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Magazine / NEED TO KNOW: BUDGET

Red Blooded

Conservatives are now trying to make their peace with Mitt Romney. On fiscal policy, they shouldn’t worry.

(top) Republican presidential candidate, former Massachusetts Gov. Mitt Romney shakes hands as he campaigns during a town hall style meeting in Manchester, N.H., Wednesday, Jan. 4, 2012. (AP Photo/Stephan Savoia) (bottom) Republican presidential candidate former Pennsylvania Sen. Rick Santorum reaches to greet children during a campaign stop in Brentwood, N.H., Wednesday, Jan. 4, 2012. (AP Photo/Charles Krupa)(AP Photo/Stephan Savoia (top), AP Photo/Charles Krupa)

photo of Nancy Cook
January 5, 2012

The Right’s critique of Mitt Romney has always held him to be a “RINO”—Republican in Name Only—especially when it comes to cutting government. He never echoed Newt Gingrich’s idea to slash the corporate tax rate to 12.5 percent or Rick Perry’s exhortation for a flat tax. He hired establishment conservatives like Gregory Mankiw and Glenn Hubbard as his economic advisers, and his wonky 160-page plan for job creation (with two of its seven chapters devoted just to tax and fiscal policy) takes a pragmatic approach. Just this week, Gingrich called Romney “a Massachusetts moderate … [who] wants the rest of us to believe he’s somehow magically a conservative.” Now that Romney’s the GOP front-runner, some conservatives worry that they’ll be stuck with a wobbly-kneed nominee who can’t be counted on to shrink government.

They shouldn’t stress. Romney’s methods may be more calculated than his opponents’, but his fiscal policy is no less radical. His plan would make the federal budget an exercise in slashing, and reorient the tax system into one that favors corporations and wealthy individuals. His desire to make the 2001 and 2003 tax cuts permanent, cap spending at 20 percent of gross domestic product, cut the corporate tax rate, and create a territorial tax system would seriously drain the government of revenue.

Romney’s plan would seriously drain the government of revenue.
 

On the tax side, the biggest winners of Romney’s proposed fiscal policies would be wealthy individuals. Not only would the GOP front-runner like to make the Bush tax cuts permanent, but he’d also like to do away with the estate tax. His policy doesn’t explicitly insist on lowering the individual income-tax rates right away (as it does for corporate-tax rates), but doing so is a clear long-term possibility. If anything, says Alex Brill, a research fellow at the American Enterprise Institute, this caution makes Romney’s plan politically palatable. “He’s reaching, but he’s not reaching somewhere beyond plausible,” Brill says. “Some of the other Republican proposals have huge tax cuts. Even congressional Republicans are not talking about huge tax cuts right now.”

The plan would place a great amount of faith on the Reaganesque idea that cutting taxes for corporations and wealthy individuals would spur spending and investment, boosting the economy. “Romney’s plan shows that he clearly thinks taxes hurt [economic growth] a lot,” says Robert Chirinko, a professor of finance at the University of Illinois (Chicago).

On the spending side, Romney’s plan would starve the federal government, a favorite conservative ideal, by depriving it of a huge revenue stream. Since 1950, according to the Tax Policy Center, individual federal income taxes have been the government’s single biggest source of cash. Cutting marginal tax rates while making big tax breaks permanent would be a drain during a time when receipts already are low. Before the Bush tax cuts took effect, according to the Office of Management and Budget, tax revenue represented about 20.6 percent of GDP. By 2011, it was down to 14.4 percent. If Romney lowered the individual tax rate, it would tumble again.

A sharp dip like that would place extra pressure on the federal budget and force Congress to cut spending even further—but not, Romney says, from the Pentagon: He would have lawmakers slash 5 percent immediately from nondefense discretionary spending, including health, education, and labor. That means overhauling entitlement programs such as Medicare and Social Security, although his proposal is elliptical on the details. Funding for everything from food stamps and aid for purchasing home heating oil to Medicaid could be on the table.

The one nod to the middle class in Romney’s fiscal plan is the elimination of taxes on capital gains and dividends for people who make less than $200,000 a year. As a political gesture, this makes sense, but it probably wouldn’t have a large economic effect: Most people in that income bracket do not derive their income from investments outside of their retirement plans. “It’s hard to see how you would benefit under Romney if you’re making under $75,000 a year,” says Alan Auerbach, the Robert D. Burch professor of economics and law at the University of California (Berkeley). “The standard Republican line has been and will be that higher-income people need a tax break because they will be job creators.” (Never mind that the tax rates of the 2000s, which favored wealthy “job creators,” produced the least amount of job growth over a decade since before the Great Depression.)

Romney’s strategy, even leading up to the primaries, has cast him as a general-election candidate. So, assuming he keeps his front-runner status, he is unlikely to spend much time on the trail this year touting the ways that his proposals help corporations and top earners. But his economic platform indicates that, far from being the RINO his right-wing critics fear, he wants to advance truly conservative budget policy.

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