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Painful Spending Cuts and Tax Increases on the Middle Class and Working Poor

Romney’s $9 Trillion Dilemma

by ANDREW FIELDHOUSE and ISAAC SHAPIRO

The budget plan of Republican presidential nominee Mitt Romney includes large unspecified consequences; these are tallied here, and the complete implications of the plan are briefly illustrated. The tally includes not only the unspecified tax increases his plan dictates that have been the subject of much debate, it also includes the less-discussed unspecified budget cuts necessitated by a proposal to cap federal outlays at 20 percent of the economy.

* To meet Romney’s commitment to limit spending as a percent of the economy to 20 percent while at the same time increasing defense spending to 4 percent of GDP, would require nondefense spending cuts totaling $6.1 trillion from 2014–2022, according to an analysis by the Center on Budget and Policy Priorities (CBPP). The Romney campaign has proposed only $2.4 trillion of specific spending reductions. It has not specified the other $3.7 trillion in spending cuts necessary to achieve its budget plan.

* Similarly, over the next decade Romney proposes $5 trillion in tax cuts, a widely-discussed figure that in fact appears to be understated.1 Beyond suggesting possibly capping the dollar value of itemized deductions—doing so could increase taxes on middle-income households and even fully eliminating itemized deductions would not keep upper-income households from receiving a net tax cut—the Romney campaign has not identified any specific changes in tax policies to offset these tax cuts, but in the Oct. 3 debate Romney stated his tax plan would be revenue neutral.

* In combination, over the next decade the Romney budget plan would necessitate $11.1 trillion of spending cuts and tax increases. It specifies just $2.4 trillion of these, thereby hiding $8.7 trillion of painful decisions. The Romney budget blueprint details all the specific proposed tax cuts, so the public knows how it might specifically benefit from this part of his plan, while leaving out 78 percent of the details that would let the public gauge how its taxes might increase and how government benefits and programs would be cut.

The necessary spending cuts

The signature spending reduction Romney has proposed is to repeal the Affordable Care Act (ACA), thereby reducing support of health care by $890 billion over 10 years, according to a Congressional Budget Office analysis. Among other implications, CBO estimates that this would mean “30 million fewer nonelderly people would have health insurance in 2022.”

Romney’s other major reduction proposal is to block grant and cut the Medicaid program, although this plan itself somewhat obscures its consequences by leaving specific Medicaid reductions to the states. This approach would reduce Medicaid expenditures by another $780 billion over 10 years.

Romney has proposed roughly $65 billion in annual savings from programmatic cuts beyond repealing the ACA and block granting Medicaid, including $47 billion from cutting federal compensation, $4 billion from reducing federal employment, and $2 billion from privatizing Amtrak.2 Indexed for nominal GDP growth, these programmatic reductions total $733 billion over 2014–2022, bringing specified spending cuts to $2.4 trillion.

The $3.7 trillion in unspecified spending cuts total nearly 13 percent of remaining nondefense primary spending (i.e., excluding net interest) projected under current policy over 2014–2022. If allocated proportionally, all programs other than Social Security and defense spending would have to be cut an additional 19 percent. These cuts would be above and beyond any specified cuts; for example, Medicaid would need to be cut another 19 percent beyond the reductions already specified by the Romney block grant proposal. (The 19 percent figure represents an average over the period; the actual cuts would be lower in the early years but higher in the later years.)

Other policy scenarios could also achieve the spending reductions consistent with the 20 percent of GDP overall cap on outlays, with 4 percent of GDP spent on defense. It is also quite possible the $733 billion in programmatic cuts might not hold up; this figure does not reflect official scoring, which could come in lower. Further, 73 percent of these cuts come from the reduction in federal compensation, which Romney’s website says is intended to, “Align Federal Employee Compensation With The Private Sector,” since “Federal compensation exceeds private sector levels by as much as 30 to 40 percent.” This differential claim is highly dubious. It is unclear how much in savings the Romney plan would yield if the objective is truly alignment, rather than merely slashing federal compensation.

The CBPP analysis examines the likely general nature of a $5.2 trillion cut over 2014–2022 from the global spending cap (after subtracting out spending reductions of nearly $900 billion for ACA repeal) implied by the Romney budget blueprint. The analysis examines two basic scenarios, one in which Medicare is subject to spending cuts and one in which Medicare is not cut (yielding deeper cuts to other programs). It then assumes cuts would be divided proportionately among the programs the Romney blueprint allows to be cut (core defense and Social Security are exempt from cuts).

All told, the affected programs would be sliced by 22 percent in 2016 and 34 percent in 2022, if Medicare is also cut. If Medicare is exempt from cuts, the programs would be cut by 32 percent in 2016 and by more than half (53 percent) in 2022. Among the consequences:

*  Over and above the cuts to Medicaid due to repeal of health reform, the additional Medicaid cuts required (which CBPP estimates would need to be significantly greater than those required by the specific block grant proposal) “would likely add at least 14 million to 19 million more people to the ranks of the uninsured.”

* “Nondefense discretionary spending would shrink to 1.8 percent of GDP by 2022 if Medicare is subject to cuts, and to 1.3 percent of GDP if Medicare is exempt. In contrast, spending for this category has averaged 3.9 percent of GDP over the past 50 years and has never fallen below 3.2 percent of GDP during this period. … This category of spending covers a wide variety of public services such as aid to elementary and secondary education, veterans’ health care, law enforcement, highways and mass transit, national parks, environmental protection, biomedical and scientific research, housing assistance, the weather service, and air traffic controllers.”

The necessary tax increases

EPI, among others, has analyzed Romney’s tax plan at great length, most recently arguing that the specified tax cuts cannot be mathematically squared with numerous other promises; something has to give. The structure of this plan is a moving target—for example, it was not until the Oct. 3 debate that Romney stated that his tax cuts would be entirely revenue neutral—but several overarching conclusions can nonetheless be reached.

First, the specific tax cuts that have been promised, which include measures such as completely eliminating the estate tax and the alternative minimum tax, would be of disproportionate benefit to high-income households. Data from the nonpartisan Tax Policy Center (TPC) indicate that the specific tax cuts, before considering the unspecified tax increases, would reduce the effective tax rates for the highest-income 1 percent of households by 7.8 percent, more than five times the rate reduction for middle-income households produced by the specified Romney tax cuts. In 2015, Romney’s specified tax cuts for the top 1 percent would average $150,000 per household.

Second, as noted, the various objectives of the plan are incompatible. The claims Romney makes about providing net tax cuts for the middle class, having all the tax cuts be revenue neutral, reducing all tax rates by 20 percent, and adopting the specific high-income tax cuts he has proposed, cannot all be accomplished at the same time.

Third, if in fact the specific tax cuts are offset in a revenue neutral fashion through broadening the tax base, there are simply not enough high-income tax expenditures (or loopholes) available for offsets, so tax expenditures for middle-class households would have to be targeted. This is why TPC found that “any revenue-neutral individual income tax change that incorporates the features Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.”

The final tally

This sketch of plausible offset scenarios suggests the large amount of pain that would be caused by the combination of $11.1 trillion in tax increases and spending reductions over the next decade that would be necessary under the broad parameters outlined by the Romney budget blueprint. For a sense of scale, the amount of necessary savings is substantially greater than the $6.7 trillion in deficits projected over the next decade under a continuation of current policies. Further, it is imperative that any budget proposal spell out its damage, and not just its benefits. Not specifying every single proposed change is one thing, but failing to detail nearly $9 trillion worth of tax increases and spending cuts is another.

Andrew Fieldhouse is a federal budget policy analyst at the Economic Policy Institute, where this article originally appeared.

Isaac Shapiro is a research associate at the Economic Policy Institute. He is the co-author of two books: Working But Poor: America’s Contradiction and Protecting American Workers. 

Endnotes

1. A more precise calculation is that Romney has proposed specific tax cuts that would reduce revenue by $6.1 trillion over 10 years. The higher figure assumes implementation in tax year 2013 rather than 2014 and includes all the revenue changes related to repealing the ACA, while the lower figure only accounts for some of the changes. This higher calculation also indexes the cost of the proposed tax cuts to nominal GDP growth.

2. Romney has also proposed cutting non-security discretionary spending back to 2008 levels, but, like the cuts required by the global spending cap, has not specified how these reductions would be apportioned. To reduce overall spending to 20 percent of GDP while raising defense spending, however, would surely require non-security discretionary spending cuts of a much greater scale. Romney’s annual savings of $60 billion from reducing “waste and fraud” is ignored in our analysis, as there is no waste, fraud, and abuse account in the federal budget and this would certainly be deemed insufficiently detailed to be scored should CBO analyze a Romney administration budget request. Savings from capping and block granting Department of Labor training programs are also ignored, as freezing either 2013 or 2014 outlays in nominal dollars would fail to produce any savings relative to projected outlays in the Office of Management and Budget’s public budget database.

All other programmatic savings listed by the campaign have been taken at face value, have been assumed to take effect in 2014, and are indexed to nominal GDP in 2015 and beyond. As discussed in the text, these programmatic savings levels do not reflect official government scoring, which might come in considerably lower.