High price of lower tax rates

Mitt Romney has said he wants to cut income tax rates by 20% and pay for that in large part by reducing tax breaks. A new study shows just how hard that will be.

NEW YORK (CNNMoney) -- Many tax reform plans, most notably Mitt Romney's, aim to lower income tax rates and make up for the loss in revenue by reducing tax breaks.

But it's a lot harder politically and practically than it sounds.

A report Tuesday by the Tax Policy Center, an independent research group, shows just how hard.

Tax breaks are politically popular. And many of them are tightly woven into the economy and thus would be hard to roll back without creating disruption.

"Offsett[ing] the revenue lost to lower rates would require curtailing broadly used and popular tax expenditure provisions and might well mean curtailing provisions that would require major policy concessions from the leadership of both political parties," the report states.

Such popular tax breaks include deductions for mortgage interest and state income taxes; the exclusion from income of employer-paid health insurance; lower tax rates on capital gains; and a host of tax credits for low- and middle-income families.

The need to seriously scale back tax breaks is most clearly evident in the Tax Policy Center's analysis of the income-tax-rate component of Romney's plan.

The presumptive Republican presidential nominee would like to cut today's Bush-era income tax rates by 20%. Under his plan the top rate would fall to 28% from 35%; and the bottom rate would fall to 8% from 10%. He would also eliminate the Alternative Minimum Tax.

The center's report offers two examples that assume no changes in taxpayer behavior.

In the first, the report estimates that if today's Bush-era income tax rates were made permanent, the individual income tax would raise nearly $1.4 trillion in 2015, or $320 billion more than under Romney's rate proposal.

One way to make up for that $320 billion difference, the report says, would be to shave 72% off the value of all itemized deductions; above-the-line deductions (such as the one for alimony); a host of smaller tax credits; and benefits such as the health insurance tax break many workers get.

Lawmakers could decide to eliminate some altogether and leave others untouched, or reduce them all but by different amounts.

But no matter how they slice it, curtailing tax breaks would be a huge headache.

"It's really hard to figure out a way to make this operational," said Roberton Williams, a senior fellow at the center and a co-author of the report.

The task becomes even harder if the goal is to raise the same amount of revenue in 2015 as current law, which assumes the Bush tax cuts expire.

In that scenario, the Romney proposal for income tax rates would need to generate an additional $699 billion in revenue that year.

One way to do that, the report says, would be to eliminate all itemized and above-the-line deductions and non-retirement fringe benefits. In addition, the value of all investment and savings tax breaks would have to be cut by 75%.

The mere suggestion is enough to cause extreme heartburn on both sides of the aisle in Congress.

To be sure, the Tax Policy Center report is a partial study of how to pay for lower rates. For example, it only looks at the universe of individual tax breaks.

Romney has said that his rate cuts would be paid for by curbing tax breaks, primarily on high-income taxpayers, and by revenue from economic growth that tax reform would generate. But he has not specified which tax breaks he would curb or how much growth he believes will occur.

In response to the report, a campaign spokesperson said lower rates will "stimulate entrepreneurship, job creation, and investment, while broadening the base to enact deficit-neutral tax reform."

"This study is independent confirmation that even employing an economic model that ignores the pro-growth effects of reducing tax rates, these goals can be met."