Mitt Romney’s plan is to reduce every tax percentage bracket by 20% but promises there would be no reduction of government revenue. To backfill the shortfall he would limit or eliminate some of the deductions and exemptions that would particularly affect wealthier taxpayers and not middle income earners, but he has refused to specify just which such “loopholes” he has in mind. He says those details would be worked out with Congress. The question is, what will we be asked to give up in exchange for another tax cut?

Setting aside for the moment the wisdom of cutting taxes still further when the country is $16 trillion in debt, the principle is sound: first, to streamline a tax code encrusted with years of barnacles that have made taxes impossibly complex (the 1040 instruction booklet has grown to 179-pages, and that’s without forms); second, to “broaden the tax base” by eliminating some of the exemptions, deductions, rules, exceptions, and special interest dispensations, thereby exposing more income to taxation.

Romney would retain all the Bush tax cuts. The 20% further cuts would be applied against that base. He would repeal the Alternative Minimum Tax (a recalculation of taxes originally meant to limit deductions by those with higher incomes); eliminate altogether the tax on long-term capital gains, dividends, and interest income for those with incomes below certain thresholds (e.g., marrieds filing jointly with income under $200,000), but would leave intact the preferential 15% rate on capital gains and dividends for those in higher brackets (75% of those benefits go to the top 1% of taxpayers). And he would repeal the federal estate tax.

That results in quite a hole in the budget. The non-partisan Tax Policy Center (the Romney campaign endorsed its “objective, third-party analysis” in November 2011) looked to 2015 and projected that the tax cuts alone would reduce revenues by $456 billion.

tax expenditures

Because Romney has said that he would fill the hole by limiting exemptions and deductions — improperly called “loopholes” and better called “tax expenditures” — on the wealthiest, the Tax Policy Center (TPC) looked at that population group first, with the objective of seeing which and how many of the expenditures needed to be closed to pay for the $360 billion revenue hole that the 20% cut caused in this group.

The answer is that there are not enough to re-fill the hole. The government would get $87,117 less on average from those earning over $1 million a year, because the elimination of $88,444 in deductions, exemptions, etc., would not be enough to offset a $175,961 drop in taxes caused by Romney’s 20% cut.

It is therefore baffling that Gov. Romney can say, as he did in the second debate, “I’m not going to have people at the high end paying less than they’re paying now”.

The TPC continued downward through the successive tax groups and discovered that when they get to families earning below $200,000, the situation is reversed. The deductions they would have to sacrifice toward making the Romney plan ”revenue neutral” would exceed the savings brought about by their 20% rate cut. So they’d pay higher taxes. Those in the $50,000 to $75,000 range, for example, would see their taxes rise by $641. One of the groups — taxpayers with children and income below $200,000 — would see taxes increase by an average of $2,041, which is the source of the Obama camp’s claim that the middle-class would pay $2,000 more in taxes. This happens because some of the most cherished of the deductions and exemptions must be taken away from even the lower income groups in order to cover the $456 billion shortfall of the 20% cuts.

conundrum

As the table shows, there aren’t enough tax reduction categories to close without taking away the mortgage interest deduction, or taxing the value of company-paid health insurance, or taxing company contributions to 401k plans, or ending the deduction of state and local taxes. The Romney plan would have to take away 70% or so of all of them, and for all income groups. Otherwise, the math doesn’t work.

Compare that takeaway to the $87,117 windfall that the million dollar and over group would enjoy (far more for the wealthier such as Romney himself) and add to that Romney’s intention to preserve their (and his) 15% tax rate on dividends and capital gains, and you have a voting public increasingly at odds with his plan the more they learn of it.

But what if he could make his plan revenue neutral by offsetting revenue loss by eliminating “loopholes”. The Republican playbook says that tax cuts create jobs. But that’s not a tax cut. Overall, it leaves everyone with the same taxes. Yet he says that 7 million of the 12 million jobs he promises will come from his tax plan.

But perhaps there’s another way around this dilemma: All tax breaks of every stripe reportedly total $1.1 trillion a year. The table shows only the biggest; almost all others save taxpayers smaller amounts. But doesn’t that leave a vast number of smaller items — in fact, an almost magical $462 billion ($1.1 trillion minus the table’s $637 billion) — that Romney could wipe out to pay for the $456 billion gap?

Yes, but consider the blizzard of special interest exemptions and deductions that lurk behind that $462 billion, every one of which will bring squadrons of lobbyists to the corridors of Congress to plead (and pay for) their preservation. And now imagine the likelihood of representatives and senators turning them all away in deference to a President Romney.

backpedaling

Romney has begun to play defense. At a Denver radio station he contemplated maybe limiting deductions to, say, $17,000 per family as a way to pay for the cuts (which he raised to $25,000 in the second debate). Or he is reportedly considering modifying the standard deduction, a hot button because it would affect most taxpayers. Or taxes on employer-paid health insurance above a cutoff lower than that already contemplated for lavish so-called “Cadillac” plans.

Advisors at the American Enterprise Institute have suggested that Romney could simply reduce the tax cut percentage to whatever extent that Congress proves uncooperative, but the Romney campaign says the candidate is committed to his goal of 20%.

Now Romney officials are saying that “revenue neutral” still works because the tax cuts will generate the economic growth that will bring in higher tax income to fill the hole. But economists argue that tax cuts are one of the weaker ways to raise an economy. After all, the Bush tax cuts were quite steep, yet job growth during his eight years was the weakest since World War II and we wound up with the Great Recession and huge job losses. Yet the Republican answer to stimulate jobs and growth is nevertheless always tax cuts. In an August CNN interview on another subject, Romney said another government stimulus program is not the right course, that the first one did not work and “expecting a different result is, as famously said, the definition of insanity”. So, Governor, how should we characterize trying a tax cut yet again?

The campaign had better hope that growth will offset the revenue loss, because the whole subject of tax cuts versus tax expenditures is really no more than a thought experiment. The prospect of Congress voting to wipe out everyone’s tax breaks is nil.

In January of this year, President Obama announced a revamping of the military that entails budget cuts of $487 billion across ten years. Before leaving office last year, Defense Secretary Robert Gates had already trimmed several hundred billion dollars by shutting down costly weapons programs, notably the F-22 fighter. And beginning this January 2, barring further action, another $500 billion over ten years will be lopped off the defense budget by law.

That’s the consequence of the nation having walked to the brink of default in mid-summer 2011 after months of dispute over raising the debt ceiling. On August 2 of last year, when Treasury Secretary Geithner had warned that the United States would run out of cash needed to pay its bills, Congress passed and President Obama signed the Budget Control Act. It called for $917 billion in spending cuts but, out of an inability to reach agreement on further savings, it set up a congressional “super-committee” to do Congress’ job. Half Republican and half Democrat, the committee was given until that November to come up with a plan — or else $1.2 trillion in cuts over ten years would be triggered automatically.

The committee failed, and else won out. The $1.2 trillion “sequester” splits the spending cuts between military and other discretionary expense. Which is why a cut of yet another $500 billion in defense spending lies in wait just past the New Year.

The three sets of cuts have caused Defense Secretary Leon Panetta to warn that the damage to national security will be “devastating”.

Governor Romney agrees. He wants to increase military spending to 4% of the Gross Domestic Product and add 100,000 more troops, although he has not specified why they are needed.

Others cite procurement as the greater need, vividly made clear in this passage from a Wall Street Journal op-ed by an American Enterprise Institute fellow:

Many of the Air Force’s aerial refueling tankers predate human space flight. Training aircraft are twice as old as the students flying them. The F-15 fighter first flew 40 years ago. A-10 ground-attack planes were developed in the Carter years. And all of our B-52 bombers predate the Cuban missile crisis.

That same piece says, “We have to look all the way back to 1916 to find a year when the Air Force purchased fewer aircraft than are included in Mr. Obama’s budget request”.
Bi-plane, 1916

F-35, 2012

Others have somehow discovered that moment as fruitful for compar- isons: Mitt Romney points out that with 285 ships, ours is the smallest Navy since 1917.

But quantity is a peculiar metric to use, failing to take the hugely greater lethality of our smaller inventory into account. Not to mention the cost of modern weaponry, which we will: Today’s Nimitz class aircraft carriers run to $4.5 billion apiece. Even a destroyer costs $2 billion. The sticker price for each budget busting F-35 Joint Strike Fighter runs to over $200 million or so — and that’s without its share of R&D. Robert Gates asked, “Does the number of warships we have and are building really put America at risk when the United States’ battle fleet is larger than the next 13 navies combined, 11 of which belong to allies and partners?”.

re-trading the deal

The sequester was the default that was agreed to by both Republicans and Democrats when negotiations between the President and House Speaker John Boehner could not arrive a “grand bargain” of spending cuts and increased taxes to reduce the deficit. But Republicans now want to re-trade the deal, arguing that the military side of the sequester should be dropped as too hazardous for national security. But they offer no quid pro quo, i.e., canceling the domestic side of the mandatory spending cuts as well, or increasing taxes to pay for restoring $500 billion to the defense budget. Any attempt to rescind only the defense portion of the law would face the president’s veto.

What is worst about the sequester and badly needs fixing is the stupid approach it took. The law requires that all programs be cut back by the same percentage — what Panetta calls taking a “meat-axe” to the budget — rather than selective cuts according to priorities. The Economist provides examples: The Pentagon wants to spend only $74 million on heavy tanks next year but because the dollars of the sequester cuts are based on out-of-date congressional spending resolutions rather than current planning and military requests, the Pentagon will be forced to spend $403 million on tanks. “On the other hand, the Pentagon is planning to put $1.8 billion next year into an urgently needed new aerial-tanker programme, but will now be allowed to allocate only $781 million to it”.

Military pay and benefits are exempt from the sequester as are “overseas contingency operations” (Pentagon speak for the Afghanistan war), which means that the cuts can only come from what’s left — a base of $375 billion — that will heavily impact weapon and equipment procurement. Organizations such as the National Association of Manufacturers and the Aerospace Industries Association are forecasting a loss of a million jobs because of the cutbacks. Congress members are up in arms about job losses in their home districts, whether at the big defense companies or at small manufacturers that are part of the huge defense supply chain and vital to local communities’ economic well-being.

Such outcries are usually exaggerated, though. The Pentagon has had a blank check for the last ten years. Since 9/11, the defense budget has been swollen by $1.283 trillion in budget authorizations for operations in Iraq and Afghanistan. With one war ended and the second beginning to pack up for home, the military should not expect continuance of $700 billion a year — double what was spent on defense in the middle of the Clinton presidency.

perennial waste

The constrained budget may force the Pentagon to take a serious look at its wasteful practices.

The military was once self-sufficient. It did all its own work on bases or in the field, from cooking to clerking. But in Iraq and Afghanistan the Pentagon adopted the practice of hiring civilian contract workers, and at much higher pay than the military. There are now nearly 800,000 civilians working for the Pentagon, up 10% from just 2009 even though the wars are winding down. One report had it that there are more contract workers in Afghanistan than troops, although this counts all the other U.S. agencies deployed there. The military cannot cry poorhouse while continuing this costly practice.

There is the question of benefits. The Hoover Institution notes that by 2014 the tab for former service personnel’s pensions and benefits will exceed that of those in active service. The military can retire after 20 years with a lifetime pension equal to half their final pay. That there is a spike in retirement at the 20-year mark says that the pension is a substantial inducement to stay in the military, but should not there be some experimentation? A huge percentage of the military is never deployed into the danger zones; they are not all “heroes”. And cannot working age retirees — many not yet 40 when they leave the service — pay more for their health plans? Somehow, the word “entitlement” is never mentioned in conjunction with “military”.

And then there are the notorious cost and schedule overruns of weapon systems development, so often caused by adding features and making mid-course changes. Senator John McCain said, “The U.S. cannot afford a budget-driven defense strategy” but went on to say “but we must also address the broader cultural problem plaguing our defense establishment: the waste, inefficiency and ineffective programs”. The cost of those F-35 fighters is double what was estimated when the project began in 2001.
The Navy’s littoral combat ship
The “littoral combat ship”, a fearsome looking, stealthy craft meant to work close to shore and capable of speeds close to 50 miles per hour, has been perhaps the most troubled program in the Navy’s annals. A decade after the program’s inauguration, only two of the 55 planned $700 million ships are in the water. One had a cracked hull. The other reportedly had difficulty identifying underwater mines, one of its principal tasks, and “is not expected to be survivable in a hostile combat environment”, in the view of the Pentagon’s top weapons tester.

And then there is the Marine’s Osprey, which lifts off like a helicopter, converts to a plane and has resulted in 30 deaths in test flights. The Pentagon artfully sprinkles contracts around the country. It is a tactic that keeps Congress members voting the money that a program will bring to their districts. Thus do programs never die. Not even Dick Cheney could kill the Osprey program.

Unlike Panetta, the President is comfortable with the cuts of the sequester, or, as The Economist put it, “the Obama administration seems to intend to sit tight and wait for its opponents’ nerves to crack”. Post Iraq and Afghanistan, the budget’s cost reductions may dovetail well with the reorientation of the military that Obama announced in January. Cuts are likely to force reduction of the army from 570,000 to 490,000, but the new strategy is no longer to be able to fight two ground wars at the same time. Experience tells us not to be drawn into ground wars against insurgencies, but instead to to use drones and special operations forces. And a re-alignment is underway to the Pacific to counter the rising threat of China, where what is called AirSea Battle will be our war fighting doctrine.

But critics are wary of a plan assumes that the future is knowable and holds no surprises.