Even Paul Ryan wants to broaden the tax base
Ryan has a two-pronged proposal for tax reform. The first part would reduce the deficit, but the second part isn't so helpful.
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Why does Ryan insist on keeping revenues in the 18-19 percent of GDP range? Besides that nasty little (just kidding) “no new taxes” pledge the Republicans have taken, there’s Ryan’s genuine desire to promote economic growth and what I think is his sincere belief in the magic of “supply-side” (really, “Laffer Curvesque”) tax cuts. But as he thought out loud about this at the summit, I made note that his logic goes this way (as quoted in a Politico story by Meredith Shiner, emphasis added):
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'EconomistMom' (Diane Lim Rogers) is Chief Economist of the Concord Coalition, a non-partisan, non-profit organization which advocates for fiscal responsibility, and the mom of four (amazing) kids to whom she dedicates her work. She’s been blogging since Mother’s Day 2008.
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Ryan reiterated his anti-tax hike stance, a point of contention with Democrats who say increases will be necessary.
“I think higher revenue is clearly helpful but we should get it through economic growth — job creation and economic growth,” Ryan said.
Ah… So I’d like to ask Paul Ryan to consider his stated economic goals and evaluate the tax pieces within his deficit-reduction plan, piece by piece. If he recognizes that higher revenue “is clearly helpful” in reducing the deficit (by the basic mathematics that deficit = spending - revenues), then he should consider how each of his two tax policy components affect revenues, accounting for effects on economic efficiency and growth:
- Paul Ryan Tax Piece #1: broadening the tax base by reducing tax expenditures. This directly raises revenue, and indirectly, through improved allocation of resources from a more level “playing field” (more neutral tax treatment across different sources and uses of income) increases economic efficiency and economic growth–also raising revenue. Score on Piece #1: unambiguously higher revenue = helpful!
- Paul Ryan Tax Piece #2: lowering marginal tax rates, but holding the tax base constant. This directly reduces revenue, and indirectly, through increased incentives to work and to save, increases the tax base, which increases revenue. Score on Piece #2: theoretically ambiguous; depends on which effect dominates, which depends on which side of the Laffer Curve we’re on. But bad news: economists pretty much universally agree that in practice (i.e., reality) we are nowhere near the side of the Laffer Curve that folks like Grover Norquist would like people to believe we’re on. So, likely lower revenue = NOT helpful!
So Chairman Ryan just needs to slow down when he self-analyzes his own tax proposals within his deficit-reduction plan. If he would take a breather after recognizing the unambiguously positive economic effects from Paul Ryan Tax Piece #1 (reducing tax expenditures holding rates constant) and note that the costs are likely to exceed the benefits of Paul Ryan Tax Piece #2 (reducing marginal tax rates holding the tax base constant), he’s more likely to conclude that the other deficit reduction plans that also happen to involve raising revenue by reducing tax expenditures, but just don’t go so gung ho on the marginal tax rate cuts (as they shouldn’t given the cost-benefit test), aren’t really very different from his own optimal deficit-reduction plan. That is, if he’s being honest with himself and true to his faith in economics–which he insisted at the fiscal summit motivates him more than his ideology.
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