Unpacking 'Romneyomics': How Mitt Would Adjust Dials on the US Economy
MItt Romney offers a prescription for the ailing US economy that hews to Republican principles. But it also has some unorthodox differences. Well-off Americans could get fewer government benefits and pay more for Medicare.
Mitt Romney’s prescription for the sluggish US economy looks to be straight from the traditional Republican mold: Cut taxes to stimulate growth, and cut spending to shrink the federal deficit. Pour more money into defense. Promise to root out waste in government.
And then, the economic road map of the presumptive GOP presidential nominee swerves off in an unexpected direction: means testing for recipients of Medicare and Social Security.
That means well-to-do Americans would eventually get a lesser share of benefits from those big government entitlement programs than they do now.
“We don’t need Social Security to provide retirement income for upper-income people,” says Glenn Hubbard, a top economic adviser to Mr. Romney and the dean of the Columbia University Business School here, in an interview.
“The nation can’t afford a very large program that’s across the board. What we can do is focus on people who really need help.”
The solution under Romneyomics? Future retirees who are well off would see their benefits rise at a slower pace than would be the case for current retirees – and at a slower pace than for their middle-income peers, says Mr. Hubbard. Likewise, higher-income Americans might be required to pay for private insurance or to pay an additional premium if they want to remain in the Medicare system.
It may seem an unorthodox proposal for the standard-bearer of the Republican Party, which likes to castigate President Obama for “class warfare” over his desire to end the Bush-era tax cuts for the rich.
But to hear Hubbard tell it, the wealthiest citizens of America could expect, under a Romney White House, to see less generous benefits from government programs, including Medicare, and, if Romney could get tax reform through Congress, they would lose many tax deductions and exemptions as well.
“Romney says everything [on tax reform] is on the table, and it has to be done so most of the burden is borne by upper-income people,” says Hubbard.
Who would qualify as upper income? That’s up to Congress and the president, says Hubbard, declining to name a dollar amount.
Of course, no one would ever describe the Romney plan as an assault on high-income wage earners. Those Americans would benefit, for instance, from Romney’s proposal to drop the top tax rate on their income from 35 percent to 28 percent.
Mr. Obama, by way of contrast, wants to push the top marginal rate to 39.6 percent – and as high as 43.4 percent on unearned income such as dividends (compared with 15 percent now).
And Romneyomics would certainly pinch people in other income classes. One change would be to raise the retirement age at which workers could collect full Social Security benefits, Hubbard says – a move that would affect most US families.
aking big structural changes to America’s entitlement programs and the US tax code, each a complicated and intricate undertaking in its own right, is a huge promise – and possibly unfulfillable, some warn. America has watched Obama grapple with these same underlying issues – debt, deficit, entitlements, tax rates, and economic growth – and extract only small movement from a gridlocked Congress.
Still, “those are the kind of things we need to consider,” says Mark Zandi, chief economist at Moody’s Analytics.com in West Chester, Pa., of Romney’s plan. “But it will be very difficult to get it done legislatively and also to get it implemented effectively.”
Economist Joel Naroff of Naroff Economic Advisors in Holland, Pa., calls the means testing for Social Security and Medicare “a backdoor tax increase based on your income.” Democrats have been trying to do this for years, he says. “I don’t think anyone knows that is what he intends to do.”
Of all the economic issues facing the nation, government spending – specifically, cutting it – is Romney’s top priority, says Hubbard. Cutting back on “big government” while simultaneously cutting taxes is the way to stimulate the economy, according to the Romney plan.
Romney’s largest spending cut, Hubbard says, would come in Medicaid, which funnels federal dollars to state programs that supply health care to poor people with no health insurance. Medicaid and Medicare spending is expected to grow 7 percent between 2012 and 2013, according to the Centers for Medicare and Medicaid Services. Romney, during a speech May 4, said he would limit the growth of federal Medicaid spending to inflation plus 1 percent each year by making it into a federal block grant to the states. He estimated that the shift – opposed by many governors – would save the US government $100 billion by 2016.
Many health-care analysts also decry that plan, saying it would result in a reduced level of health care for the poor. “What it does not take into account is the aging population and the fact [that] health-care costs grow more rapidly than other things,” says Judy Solomon, vice president for health policy at the Center on Budget and Policy Priorities, a think tank in Washington.
If Romney could manage to force Congress’s hand and shrink entitlements and the budget deficit, he would move on to replacing Obama’s health-care plan, and then try for a rewriting of the Dodd-Frank financial reform law, says Hubbard. Reducing “policy uncertainty” coming from Washington – such as what the tax rate will be in the future or whether businesses will have to comply with the health-care law – would stimulate the economy and provide 2.3 million jobs within 18 months of Romney taking office, he asserts.
There is something to be said for addressing uncertainty, says Moody’s Mr. Zandi. “If you nail down the fiscal outlook, you provide a lot of juice to the economy,” he says. “But the same could be said for Obama, too.”
A Proving Ground?
Other Republican chief executives have implemented some of the economic and fiscal policies that Romney espouses. One whose approach comes close to Romneyomics is Gov. Luis Fortuño of Puerto Rico, who has been on a tax-cutting, budget-slicing streak in the US territory since his election 3-1/2 years ago.
“We [in Puerto Rico] could be a microcosm of what could be done at the national level,” says Governor Fortuño, during a recent interview in his San Juan office. “What is interesting about our tax situation is that ... we have a mirror image of the federal government tax code.”
Comparisons between the financial situation of the island territory of 3.7 million and that of the United States, a global superpower of at least 300 million residents with an economy 213 times Puerto Rico’s, need to be taken with several grains of salt. But Fortuño, a Romney supporter, nonetheless sees his fiscal fixes as instructive.
There’s little doubt that Puerto Rico was in dire straits in 2008: Bond-rating agencies were poised to downgrade its status to junk, and its budget deficit was the worst in the nation, measured by the share of spending actually covered by revenue.
Fortuño’s prescription was to shrink the government workforce by 35,000 jobs (a 17 percent reduction), and to merge agencies, consolidate office space, and computerize services.
He also reduced individual and corporate tax rates – something that is on the Romney agenda. The number of corporate tax brackets shrank from seven to three, and the top tax rate for businesses went from 41 percent to 30 percent. He slapped multinational corporations with an excise tax, though, on their income outside Puerto Rico.
At the same time, Puerto Rico reduced tax rates for individuals by 11 percent the first year and 25 percent this year. Those rates will continue to drop through 2016 – but only if the island has a balanced budget and meets economic growth targets.
Many tax deductions have been eliminated in a bid to do what Republicans call “broadening the base,” just as Romney would do. “We had a deduction for the interest you pay on car loans,” says Fortuño. “But come on, you shouldn’t be allowed to deduct interest payments on the car – it could be a Ferrari.”
After three-plus years, Puerto Rico’s deficit has shrunk from $3.3 billion to $332.7 million. Within a year, Fortuño hopes to have a balanced budget. He says his goal is surpass the national average in terms of growth. “I believe we can do that,” says the governor.
As for Fortuño’s targets for economic growth, upon which lower tax rates for individuals depend? There is a lot of skepticism that Puerto Rico will meet them, says Mike Soto, president of the Center for the New Economy, a nonpartisan think tank in San Juan. He gives the governor mixed grades for his handling of the island’s economy.
“He has done a good job of getting the fiscal house in order,” says Mr. Soto. “But we feel there should be more of a focus on growing the economy."
The spending cuts have been felt on the street. On a recent June day, doctors outside the University of Puerto Rico’s medical center held a protest over cuts in their budget – for the third year in a row. “We are asking them [the government] to reevaluate the budget,” says Dr. Pedro Vargas, a spokesman. “Doctors are leaving Puerto Rico and going to the US.”
Doctors aren’t the only ones leaving. The 2010 Census showed that Puerto Rico lost 2.2 percent of its population – the highest rate in the nation – and the exodus continues. Two reasons for the outmigration: The unemployment rate is 14.8 percent – 1.5 percentage points higher than when Fortuño took office – and the murder rate is the highest in the US.
At a small sporting goods store in San Juan, tough times have become worse over the past six months, says Viana Bosque, whose parents own the shop. She works there with her husband, who lost his job in the government layoffs.
“Sales are down, suppliers are low in inventory, credit lines are difficult to get, and security has become an issue,” says her mother, Carmen Rodriguez. “The governor has given all the tax breaks to big business. The middle class is left subsidizing the poor.”
Tax Reform is a Hard Nut to Crack
If the US tax code were to get a make-over on Romney’s watch, the changes would have to conform to the Republican tenet of being “revenue neutral.” If perchance new revenues did flow into the Treasury, they would go toward paying down the national debt, says Hubbard.
It is perhaps the matter of tax policy on which Republicans and Democrats most differ, making it one of the thorniest to resolve.
Broadening the tax base is tough for any president because interest groups fight to prevent change. Take the largest federal tax exemption: employer-sponsored health-care insurance plans. In theory, subjecting the plans to some level of taxation would most affect the wealthiest Americans, because they have the most expensive health-care plans. But many union workers would be affected, as well, notes Mr. Naroff.
“What people forget is that a lot of unions traded off salary increases for benefit increases,” he says.
Other popular tax deductions are on mortgage interest, charitable donations, and payments of state and local taxes. How hard would it be to get Congress to change them?
“It would be really hard,” says Pete Davis, who worked on Capitol Hill when Congress approved the last major tax reform act in 1986.
Ronald Reagan was president then, and he supported tax reform. Now, Mr. Davis notes, Congress is much more divided. And the Romney plan for changing the tax code would probably result in 40 percent of taxpayers getting a tax hike and 60 percent getting a tax cut.
“It’s not that far from 50-50,” he says. “That’s why tax reform is so difficult.”
Alfredo Sosa contributed to this report.