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New JCT Study Shows Futility of Base-Broadening to Pay for Massive Tax Rate Cuts

As long as the only thing we’re going to talk about for the next few weeks in the election is taxes, I might as well provide the update. The Joint Committee on Taxation, the “CBO for taxes” as it were, the nonpartisan scorekeeper on tax policy, just released a report that should end all discussion about the Romney campaign’s plans for a deficit-neutral 20% across-the-board rate cut.

Repealing all itemized deductions in the U.S. tax code would pay for only a 4 percent cut in income tax rates, according to an estimate from the nonpartisan scorekeeper for Congress that casts doubt on Republicans’ ability to finance lower income-tax rates with base broadening.

The analysis by the Joint Committee on Taxation shows the arithmetical difficulty of an approach that assumes long-favored tax breaks such as deductions for mortgage interest and charitable contributions could be repealed instantly and completely. Republican presidential nominee Mitt Romney proposes a 20 percent income-tax cut and says he would pay for it by limiting tax deductions, credits and exemptions.

There are some important differences between Romney’s approach and the JCT analysis that make it difficult to compare the 4 percent finding in the study with Romney’s promise of a 20 percent tax cut. Much of the base broadening in the analysis pays for some changes that Romney assumes in his starting point and for policies from the 2009 stimulus law that he may not want to extend. That means he would able to use the changes to deductions to cut rates by more than 4 percent.

The estimate assumes the expiration of the Bush-era tax cuts completely, and the base-broadening pays for the perennial patch to the alternative minimum tax (in fact, it pays for a repeal of it, as well as extensions of the increased child tax credit and Earned Income Tax Credit). That changes what the rate cut would actually look like, and so this is not a perfect indicator of the Romney plan. But the basic principle applies, and it’s so far from the reality of what Romney wants to achieve – a 20% rate cut without adding to the deficit, and without an increase on the middle class – that I think it serves as more evidence of the futility of the exercise. Indeed, many of the other tax expenditures that JCT doesn’t use here are ones that Romney has already taken off the table.

Mark Zandi, the Moody’ economist always trotted out to bless this or that plan, admitted today that the Romney plan is mathematically impossible.

For those that care about the deficit, it’s worth noting that the last major cut to taxes, the Bush-era tax cuts, accounts for the majority of the deficit problem currently, particularly in the out years. The tax cuts and the two wars will account for $9 trillion in deficits between their inauguration and 2019, under current policy. So throwing another $5 trillion tax cut that cannot be plausibly offset on the pile makes even less sense, especially in the constrained, non-MMT environment of Washington.

You can end the rise in the debt-to-GDP ratio ENTIRELY, in fact, by simply letting the Bush-era tax cuts expire. And I would do it, triggered by a return to normal employment and phased in gradually on the lower end of the scale. What I would not do is an ill-advised 20% tax cut that cannot be plausibly offset, and which would leak out at much greater rates to the rich, at the expense of the poor.

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David Dayen

David Dayen