Mitt Romney finally offered up some details Tuesday about tax reform, specfically how he would limit tax deductions and broaden the tax base in order to afford the lower tax rates he is proposing. Romney said in Denver:
As an option, you could say everybody's going to get up to a $17,000 deduction. And you could use your charitable deduction, your home mortgage deduction, or others -- your health care deduction, and you can fill that bucket, if you will, that $17,000 bucket that way. And higher income people might have a lower number.
Romney's idea of limiting tax deductions should be taken seriously. Most of the big tax breaks for individuals tend to disproportionately benefit the affluent, who have bigger mortgages, put more into their 401(k)s, can stuff bigger wads of cash into health savings accounts, give more to charity, and whatnot. Placing an overall cap on tax deductions, as Romney proposes, would largely preserve the value of key tax breaks for the middle class while dramatically shrinking the scope of breaks for the affluent.
Demos proposed something similar in a fiscal policy blueprint we released in 2010 with EPI and the Century Foundation. But instead of proposing a dollar figure, as Romney suggested, we proposed limiting itemized deductions to 15 percent of a filer's income -- and also converting some breaks to refundable credits.
So Romney is on the right track here. The only problem -- and it's a big one -- is that the math on his tax plan overall still doesn't add up.
Romney's tax plan has been shrouded in mystery since the day he unveiled it. He has promised big cuts in tax rates and says he would make up lost revenue by closing tax loopholes. Yet -- until yesterday -- he hasn't offered details on what loopholes he would close. It's hard to blame the guy for not wanting to talk specifics, given that huge special interests like the real estate industry are lined up behind key tax breaks and many voters wouldn't be thrilled that a candidate is coming after their mortgage interest deduction.
But Romney has a bigger reason to avoid specifics: Which is that it is not clear that any realistic reduction in tax breaks will make up for all the revenue that would be lost by extending the Bush tax cuts and also further lowering tax rates.
Just how much revenue are we talking about?
According to the Tax Policy Center, "the Romney plan would lower federal tax liability by about $900 billion in calendar year 2015 compared with current law, roughly a 24 percent cut in total projected revenue."
So for Romney's tax plan to be revenue neutral, as he has pledged, he would need to close tax breaks to the tune of $900 billion in 2015. That is not going to happen. Every tax break together costs about $1.1 trillion annually according to the Congressional Research Service -- so Congress would need to make a nearly complete sweep to get the math right under Romney's plan, a politically unrealistic outcome.
In any case, that is not what Romney seems to be proposing now. He wants to deeply trim tax breaks, not eliminate them entirely. The Simpson-Bowles Commission, which Romney often invokes, also would modify many tax breaks, not eliminate them, including the following:
• Support for low-income workers and families (e.g., the child credit and EITC);
• Mortgage interest only for principal residences;
• Employer-provided health insurance;
• Charitable giving;
• Retirement savings and pensions.
If you know anything about tax expenditures, you know that that list includes all the biggest tax breaks now on the books. Even if Congress greatly scaled these back under a Romney presidency, such base broadening wouldn't generate $900 billion in new revenue. For example, the Demos analysis found that limiting tax deductions to 15 percent of income would raise just $141.5 billion in new income in 2014.
Tax reform is a good idea and Romney is right to embrace it. What is a bad idea is imagining that the U.S. can also drastically lower rates at the same time. In truth, given our fiscal challenges and investment needs, what is really needed are higher rates and fewer loopholes. In other words, more revenue overall.