"Scoring" The Romney Tax Plan: Trillions Of Dollars Of Deficits As Far As The Eye Can See

Well, this could be a short blogpost, because in Mitt Romney’s words, “frankly it can’t be scored” [The Hill]. However, I think it of interest to consider what it would take to make the Romney plan deficit neutral, as he has argued it would be.

What can one say, given this constraint of vagueness? One could calculate the tax revenue losses in a static sense, as the Joint Urban-Brookings Tax Policy centre did.


TPC notes:

TPC found that repealing the AMT and cutting rates by 20 per cent would increase the deficit by more than $3 trillion over the next 10 years, even after the 2001/2003/2010 tax cuts are extended.

The loss is $8.8 trillion if those reductions are combined with permanent extension of the 2001 and 2003 tax cuts. If however, other proposed tax cuts are implemented, the revenue loss would be even larger. The Committee for a Responsible Federal Budget has tabulated the impact on the Federal debt held by the public, assuming no spending cuts (h/t [Krugman]).


The dashed line is what happens if the tax cuts are implemented, and no spending cuts relative to CRFB baseline implemented. One can compare against the CRFB assessment of the President’s budget here.

What about a revenue increase for a given tax reduction, a la Laffer and Wanniski? Well, we are all supply-siders. I use the aggregate supply-aggregate demand framework common in undergraduate textbooks to think about the effects of tax and expenditure policies. The issue is what is the strength of these effects, and at what horizons those effects hold (see this post on the Bush Treasury analysis here). Using the more comprehensive estimates of static revenue loss, ThinkProgress has reverse-engineered the GDP growth rate required to keep revenues at baseline by 2017: it’s 6.8%.

For the Romney tax plan — which raises 15 per cent 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 per cent 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 per cent nominal growth becomes 6.8 per cent real annual growth.

This growth path for real GDP is depicted in Figure 1 below:


Figure 1: Log actual GDP (blue) and GDP with 6.8% growth from 2012Q4 onward (2012Q4 figure is implied from February 2012 WSJ survey) (red squares). NBER defined recession dates shaded grey. Sources: BEA, 2011Q4 second release, WSJ, NBER, author’s calculations.

I leave it to readers to determine whether this outcome is plausible.

Of course, Governor Romney has proposed spending reductions of $500 billion (presumably per year) [1]. If this is successfully undertaken, then the required growth rate would be less. The Joint Tax centre’s Table T12-0037 indicates 16% revenues over the next 10 years (even when not including all the proposed tax cuts), while Romney has promised to cap spending at 20% of GDP. [2] That implies a 4 percentage points of GDP gap on average over the next 10 years.

Governor Romney has stated he wishes to eliminate tax expenditures. Doing so would clearly increase tax revenues substantially (see this post). However, he has not identified exactly which tax expenditures (home mortgage deductability, deductability of health care insurance, etc.) he would be willing to target.

Obviously, it is possible that that trend growth increases to 6.8%, or that massive spending cuts are implemented. Whether it would be likely is another matter. I suspect that in order for this scenario to come to pass, some supply side elasticities of the magnitude such as those used in the Heritage Foundation/centre for Data Analysis of the Ryan plan would be necessary. [3] [4] [5]

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.