Romney Will Raise Taxes, Private Equity Argues

NEW YORK ( TheStreet) - Candidate Mitt Romney wants you to believe he will lower taxes while cutting the national debt.

But President Romney will need to raise taxes if he is going to have any chance of lowering U.S. debt, according to his former private equity pals.

Now a strong frontrunner for the Republican presidential nomination, Romney has repeatedly said that cutting the national debt, reducing the budget deficit and curbing taxation will be a key to his economic agenda.
Mitt Romney

The problem is that while tax cuts and a less mindboggling national debt would be nice, Romney's plan wouldn't work if it were taken to the White House and some in the private equity industry that made Romney a millionaire know it.

David Rubenstein, co-founder of The Carlyle Group said that only a policy of spending cuts and tax increases will chip away at the national debt, which he says is the most pressing long-term issue facing the U.S. "Some combination of the two will work," said Rubenstein, who was speaking at a Columbia University Business school panel last week. The private equity titan outlined three other ways to tackle a debt that may grow to $25 trillion; inflation, a default or an International Monetary Fund rescue. No U.S. president has ever run on those policies and Rubenstein wouldn't advise starting now.

For more on Rubenstein, see why private equity has a social responsibility.

As someone who celebrates many points of Romney's investing and growth agenda, Rubenstein's dismissal of simultaneous tax and debt cuts signal a rift in what may be campaign trail posturing and what is achievable in office. It means that though Romney's calls for a smaller and smarter government are a tribute to Ronald Reagan's economic proposition for the 1980s, an eventual tax increase may have a more cutting likeness.

Reagan campaigned on an economic platform of lowering taxes to spur the growth to bolster government tax receipts, stemming what was a budget deficit that equated to 2.7% of overall GDP at the time. Though the plan was called "voodoo economics" by then candidate George H.W. Bush in election primaries, Reagan won voters and shortly after taking office he signed the Economic Recovery Tax Act of 1981, which cut the top marginal rate to from 70% to 50%.

The deficit quickly soared and President Reagan quickly changed course, raising taxes through the Tax Equity and Fiscal Responsibility Act and the Highway Revenue Act of 1982. A similar pivot in campaign promises and policy reversals may be in store for Romney.

"I agree with the view that the only feasible way to make sufficient cuts in the deficit to stabilize the debt-to-GDP ratio is through a combination of spending cuts and tax increases," says Nigel Gault, chief U.S. economist at IHS Global Insight. "A President Romney might initially try to do it only via spending cuts but either he or his successor would eventually have to raise taxes," he adds.

For more on the Republican primary, see Ron Paul's Wall Street support and what recent jobs data says about Obama's re-election chances.

Cautious to conjure the free enterprise message of his hero Reagan without committing to what may be a losing mix of tax and debt cuts, Romney has dodged promises to reduce or eliminate the debt.

" President Obama raised the national debt. I will cut, cap, and balance the budget," said Romney after winning the New Hampshire primary. A high rhetorical moment of his campaign, the statement can be parsed several different ways. After all, Romney didn't say he would cut the national debt, which could grow during his presidency even if he were to balance the budget by 2016.

Nevertheless, Romney wants you to believe he'll tackle the national debt - he even said so. "How I'll tackle spending, debt," was the headline of a USA Today Op-Ed that Romney wrote in November, just as the primary campaign heated up. In the article, Romney highlighted cutting the federal budget to below 20% of GDP - $500 billion in spending cuts by 2016 - all of which would come in discretionary areas like "ObamaCare" and Amtrak subsidies, not to the military or current social security beneficiaries, the two biggest pieces of the budget.

Meanwhile, Romney's committed to maintain the Bush tax cuts and even hinted at cutting the top marginal tax rate from 35% to as low as 20% in January debates. He doesn't stop there. Romney's plan goes on to further say that he would seek to eliminate taxes on capital gains, dividends and interest for any taxpayer who makes less than $200,000 a year.

Extending the Bush tax cuts will cost the government $5.4 trillion in revenue in the next decade keeping deficits in the $1 trillion neighborhood, according to January estimates from the Congressional Budget Office. The report also showed that the deficit could fall to $200 billion if those cuts were to lapse. In his State of the Union Address, President Obama committed to ending the tax cuts for the wealthiest 2% of Americans, in a push to guarantee a 30% tax rate for those earning $1 million or more titled "the Buffett Rule."

On Monday, two new polls show the president firmly ahead of the former Massachusetts governor in a theoretical general election.

"Governor Romney believes the right way to close the budget deficit is to keep tax rates low and bring federal spending back down to historical averages below twenty percent of GDP," said Romney spokeswoman Andrea Saul to questions on Romney's ability to simultaneously cut the national debt and taxes. "He is categorically opposed to tax increases and believes they should not be on the table," added Saul.

"I think if he is elected Romney will hold to his promise on marginal tax rates," says Chris Edwards of the Cato Institute, a libertarian think tank.

Edwards says he thinks that there's no reason for marginal tax rates to rise because new CBO data found that even if the Bush tax cuts and the alternative minimum tax relief were extended, federal revenues as a percentage of GDP would rise in coming years.

Edwards however says he fears a President Romney would do other things to raise revenues, such as reducing reductions, credits and exemptions. He points to the Bowles-Simpson plan that cuts back on the mortgage interest deduction, health care exclusion and other loopholes. In a January New Hampshire debate, Romney seem to endorse major aspects of the plan.

Another revenue raising alternative would be a silent hike of the marginal tax rate through inflation, says Paul Ashworth, chief U.S. economist at Capital Economics. "If you don't index the marginal rate dollar thresholds for inflation then gradually more people will fall into the higher rate brackets naturally... This is exactly what has been allowed to happen to the AMT this year," says Ashworth.

Because of careful phrasing and the potential for non-income related tax increases, Romney's balanced budget plan isn't yet in "voodoo" territory. Still to be seen is whether the campaign primaries will force Romney to commit outright to cutting the debt and taxes during his presidency.

The paradox between Romney's criticism of the growing government debt and potential tax increases under President Obama and his own policies are sure to be at the forefront of general election debates.

-- Written by Antoine Gara and Joe Deaux in New York

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