Analysis: Gingrich tax plan starves government, say economists

Reuters News
Posted: Dec 19, 2011 9:13 AM
Analysis: Gingrich tax plan starves government, say economists

By Kim Dixon

WASHINGTON (Reuters) - Newt Gingrich's tax plan could blow a gaping hole in U.S. government revenues, while preserving special interest tax breaks, said economists aligned with the Republican presidential candidate's own party.

While other Republican contenders have made headlines with their tax proposals, Gingrich quietly released his months ago. It calls for slashing the corporate rate, giving individuals big tax breaks, and retaining many major deductions and credits.

Conservatives have applauded his proposal to lower rates, but economists on both the left and right have said his plan would drain federal coffers in the near term, making it impractical amid concerns about the federal budget deficit.

"The revenue loss in this plan is absolutely staggering," said Alan Viard, an economist at the American Enterprise Institute, a conservative think tank.

Viard based his assessment on an estimate by the Tax Policy Center, a left-leaning think tank, that he called reasonable.

The center forecast that Gingrich's plan would slash government revenues by at least $850 billion in one year, more than a third of the $2.3 trillion in 2011 government revenues.

A Gingrich adviser refuted the center's estimate and said the candidate's plan was not designed to be revenue neutral, but to be "growth maximizing."

"They made up the details," Gingrich economic adviser Peter Ferrara said of the TPC study. "They also did not take into account the impact of lowering rates on economic growth."

The idea that tax cuts can pay for themselves through growth is a controversial notion, dismissed by all but a handful of economists, but it is deeply entrenched in the Republican Party.


For decades, Republicans have touted low taxes as a path to prosperity. Even though huge deficits and economic troubles have followed deep tax cuts made during the Bush administration, the gospel of growth-through-tax cuts has gained intensity with the rising power of the anti-tax Tea Party movement.

Riddled with loopholes and credits, the byzantine tax code is increasingly unable to produce sufficient revenue to fund the government, making tax reform a hot topic among both Democrats and Republicans vying to take on President Barack Obama in 2012.

At the same time, cutting spending to tame the $1.3 trillion federal deficit was a rallying cry for Republicans that helped them take control of the House of Representatives in 2010. Gingrich was House speaker from 1995 to 1999.

The Tax Foundation, a business-oriented think tank, gave Gingrich's tax plan a grade of C+ in a study released on Monday. That was in the middle of the range for Republican candidates, with Jon Huntsman getting the highest grade of B+, Rick Perry, B; Ron Paul, B-; Michelle Bachmann, C; Mitt Romney, C-; and Rick Santorum, D+.

The foundation said Gingrich's plan is "pro-growth," but keeps "far too many tax expenditures" and makes the tax code "more complex and less understandable."

The Tax Policy Center called Gingrich's plan a windfall for the wealthy, with the richest Americans getting a 13 percent tax cut, and the poorest seeing a less than 1 percent break.

"A plan such as this seems tailor-made for anti-tax Republican primary voters," the center's Howard Gleckman wrote on his blog. "But if Gingrich wins the nomination, he may not have such an easy sell to independents, who may wonder why adding a $1 trillion a year to the deficit is a good idea."

Gingrich has surged ahead of Mitt Romney, who had been widely viewed as the Republican to beat in many national polls.

As tax systems go, economists tend to favor low rates and a minimum of deductions and other breaks, with the idea that expanding the tax base will raise more revenue. Gingrich's plan fares poorly by that test, several conservative economists said.


"It keeps a couple of deductions that are indefensible by anyone outside the special interests that support them - specifically the mortgage interest deduction," said William McBride, an economist with the conservative Tax Foundation.

McBride said the Gingrich plan is very unlikely to raise revenue in the short term, but over the long term it "could generate a great deal more growth than the current code," due to its cuts to the corporate rate. Still, he said, the rate is a bit low to be "revenue maximizing" by the typical standard.

Some are willing to give Gingrich the benefit of the doubt, awaiting future details.

Similar to a proposal from Perry, the Gingrich plan gives individuals a choice of keeping their current tax rate or taking a 15 percent rate.

That could work if the plan assumes most people will choose the lowest rate and rates are adjusted accordingly, said Heritage Foundation political analyst J.D. Foster.

"For the most part, people will choose the system to give them lower liability," Foster said. "So the rates in the old and new system have to rise."

Foster called the TPC analysis "irresponsible" because he said too few details are available about the Gingrich plan.

Douglas Holtz-Eakin, economic advisor to 2008 Republican presidential nominee John McCain, said Gingrich's plan has merits, but the key will be how it controls spending to offset lost revenue. "This is very aggressive," Holtz-Eakin said. "In the end he has to show that he can control the spending side."

For business, the Gingrich plan would cut the top U.S. corporate rate to 12.5 percent from 35 percent. It also would allow companies to write-off investments fully in the first year and keep the deductibility for corporate debt.

In this too, Gingrich proposes to fix only one leg of the tax reform stool.

"They give away a lot of the base by holding onto the interest deductions on the corporate level," Holtz-Eakin said, adding that he wouldn't expect much more from a presidential campaign. "All of these campaigns will have some unrealism. They are saying what they'd like to do."

(Reporting By Kim Dixon. Editing by Kevin Drawbaugh.)