Politicians put more fudge in budget numbers than bakers put in brownies. Take President Barack Obama's fiscal-2012 budget, which assumed 4.4% growth in 2013 and 4.3% in 2014. Where did such rosy projections come from?
They were needed in order to be able to claim a stable 77% debt-to-GDP ratio from 2015 to 2021.
Yet even assuming the United States somehow avoids the looming "fiscal cliff", the Congressional Budget Office now projects growth at only 3.2% in 2013 and 3.4% in 2014. This growth deficit means a much higher 88% debt-to-GDP ratio in 2021.
Such fiscal fudging, however, is modest in comparison with what the Romney campaign has been baking up. Mitt Romney and his running mate Paul Ryan are putting out numbers that not only don't add up, whether or not you buy their growth numbers, they don't add up to the tune of nearly $1 trillion a year.
In the October 11 vice-presidential debate, Ryan defended the fiscal prudence of lowering top marginal income tax rates 20%, arguing that it would be accompanied by "forego[ing] about $1.1 trillion in loopholes and deductions… deny[ing] those loopholes and deductions to higher-income taxpayers."
The $1.1 trillion he refers to is actually an amalgam of specific "tax expenditures" – benefits distributed through reductions in taxes otherwise owed – identified by the Joint Committee on Taxation. We break out the largest 10 of these graphically in the chart. The full list is available on http://subsidyscope.org/data/
The red bars in the graphic indicate items that Romney and Ryan had previously promised not to touch: exclusion of employer contributions for health care, deductions for mortgage interest, reduced tax rates on dividends and long-term capital gains, and deductions for charitable giving. These four items constitute a massive 30% of the $1.1 trillion. Therefore the Ryan pledge to cut loopholes and deductions cannot, mathematically, be worth more than $770bn.
But note some of the other big-ticket "loopholes and deductions" on the list. Social security and other retirement income constitute three of the top 10 items, together making up 13% of the total, and the earned income credit, which benefits the working poor, represents another 5% of the total. Would Romney eliminate those deductions? It would seem unlikely, to the say the least.
In fact, few significant tax expenditures constitute "loopholes" in the public's mind. They are items few voters think should be taxed – things like the exclusion of veterans' disability compensation from calculations of income tax liability, which is worth $5.4bn a year.
In short, Romney and Ryan cannot, logically, keep the pledge to cut $1.1 trillion in tax shields for the rich because, one, they have already ruled out eliminating the biggest of such shields, and two, much of the $1.1 trillion is actually derived from tax expenditures targeted at lower and middle income taxpayers, not tax shields for the rich. This almost surely means that only a small fraction of the $1.1 trillion is actually in play.
At the October 16 presidential debate, sensitive to the charge that his numbers are not adding up, Romney proposed capping deductions at $25,000. This would raise $1.3 trillion in revenues over the next 10 years, according to the Tax Policy Center. But that figure is only slightly above what Ryan said they would raise each year.
The Romney campaign retorts that the TPC's analysis is flawed because it only considers the impact of eliminating itemised deductions. The campaign insists that there are "hundreds and hundreds of billions in other tax expenditures that could be used to help offset the rate reductions to ensure the plan meets the goal of not adding to the deficit".
By far the largest of these, as shown in the figure, is the exclusion of employer contributions for health care from calculations of income – worth a whopping $128bn a year.
The Kaiser Family Foundation estimates that large firms contributed an average of $12,054 to covered families' health insurance this year, so eliminating this one tax expenditure alone would mean that an average family would owe income taxes on another $12,054 in income. Not surprisingly, the campaign has ruled out cutting it. Instead, a campaign official said that Romney would consider a separate deduction limit, presumably above and beyond the $25,000 limit already proposed, for such plans.
The bottom line is that Romney's tax maths still has a roughly $1 trillion a year hole in it. If he's not going to fill it with more spending cuts or tax increases, projected deficits must soar.
Unless, of course, a Romney administration just sugar-spikes the growth forecasts, a là President Obama's fiscal-2012 budget.
More fudge, anyone?
Benn Steil is director of international economics at the Council on Foreign Relations and co-winner of the 2010 Hayek Book Prize. Dinah Walker contributed to this column.
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