Fuzzy Math

I’ve always liked math.  I was in the concentrated math/science track in high school.  I completed a math minor in college (and briefly considered being a math major till 3rd semester calculus convinced me otherwise).  And I took several high-level finance courses on the road to my MBA.  So it’s been bugging me ever since the second Presidential Debate last Tuesday that I can’t seem to understand the basic arithmetic behind Mitt Romney’s tax plan.

Now in the interest of full disclosure, I don’t like Mr. Romney and I don’t believe most of what he says, but I found it astonishing that he would promulgate a plan that seemed so obviously unworkable.  I figured I must be missing something in the excitement of the knock-down, drag-out debate.  So this week I decided to see if I could find the necessary statistics to run the numbers myself – at a 30,000-foot level to be sure, but nevertheless, I would do the math and see if his conclusions were truly so flagrantly dishonest.

The first thing I was startled to discover was how easy it was to find all of the information necessary to make the calculations.  I googled  “US government budget revenue 2012” and ended up at a site called www.usgovernmentrevenue.com.  The site is run by a conservative writer named Chris Chantrill but as best I can tell by tracking down the source material that he used, it’s all sourced from government documents, gathered into one easily accessible website.  And you can slice and dice the information six ways to Sunday, making graphs and charts and tables.  If you stay away from the associated links and the speechifying sidebars, you can get reliable, spin-free statistics.

I also got information on tax expenditures from the Joint Committee on Taxation of the US Congress, here:  https://www.jct.gov/publications.html?func=startdown&id=3642.  “Tax expenditures” is the name for any legal tax deduction or loophole that reduces the amount of tax collectible.  Think of home mortgage deductions, charitable giving deductions, things like that.

Then I took the “givens” that Romney has been spouting:

  1. an across-the-board 20% reduction in taxes for everyone
  2. the wealthy (above $250,000 AGI) will continue to pay the same percentage of total tax collected (currently, according to him, 60% of all personal income tax collected)
  3. $2 trillion increase in military spending (with the assumption that it’s over a 10-year period)
  4. no deductions will be eliminated that will increase the tax bill for those making under $250,000
  5. no one will pay income tax on interest or capital gains
  6. any changes to the tax code will be revenue-neutral, i.e. there will be no more money coming in or less money coming in than today

I think that’s the gist of the argument.

Here are some other facts you need to know:

  • the US Federal budget projects revenue (income) of about $2.5 trillion for 2012
  • the US Federal budget projects expenses of about $3.6 trillion for 2012
  • the difference ($1.1 trillion) equals the deficit (the amount we’re short)for one year – 2012
  • the national debt is about $16.65 trillion – that’s the sum of all the debt accumulated over all the years since the last time the budget was balanced while Bill Clinton was president (pause for a moment of silence for the good old days)

Now I don’t know about you, but talking about things in trillions of dollars gives me the shakes.  First, I’m never sure how many zeroes to put after the number and I worry I’ll be off by a factor of ten or one thousand.  So I took all these gigantic numbers and did all the division necessary so that I can give you an example of how this would work if the US government’s total budget was for $100.  To me, that’s manageable.

So here’s how the budget shapes up today in easy arithmetic equations:

$100    =     $57         +         $43

$100 Total revenue = $57 paid by non-personal-income taxes (Social Security, Medicare, corporate income, etc.) + $43  paid by personal income taxes.

$43     =    $26         +        $17

Of that $43 = $26 comes from the wealthy (60%) + $17  comes from the rest of us (40%).

If we reduce everyone’s tax rate by 20%, here’s what happens:

$43     =    $21        +        $14     +  $8 short 

In other words, of that $43 that we currently collect in personal income tax = $21 will come from the wealthy(reduction of 20%) + $14 will come from the rest of us(reduction of 20%)  + $8 is how much we’ll be short of what we need to keep our revenue where it is today.

So now we’re $8 short of the revenue we need for our $100 budget.  Plus Romney said that he’s not going to tax interest and capital gains.  I couldn’t find those numbers so I’ll give him the benefit of the doubt and we’ll forget about that for now.   It would make the shortfall bigger.

But we’re still short $8 for our $100 budget.  Where’s that going to come from?  Romney says by closing loopholes and deductions only for those making more than $250,000.  With the help of the Joint Committee on Taxation, I found those numbers for people making more than $200,000 in 2008.  By eliminating all the major deductions (tax expenditures as I explained earlier) that are taken by those making more than $200,000, such as mortgage interest, state and local income taxes, sales and personal property taxes, charitable contributions, child care credits, medical, and real estate tax, we get $3 (that’s right, $3) more to add to our revenue.  And remember, these numbers were for people making more than $200,000.  Romney said he’d set the floor at $250,000 which would mean this number would be smaller.  Well, whatever.

Guess what?  We’re still $5 short.

Now let’s tack on the additional spending for the military that he’s proposed.  That works out to another $8 to add to the shortfall, making a total of $13 short on our now-$108 budget.

But wait, as they say on late night TV, there’s more!

Remember that deficit I explained earlier?  We may have a $100 budget, but we actually spend $144 each year.  So in order to just balance the budget each year, we’re now going to be short $57 in order to make it to ZERO!

And that $16+ trillion national debt?  There’s nothing that can go towards that.

So I was right.  What Romney was spewing was solid gold horse-hockey (as Colonel Potter used to say).  He cannot provide a tax cut and make up the difference by closing loopholes and eliminating targeted deductions based on the givens he’s offered.  He can’t pay for a military ramp-up of the magnitude he’s proposing (he actually can’t pay for a military ramp-up of any amount) and he won’t even make a dent in the national debt.  In fact, by these calculations, he will add $1.425 trillion to the national debt each year.

So where do you think the difference will come from?  Well, here’s a scary number.  If you eliminate all those deductions and loopholes for everyone, not just those making over $200,000/year, you find yourself with another $10 in revenue for your budget.  Then maybe you could add in some cuts in Medicare and Medicaid and some tax hikes in Social Security and pretty soon you’re talking real money.

Before you vote, I would suggest that you think long and hard about why Donald Trump, Shel Adelson, the Koch boys, AND Mitt Romney would need a 20% tax cut. Then I’d think about where the money’s going to come from to pay for that tax cut [HINT: Keep your hand firmly on your wallet while you contemplate this.] And then ask yourself why you would vote for a man who is so comfortable assuming that you can’t do third grade math that he would manufacture such a web of lies.