How Fast Would The Economy Have To Grow To Keep Romney’s Tax Plan From Adding To The Deficit?

Our guest bloggers are Michael Linden, the Director of Tax and Budget Policy at the Center for American Progress Action Fund, and Seth Hanlon, the Director of Fiscal Reform at the Center for American Progress Action Fund.

Mitt Romney’s latest tax plan would reduce federal revenues by more than $6 trillion over the ten year period from 2013-2022, and that’s on top of the more than $4.5 trillion cost of extending all the Bush tax cuts. But Romney insists that his tax plan will not add to the deficit. He claims that a mixture of “stronger economic growth” and “base broadening” will make up for the lost revenue.

So, just how strong would economic growth have to be to make his plan add up?

The economy would need to grow at a real rate of 6.8 percent every year for the next five years! In other words, without additional measures to raise revenue, the only way Romney’s tax plan will raise the same amount of revenue by 2017 as the current tax code would, is by having the economy go on an unprecedented tear like nothing this country seen in generations. 6.8 percent real growth for five straight years is “implausible,” to say the least.

To put that in perspective, the Congressional Budget Office currently projects that the economy will grow by an average of 3.3 percent annually over the next five years. The very best five year period in American post-war history was from 1961 to 1966 when economic growth averaged 5.8 percent. Former Romney opponent and now Romney-backer Tim Pawlenty’s economic plan relied on consistent 5 percent real growth and he was basically laughed out of the room for making such outlandish assumptions.

Of course, Mitt Romney has also promised to “broaden the base” by eliminating or limiting some tax breaks for the wealthy, while leaving those for the middle intact – though he has yet to identify even a single specific one.

But even if we take Romney at his word, the math still doesn’t work without enormous and unrealistic economic growth. Limiting the value of tax expenditures for those making more than $250,000 would generate between $40 and $50 billion in 2017. Romney would still need five years of 6.5 percent real growth to make up the rest. Even completely eliminating all of the major tax benefits for those in the top 1 percent except for the special rates on investment income – which would generate around $150 billion – would still leave Romney relying on five years of 5.8 percent real annual growth. In fact, anything under $275 billion in base broadening for 2017 would require 5 percent real growth or better to make the numbers add up to the same level of revenue as current policies would generate.

“Offering gimmicky proposals that rely on implausible levels of economic growth and blow huge holes in the budget is easy,” Romney said. He might have continued with, “Now let me show you how easy.”

The Math

Growth Estimates

The Congressional Budget Office projects that, under current tax policies – with the Bush tax cuts extended permanently – total federal revenue in 2017 will be a little over $3.5 trillion.

Romney’s tax plan, by contrast, generates just under $3 trillion in 2017, according to estimates from the Tax Policy Center, and including the effects of his corporate tax cuts, estate tax repeal, and Affordable Care Act repeal – which assume no special economic growth. That translates to about 15 percent of the current CBO projection of gross domestic product for 2017.

For the Romney tax plan – which raises 15 percent of GDP – to generate the same $3.5 trillion that current policies would generate under “normal” conditions, GDP in 2017 would need to be over $23 trillion. That’s about 18% higher than the current projection. To get there from this year’s GDP would require annual 8.5 percent growth in nominal – i.e. not inflation adjusted – GDP each year starting in 2013. After using the CBO’s GDP index to adjust for inflation, 8.5 percent nominal growth becomes 6.8 percent real annual growth.

These estimates implicitly assume that the revenue generated from Romney’s tax plan will stay the same – as a share of GDP – even if GDP growth is much faster. If, however, the additional economic growth came disproportionately from sources that were tax-favored, that would reduce the revenue generated by Romney’s code, and therefore require even higher economic growth to make up the difference. Conversely, if the extra growth came from higher-taxed activities, that would increase revenue, and reduce the need for extra growth.

Tax Expenditure Estimates

The Tax Policy Center estimates that limiting tax benefits for those making more than $250,000 a year to 2 percent of adjusted gross income (along the lines of a proposal offered by Professor Martin Feldstein, but limited only to high-income taxpayers) would generate $48 billion in 2015. For 2017, it would likely generate around $54 billion, assuming the revenue generated stays constant as a share of total income tax revenues. But those estimates depend, in part, on the current tax rates. With marginal income tax rates 20 percent lower – as Romney has proposed – limiting those tax benefits would generate about 20 percent less revenue.

A 2008 Tax Policy Center report determined that eliminating major tax expenditures other than capital gains and dividends would reduce the after-tax incomes of the top 1 percent by 6.2-6.6 percent (depending on whether interactions between them are counted) in 2007. But at Romney’s 28 percent rates, the value of such tax expenditures would be less – about 5 percent per household. Given that after-tax incomes of the top 1 percent averaged$1.3 million in 2007, a 5 percent decrease in after-tax income would translate roughly into $65,000 per household in the top 1 percent – or about $79 billion overall. That is approximately 7 percent of individual income tax revenues in 2007. A similar change in revenues would amount to $140-150 billion in 2017.