Mitt Romney's tax plan gets curiouser and curiouser.
The basic concept behind the plan is pretty simple. The Republican presidential nominee wants to cut each of the six federal income-tax rates by one fifth, so those in the 15 percent bracket would pay 12 percent, those in the 25 percent bracket would pay 20 percent, and so on. He'd also eliminate the estate tax and kill or reduce other levies. President Obama, by contrast, would leave most rates where they are, while raising the rate for top earners by roughly 9 to 13 percent, depending on income.
The problem with Romney's plan, of course, is that the federal government is already drowning in debt and can't take on more to finance sizeable tax cuts. The nonpartisan Tax Policy Center estimates that Romney's cuts would reduce federal revenue by $480 billion per year, which Obama has characterized as a $5 trillion tax cut (over 10 years, a rounded-up qualifier that Obama doesn't usually mention). Romney has addressed that, sort of, by saying he'd offset lost revenue by cutting or reducing a bunch of tax credits, deductions, and other loopholes, with one idea being to put a limit of $17,000 on the amount of deductions any taxpayer could claim in a given year. That would help a bit with the accounting, since some wealthy taxpayers claim deductions that help them avoid thousands or even millions of dollars in taxes.
But new limits on deductions still wouldn't be nearly enough to fill the hole left by those big cuts in tax rates. So in his first debate with President Obama, Romney made a new pledge: He will approve no tax cut that adds to the deficit.
This sounds like a guarantee that Romney's tax plan, if ever enacted, would do nothing to harm the government's finances or the overall economy, and would only help. It also relieves Romney of the burden of explaining all the details now, since he can wave away objections that his numbers don't add up by simply saying he'll make them add up when the time comes. But the irony is that a plan to cut taxes that doesn't raise the deficit may have even less chance of ever becoming law than tax cuts that would require more borrowing. That's because markets and even some politicians may no longer tolerate the kind of legerdemain that it takes to cut taxes today while supposedly paying for them tomorrow.
The only way Romney would be able to cut taxes as deeply as he wants, without adding to the deficit or simply offsetting a tax cut in one place with a tax hike in another, is to boost the economy so much that total tax payments would actually go up, despite lower rates. The idea that lower taxes stimulate growth is a core belief of many "supply-side" conservatives, even though there's plenty of evidence to the contrary. The federal tax burden today is the lowest in modern times, for instance, yet over the last decade that has corresponded with slowing growth rates and falling median income rather than the kind of boom that supply-side theory predicts.
But let's say Romney is right, and lower taxes really will trigger an impressive economic revival. Under the best scenario, it wouldn't happen for a few years, yet tax cuts would reduce the federal government's revenue immediately. So the deficit would have to rise in the short term, at a minimum. The only way Romney can claim that tax cuts wouldn't add to the deficit is to do "dynamic scoring," which relies on projections of falling deficits in the future, predicated on much higher growth rates than at present.
That's not so different from the just-trust-me growth rates that the Obama White House predicted in 2009 to justify its huge stimulus bill. The yawning gap between those White House predictions and reality is now one of Obama's biggest liabilities.
In the past, Washington was able to hike up the deficit, despite dubious predictions about the lugubrious outcome, because there was wiggle room in the government's finances. That wiggle room is now nearly gone. Standard & Poor's cut the U.S. credit rating for the first time ever last summer because the national debt, now $16 trillion, is getting too big, and Washington has made no serious effort to do anything about it. Moody's has now said that it may also cut the U.S. credit rating before long. Eventually, those dings will raise Washington's borrowing costs, which could quickly become a very big problem that forces bigger tax hikes and spending cuts than Americans are prepared for.
So if Romney were elected and he passed a tax plan that made deficits even bigger, the global investors who finance America's debt would have to decide if promises of declining deficits in the future seemed plausible. No doubt they'd study the administration of George W. Bush, who made basically the same promises in 2001 and 2003 when he passed his own tax cuts. Alas, there's almost no way to argue that those tax cuts boosted growth and improved the government's finances. On the contrary, the national debt rose by about $3.5 trillion under Bush, who left office, as we know, amid a Depression-style financial meltdown.
Some serious economists back Romney's claim that he can cut taxes without raising the deficit, including Glenn Hubbard of Columbia, Greg Mankiw of Harvard, and John Taylor of Stanford. But markets won't react to such a plan by listening to what economists say. They'll look to history to predict the future, and turn the screws when rosy projections don't materialize. It's a wonder that hasn't happened yet.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.