WASHINGTON — Mitt Romney has added moderate-sounding ingredients recently to his campaign promise to cut personal tax rates by 20 percent, but the math still hinges to a significant degree on an assumption that has inspired conservative Republicans for decades.
The idea: Reduce taxes, especially for the wealthy and corporations, and America’s entrepreneurial fortunes will soar. The economy, unleashed from the drag of excess taxes, will grow. Government deficits will shrink.
Call it Supply-side Economics 101.
“Let’s get a tax policy that encourages growth and investment, and doesn’t just penalize people for being successful,’’ Romney declared during this year’s Republican primary contest, after he unveiled his plan to slash marginal tax rates.
The rate cuts, taken alone, would cost the government $4.8 trillion over 10 years and extend the greatest benefits to the richest taxpayers, whose rate would decline to 28 percent from 35 percent. Under fire for potentially exposing the middle class to increases, Romney in the last two weeks has promised that he would make up for the lost revenue by limiting deductions and making sure the rich pay the same amount of taxes, even at the lower rate.
Even with those new qualifiers, economic growth resulting from tax cuts is still required to provide new revenue to balance the plan, Romney and his running mate, Paul Ryan, said in their debate appearances this month. And that is where some of the harshest disagreements arise.
The trouble with the approach is that supply-side tax policy remains unproven and controversial more than three decades after George H.W. Bush branded it “voodoo economics’’ during a debate with Ronald Reagan. Even if it did kickstart an economic burst, predicting the size and its effect on government revenues is exceedingly difficult.
A report by the Congressional Research Service last month examined the historical relationship between top marginal tax rates and economic growth going back to 1945 and found none. “Top tax rates appear to have little or no relation to the size of the economic pie,’’ according to the report.
A nonpartisan group in Washington, the Tax Policy Center, has said Romney cannot deliver all the tax cuts he promised to the wealthy without raising taxes on the middle class.
Washington analysts continued to puzzle over his math last week after a report by the congressional Joint Committee on Taxation said eliminating all deductions in the tax code would only pay for a 4 percent cut in tax rates — far short of Romney’s 20 percent. That study was not focused directly on Romney’s plan, and Romney’s campaign says it does not apply.
All this has made it easier for President Obama — who favors tax increases for the wealthy — to pound Romney for hewing to “trickle-down’’ policies that failed to work in the past. He charges that Romney’s plan will cause further damage to the middle class in crucial swing states like Ohio. The president cites the income tax cuts of George W. Bush’s first term, in 2001 and 2003, which Obama argues pushed deficits higher and “we ended up with the slowest job growth in 50 years.’’
Romney is defending his plan aggressively, promising to protect the middle class and not unfairly reward the rich. He cites a handful of conservative studies and commentaries that say his plan would work, including several that predict it would produce new government revenues by spurring growth.
“In order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions so that we keep taking in the same money — when you also account for growth,’’ Romney said in his first debate against Obama.
Romney’s campaign cites 1964 and 1986 as years when tax cuts spurred growth and government revenues and insists it could happen again.
“The entire reason that Governor Romney is proposing these reforms is because it would lead to a simpler tax code, create more jobs, and increase economic opportunity for the middle class,’’ campaign spokesman Ryan Williams said in response to questions from the Globe.
The same ideological divide on tax policy lies at the heart of the gridlock in Congress. Republicans, especially in the House, strongly oppose raising taxes on the wealthy, saying it would damage the economy by discouraging investment by “job creators.’’
Some economists remain at odds over the potential of supply-side economics to work as a generation of GOP leaders have promised. The effects of tax cuts often are clouded by other major economic factors, such as inflation and interest rates.
“To count on this huge private sector response offsetting the negative effect of higher deficits, that has pretty much been proven over the years to not occur,’’ said Diane Lim Rogers, an economist and deficit hawk at the Concord Coalition, a centrist think tank in Washington. “The evidence has certainly been that households and businesses are not as responsive to reductions in marginal tax rates, or increases, as some economists might think they are.’’
A onetime proponent of supply-side economics and domestic policy adviser to Reagan, Bruce Bartlett, says Republicans have relied too heavily on it and the concept should be retired. He is harsh in his assessment of the motivations of wealthy individuals and corporations who back the doctrine through advocacy groups such as Club for Growth, a fiscally conservative political action committee that provides support for Tea Party candidates for Congress. “It is in the best interests of rich people to want to believe this,’’ he said in an interview. “It justifies cutting taxes, especially at the top.’’
Conservative economists point to isolated instances where tax cuts correlated to economic growth in overseas economies, or when reductions in capital gains taxes in the United States coincided with greater investment on Wall Street. Ryan, in his debate with Vice President Joe Biden on Thursday, cited 1964, when President Lyndon Johnson made good on a pledge by predecessor John F. Kennedy to cut the top marginal rate from 91 percent to 70 percent.
“It is mathematically possible. It’s been done before. It’s precisely what we’re proposing,’’ Ryan said in the debate, when pressed by Biden on how the middle-class could keep its deductions while tax rates were cut for the wealthy. “Jack Kennedy lowered tax rates, increased growth.’’
At the time of that rate cut, economic growth rate already was relatively strong, according to historic data. Moreover, those cuts were weighted more heavily to the middle and lower brackets, not the top. Bartlett, who has studied 1964, has estimated that only a third of revenues sacrified by the cut were recovered through growth.
The Romney campaign also cites 1986, when Reagan and House Speaker Thomas P. “Tip’’ O’Neill Jr. agreed to reduce the top rate from 50 percent to 28 percent. After that cut, the growth rate remained relatively steady, then slumped and the economy fell into a recession in the early 1990s.
Greg Mankiw, a Harvard economics professor and Romney campaign adviser, has acknowledged that the actual results of supply-side economics have been “mixed.’’ Mankiw declined to comment for this article. But he and others, including economist George Gilder, a resident of Tyringham who was a pioneer of the supply-side school in the 1970s, have long contended that taxes are powerful economic motivators.
If a person is taxed at a high rate for investing or working, they reason, that person is less likely to invest and work.
An example is a story attributed to Reagan, who once said that after he made four movies in a year, he would “go to the country,’’ because tax rates for more income were confiscatory and discouraged the additional effort. In Reagan’s movie-making heyday in the 1940s and 1950s, top marginal tax rates ranged from 80 percent to 90 percent. Reagan whittled them down from 70 percent to 28 percent during his two terms as president; today the top marginal rate is 35 percent.
“High tax rates don’t redistribute income, they redistribute taxpayers — from productive work and investment into offshore tax havens and municipal bonds, and golf courses and early retirements,’’ Gilder said.
Romney is a former moderate Republican governor from Massachusetts who sought to distance himself from Reagan’s presidency during a 1994 Senate race; who opposed George W. Bush’s tax cuts in 2003; and who raised fees and corporate tax revenues in Massachusetts by $740 million a year to balance state budgets.
Gilder called those moderate actions and positions necessary for Republican survival in a Democrat-dominated state. He traces the roots of Romney’s embrace of deep tax cuts to the former executive’s tenure at Bain Capital.
It was in the world of growth curves, pricing analysis, and balance sheets, says Gilder, that Romney learned the importance of reducing costs to an enterprise.
Because of that business experience, Gilder wrote in the conservative American Spectator last month, Romney holds a “fundamental grasp of supply-side theory excelling all other Republicans.’’