One thing that irked me during the US presidential debates (there were many things, but this stood out) was the continued claim by the President that Mitt Romney was proposing a $5 trillion tax cut, which would simply drive up our debt to astronomical proportions. This claim should be absurd on its face for a few simple reasons if you actually stop to think about it.
The first and primary reason to regard this claim as ridiculous is to compare the magnitude of the supposed tax cut to the current tax revenues of the United States government. Any idea how much the US took in for taxes in 2011? $4.95 trillion. Expected revenues for this year? $5 trillion. So, if one infers from the statement that the tax cut is $5 trillion annually, this would mean that Romney would be abolishing all taxes and either borrowing in full or simply disbanding the government. Even a cursory review of Romney’s tax proposal shows that this is simply not the case.
That brings us to the question, if this is not an annual rate then how many years is it over? The size of a cut that is enacted in perpetuity is irrelevant if it does not have a time frame on it (or is adjusted for time value of money). Consider the following: under the President’s rules if the tax cut were even one dollar per year, one could claim that it is a $5 trillion dollar tax cut, simply not disclosing that the time frame was five trillion years. This is simply a way to trick people, understanding that most will never look into the underlying assumptions of the claim. It’s kind of insulting.
Well, it turns out that the time frame on the $5 trillion (actually $4.8 trillion) claim is 10 years. The Tax Policy Center (a branch of the liberal Brookings Institute) took a look at the impact of the proposed tax cut and said that it’s first year impact would be $480 billion. That number was then multiplied by 10 by the President to make sure the American public would think it is really big. In fact, $480 billion is plenty big. But there’s a problem… it’s not actually an evaluation of Romney’s tax plan.
What the figure is actually is an evaluation of the cut part of Romney’s plan. His proposed plan includes tax cuts on the base rate, but also to raise revenue by removing common exemptions. Many people (especially the wealthy) pay nowhere near the stated tax rate for their income because they have all sorts of deductions and exclusions. If those were closed, the nominal (i.e. stated) rate could be lowered while the amount paid remains the same. It’s a plan for a simpler system that holds everyone to the same standards. In theory, it can be done where it is revenue neutral. The Tax Policy Center was asked to only look at half the plan, which is exactly what they did. They looked at the lower rates, but none of the additional revenue (as well as none of the macro effects). It has absolutely no bearing on what would actually happen (which the TPC has, in their defense, pointed out repeatedly). If Romney can pull of the plan like he wants (which would depend on Congress), the total cost over ten years would be zero dollars.
Now, do I think that they could raise $480 billion in tax revenue by closing those deductions? Well according to the GAO tax “loopholes” resulted in a loss of over $1 trillion in revenue in 2010. Getting loopholes cut in half will be a difficult task, and many are regarded as sacrosanct by this group or that group, so there would be a lot of bickering. It can be – and arguably should be – done.
It just irks me that the President is trying to spin the numbers so blatantly that he may as well make up any number he wants. Apparently he thinks that the American people won’t ever actually check, or aren’t able to comprehend what Romney’s actual plan is. I hope he is wrong.