How will Romney account for billions of lost revenue?

Romney rolled out a new tax proposal after many Republicans blasted his initial plan as too cautious. His plans to cut income tax rates by 20 percent and eliminate the Alternative Minimum Tax sound appealing, but he offers no specifics on how he'll offset the billions in lost revenue. 

The Tax Policy Center has updated its analysis of Mitt Romney’s platform to reflect his proposed new tax cuts. And the result: Lower taxes for nearly everyone. The highest-income households would pay significantly less, while few with the lowest incomes would benefit.  And without offsetting revenue increases or new spending cuts, Romney’s plan would significantly increase the budget deficit.

Romney’s initial tax plan was blasted by many Republicans as too cautious, so last week he rolled out a far more ambitious proposal. Instead of simply making the 2001/2003 tax cuts permanent , abolishing the estate tax,  eliminating taxes on investment income for those making less than $200,000, and cutting corporate tax rates,  Romney threw the long ball.

On top of his original plan, Romney proposed cutting all ordinary income tax rates by 20 percent and eliminating the Alternative Minimum Tax. While Romney said he’d offset the lost revenue from these new tax cuts by trimming deductions, credits, and exclusions, he did not say how. 

The cost of the new Romney plan? For 2015, when changes would be fully effective, he’d add nearly $500 billion to the budget deficit, even after extending the 2001/2003/2010 tax cuts. If the tax cuts are allowed to expire, he’d add $900 billion to the deficit in 2015.

Two caveats: First, Romney has not described how he’d broaden the tax base, thus TPC could only score his proposed tax cuts.  Second, on Wednesday TPC released 10-year revenue projections for two changes Romney added to his plan—the across-the-board rate cut and repeal of the AMT.  Those estimates are very different, in part because they only included two elements of his plan. This projection—for one year rather than 10—looks at his entire proposal. 

Romney aides also say high-income households would pay about the same share of taxes under his new system as they would if he extended the 2001/2003 tax cuts. But, without those unidentified revenue increases, they would pay a considerably lower share.  

For instance, those making $1 million or more would enjoy an average tax cut of  8 percent of income or roughly $250,000 (relative to a world where the Bush/Obama tax cuts remain in place) compared to an average cut of less than 4 percent of income, or $2,900, for all households. Because Romney would repeal President Obama’s 2009 tax cuts, those making less than $10,000 would pay an average of $100 more in taxes and only about 11 percent would get any tax cut at all.

Romney would cut taxes for nearly all households making between $50,000 and $75,000 but by far less than those with higher incomes. On average, those making $1 million or more would see their after-tax incomes rise by nearly 12 percent while incomes of households earning $50,000-$75,000 would rise by only about 2 percent.

Romney’s promise to make his new system as progressive as today’s puts him in a difficult policy box. Which tax preferences aimed at upper-income households could he dump to keep the code progressive while not adding hundreds of billions to the deficit?   

Raising rates on capital gains and dividends might help, but he’s already promised to cut them to zero for those making $200,000 or less and hold them at 15 percent for everyone else. Eliminating or restructuring tax breaks for retirement savings, mortgage interest, and employer-sponsored health insurance could make Romney’s low-rate system more progressive, but these changes would be hugely controversial. Besides, while they’d target many of the merely rich, they wouldn’t matter much to the uber-wealthy who benefit most from Romney’s rate cuts.

Romney seems to be trying to walk a fine line between responsible fiscal policy and pandering to his base. But by not identifying how he’d pay for his generous tax cuts, his tightrope is getting pretty wobbly.