent — so the top tax rate would fall to 28 percent from 35 percent, and the bottom tax rate would fall to 8 percent from 10 percent. That by itself would reduce the government’s revenue by hundreds of billions of dollars a year.
Second, Romney has promised that his plan will be “revenue neutral,” meaning it would pay for those rate reductions by clearing out the underbrush of loopholes and credits in the tax code.
But each tax break has its own rationale and fierce defenders.
Eliminate the home-mortgage interest deduction (annual cost: $99 billion and rising) and risk that housing prices will plummet just as that sector of the economy is starting to recover. End the deduction for charitable giving (annual cost: $53 billion) and attract the wrath of every hospital chief and museum director. Touch the protections for investment income (annual cost: more than $100 billion) and anger everyone from Wall Street executives to retirees.
Given that reality, the campaign has said it would protect some tax breaks — most notably the home-mortgage interest deduction and the investment protections.
But it has refused to detail which tax expenditures it would cut, leaving economists and other tax experts guessing and making a definitive analysis of its effects on families, businesses and the economy close to impossible.
“Everything is on the table,” R. Glenn Hubbard, a top economic adviser to the campaign, said in an interview, refusing to elaborate any further.
Third, and finally, the Romney campaign has said that it would not raise taxes on the middle class.
The problem, tax analysts say, is that it is mathematically impossible do all three of those things.
High-income earners would pay far less as tax rates fell. Even if the Romney campaign eliminated every one of their non-investment tax breaks and credits, rich families would still not pay what they do today.
That raises the question of whether the plan would increase taxes on the middle class, add to the deficit or require less-steep rate reductions.
“The combination of stuff they’ve specified is not only impossible — it is impossible several times over,” said William G. Gale, the director of economic studies for the center-left Brookings Institution and a co-author of a definitive Tax Policy Center study on Romney’s plan, whose arithmetic the Obama campaign is citing.
“It’s not as if the entire philosophical approach he’s pursuing is doomed,” said Alan D. Viard, a tax expert at the right-of-center American Enterprise Institute. “But he’s going to need to cut rates significantly less than 20 percent if he wants to honor his other goals.”
For weeks, the Obama campaign has used the vagueness of Romney’s tax plan as an opportunity, filling in the gaps in the equation on its own and, not surprisingly, accusing him of being a class warrior on behalf of the wealthy.
Presuming that Romney would protect the investment income of the 1 percent, Obama’s campaign has argued that Romney can pay for his tax cuts only by eliminating tax breaks that benefit the middle class.
In his acceptance speech Thursday, Obama warned that those lost deductions and tax credits would add up to $2,000 to middle-class families’ tax bills.
Obama, for his part, has promised to preserve the Bush-era cuts for income below $250,000. But income over $250,000 would be taxed at the Clinton-era rates — with the rate for the top bracket climbing to 39.6 percent from 35 percent now. All told, Obama’s proposal would raise about $1 trillion in new revenue over the next decade, according to most projections.
Romney has said that it is “just not true” that he would raise taxes on middle-income earners, with his campaign hitting the Obama campaign for playing “class warfare.”
But it is simply not clear how the Romney campaign would fill the holes. And his campaign for the presidency has raised much broader questions about how to perform tax reform in a heated political climate and a tepidly growing economy.
“Slowly,” is the answer that most tax experts give.