WASHINGTON — Wiping out itemized deductions and raising taxes on investment income would generate only enough cash to pay for a minuscule reduction in federal tax rates, according to an official analysis, raising new questions about the workability of Republican-style tax reform.
In a report released Friday, the nonpartisan Joint Committee on Taxation, the official scorekeeper for tax policy, concluded that such changes would pay for a 4 percent reduction in tax rates next year — far short of the 20 percent reduction sought by Republican presidential candidate Mitt Romney.
Even with the total elimination of some of the biggest breaks in the tax code — including popular deductions for mortgage interest, charitable contributions and state and local taxes — the JCT found that the top rate could be pushed down from the scheduled 39.6 percent next year only to 38 percent, while the rate for the lowest tax bracket would fall from 15 percent to 14.4 percent.
Democrats immediately seized on the report as further evidence that the tax plans advocated by Romney and other Republicans cannot significantly reduce rates without increasing budget deficits.
“This confirms that the math behind Reagan-style tax reform doesn’t work even if you completely eliminate the most popular of deductions,” said Sen. Charles Schumer, D-N.Y., who is pressing Democrats to resist calls to lower tax rates.
The Romney campaign — along with aides to House Ways and Means Committee chairman Dave Camp, R-Mich., and Sen. Orrin Hatch, R-Utah, the senior Republican on the Finance Committee — just as quickly noted shortcomings in the JCT analysis. And they got a boost from four icons of deficit-reduction: Democrats Erskine Bowles and Alice Rivlin and former Republican senators Alan Simpson of Wyoming and Pete Domenici of New Mexico, the leaders of two respected bipartisan fiscal commissions.
“Nothing in the JCT analysis changes our belief that it is possible for tax reform to reduce rates and produce additional revenues if policymakers are willing to make the tough choices to eliminate or scale back tax expenditures,” the quartet of budget experts said. “There is a growing bipartisan consensus for an approach that broadens the base, lowers rates and raises revenue as part of a comprehensive” debt-reduction plan.
JCT chief of staff Thomas Barthold acknowledged that he did not include “a significant number” of potential money raisers, such as taxing employee-provided health insurance or changing the taxation of retirement savings. And the JCT analysis compares the changes to a world in which all the George W. Bush-era tax cuts have expired — a world neither party wants to visit.
“This self-described ‘experiment’ says nothing about the pro-growth tax reform proposed by Mitt Romney,” said Romney spokeswoman Andrea Saul. “It’s simply irrelevant to any analysis of his plan.”
One positive for Republicans: Families earning less than $100,000 a year would see significant tax cuts in the JCT analysis, while tax bills would rise for households earning more than that amount — proving, as Hatch aides noted, that “modest across-the-board reductions in rates could be achieved” without “shifting … the burden from high-income taxpayers to taxpayers further down the income scale.”