Tax VOX
The logo for Amazon.com is displayed at a fall news conference in New York in this file photo. Williams argues that laws requiring online vendors like Amazon to collect local and state taxes will make tax filing easier for everyone. (Mark Lennihan/AP/File)
Amazon taxes: Good for states, and taxpayers, too
I’ve finally finished my income tax returns for 2011. The last task—and least pleasant—is figuring my Virginia use tax. That’s the sales tax I owe on our many out-of-state web purchases. It’s a pain to plow through 12 months of receipts to identify untaxed transactions but I do it every year, stubbornly—some say foolishly—insisting on paying what I owe.
But in a couple of years, Amazon will ease my task when it starts collecting Virginia sales tax on things I buy. I can hardly wait.
All 45 states that impose sales taxes also have use taxes that apply to all taxable purchases on which buyers paid no sales tax. Relatively few taxpayers know about use taxes, much less pay them, and most states exert little effort to collect them.
Nearly half of taxing states include a section on their income tax returns where filers can pay use tax. In those states, less than 2 percent of taxpayers ante up, at least in part because paying requires figuring out how much you owe. Nine states simplify the process by providing look-up tables of acceptable amounts based on income. About 3 percent of filers in those states pay the tax, compared with about half a percent of those in other states that collect the levy on income tax returns (which includes Virginia). States with separate collection mechanisms undoubtedly see even less compliance. And most states don’t seem to try very hard to make consumers pay.
States have worried for years about losing revenues as retail sales have moved from in-state bricks-and-mortar stores to on-line firms that rarely collect state sales taxes. The Supreme Court ruled a few decades back that a state cannot force sellers to collect sales tax unless the seller has a commercial presence in the state. That ruling effectively exempts many e-tailers from having to collect sales tax.
But states have recently tried to force some big sellers like Amazon to charge state and local taxes with mixed success. Some, like New York, enact “Amazon laws” that assert that companies with in-state affiliates must collect sales tax, even if the companies themselves have no physical presence in the state. That worked for New York and a few other states: Amazon currently collects sales tax on purchasers who live in Kansas, Kentucky, New York, North Dakota, or Washington (where Amazon’s headquarters give it physical presence).
But the tactic failed elsewhere. Amazon pulled its affiliates in Arkansas, Connecticut, Illinois, Rhode Island, and Texas after those states enacted Amazon laws.
At least five states have cut deals with Amazon, deferring required tax collection in exchange for not legislating such a requirement. For example, Amazon will start collecting tax on sales to Virginians starting in September 2013. California, Indiana, South Carolina, and Texas will join that list over the next two years.
Congress could short circuit this piecemeal process and require e-tailers to collect state and local sales taxes, as Howard Gleckman noted last fall. The Streamlined Sales and Use Tax Agreement (SSUTA), onto which at least 24 states have signed, simplifies sales tax rules in order to make it easier for out-of-state sellers to collect sales taxes on sales to non-residents. The Main Street Fairness Act, introduced last year in Congress, would authorize states to implement SSUTA with restrictions. But congressional efforts have gone nowhere so far.
Since most of my untaxed on-line purchases are from Amazon, the company’s agreement with Virginia will cut my use tax calculations substantially—for my 2014 tax return. In the meantime, I can only hope that Congress will give states authority to require all e-tailers to collect the sales taxes we are all supposed to pay.
A house with a "for sale" sign in front is seen in Newton, Mass., in this file photo. Despite persistent rumors, the vast majority of home sellers will not need to pay a federal health care tax upon the sale of their homes, Gleckman says. (Steven Senne/AP/File )
Myth buster: There is no health care tax on most home sales
It is the unfounded rumor that never dies: You will have to pay a 3.8 percent federal health care tax on the sale of your house.
For all but a handful of taxpayers, this is not true. It is wrong. It is urban myth. It is the revenue equivalent of death panels or the Halliburton conspiracy to start the Iraq war.
This is one of those seemingly immortal Internet stories. You know the ones: They usually start with the assertion that, “They don’t want to know this but….” In the words of one blogger, “Obamacare will impose a 3.8 percent tax on all home sales and real estate transactions.”
Umm, no it won’t. Yes, the health law will impose a 3.8 percent tax on investment profits and other non-wage income starting in 2013. But that tax applies only to couples with adjusted gross income of $250,000 (or individuals with AGI of $200,000). About 95 percent of households make less than that, and will be exempt from the law no matter what.
In addition, couples who sell a personal residence can exclude the first $500,000 in profit from tax ($250,000 for singles). That would be profit from a home sale, not proceeds. So a couple that bought a house for $100,000 and sold it for $599,000 would owe no tax, even under the health law.
If that couple had AGI in excess of $250,000 and made a profit of $500,010, it would owe the new tax. On ten bucks. That would be an extra 38 cents.
The Tax Policy Center figures that in 2013 about 0.2 percent of households with cash income of $100,000-$200,000 would pay any additional tax under this provision. And they’d pay, on average, an extra $235. Keep in mind that is added tax on all sources of non-wage income, not just home sales.
Still, like Dracula, this rumor can’t be killed. Politfact tried to knock it down in 2010. A couple of months ago, my Tax Policy Center colleague Donald Marron did the same in a Tax Notes article called “Health Reform’s Tax on Investment Income: Facts and Myths.”
People who send Internet chain letters probably don’t read Tax Notes. Still, imagine Donald’s surprise when just last week he met a guy in Kansas City who insisted that the tax not only exists, but the rate is 7 percent (some sort of weird bracket-creep, I guess).
Now imagine my surprise when, after I wrote a TaxVox article the other day about the (real) tax provisions of the health law, I got an email from a frustrated housing industry tax specialist. “There is usually some confusion/disinformation associated with new tax rules,” he wrote, “but I’ve never seen an issue that has as much as this one.”
So the bottom line is this: If you are a married couple whose AGI exceeds $250,000, and if you make more than a $500,000 profit from the sale of your house, yes, you may owe this tax. But if you are anybody else, spend your time worrying about how you’re going to win the next $600 million lottery—or whether you are going to get bopped in the head by a stray asteroid on your way to work.
Supporters of health care reform stand in front of the Supreme Court in Washington, Wednesday, March 28, 2012, on the final day of arguments regarding the health care law signed by President Obama. (Charles Dharapak/AP)
How will the Supreme Court's health-care ruling affect taxes?
There is more to the Affordable Care Act than the individual mandate. There are also, for example, taxes. And since this is TaxVox, I thought it would be useful to think about some of those revenue provisions in the wake of the Supreme Court’s three-day hearing on the fate of the ACA.
The law includes both tax increases and tax cuts. Even if the controversial individual mandate is struck down, most of those tax changes would survive—unless, of course, the High Court grants the law’s critics their fondest wish and kills the entire act.
The only tax—if it is a tax at all—that relates directly to the mandate is the penalty people would owe for failing to buy insurance. Whatever High Court does to the mandate, it will be interesting to learn whether the justices decide this levy is in fact a tax or a penalty. The Obama Administration is firmly on both sides of this question, as are the opponents of the law.
The ACA also includes some important tax cuts—generous credits aimed at subsidizing small businesses that buy insurance for their employees. You might not know these tax cuts are in the law given the $1 million-plus the National Federation of Independent Business reportedly paid for legal and other fees to challenge the ACA, but they are there nonetheless.
Query: Does it make sense to maintain the subsidy if the Court rejects other key elements of insurance reform? I’m sure the NFIB will say so.
Finally, the law includes several tax increases, including a new excise tax on high-value employer sponsored health plans (starting in 2018) and a provision that makes it tougher for people to itemize deductions for their medical costs.
Two other tax increases are worth noting. They are often labeled hikes in the Medicare payroll tax, although the biggest has nothing to do with either Medicare or payrolls.
The first is a 0.9 percent increase in the Medicare wage tax for high-income workers. This would help finance the senior health system. The second is a new 3.8 percent tax that high-income households will have to pay on income from investments and other non-wage sources. Sometimes called a Medicare surtax, its real purpose is to bankroll some of the costs of the ACA.
In a new study, the Tax Policy Center finds that the new taxes would indeed hit very high-income households–some quite hard. Combined, in 2013 the two new levies would raise taxes for households making between $500,000 and $1 million by an average of about $4,600 and boost taxes for those making at least $1 million by more than $41,000. These estimates are relative to current law, where the 2001/2003 tax cuts expire at the end of 2012.
These taxes will hit incomes in excess of $250,000 for couples ($125,000 for singles). But because that threshold is not indexed for inflation, the number of households facing these taxes will nearly double over the next decade, from 2.4 percent of all taxpayers in 2013 to 4.6 percent in 2022.
Don’t forget about these tax provisions. Even if the Supreme Court leaves all them untouched, I suspect we have not heard the last of them.
In this photo provided by CBS News, House Budget Chairman Paul Ryan, R-Wis., speaks during CBS's "Face the Nation" Sunday in Washington. Gale argues that Paul Ryan's fiscal budget released last week would transfer the fiscal burden away from the rich and onto low and middle-income families. (Chris Usher/AP/CBS News)
Low-income households would shoulder Ryan's tax burden
The budget proposal House Budget Committee Chairman Paul Ryan (R-WI) released last week is, essentially, an effort to have low- and middle-class households bear the entire burden of closing the fiscal gap and bear the costs of financing an additional tax cut for high income households.
The Tax Policy Center (which I co-direct) analyzed the revenue policies as proposed by Rep. Ryan. We simulated the effects of repealing the AMT and reducing ordinary income tax rates to 10 and 25 percent. These proposals would cost about $3.2 trillion over ten years, on top of the $0.3 trillion lost from repealing taxes enacted to pay for Affordable Care Act, the $1.1 trillion lost from his desired reduction in the corporate tax rate, and the $5.4 trillion lost from first extending the Bush-Obama tax cuts (which he also supports). By 2022, the tax policies he has specified would lower federal revenues to just 15.8 percent of GDP. Talk about digging yourself a hole.
Ryan claims he can fill this hole by eliminating tax breaks, which he correctly identifies as “spending through the tax code.” At first glance, this sounds like a step in the right direction: broaden the base and lower rates. Yet, like many recent proposals, the devil is in the details. Ryan never specifies which specific tax expenditures he would cut.
At a time when our country faces a daunting fiscal challenge, Ryan asks nothing of the wealthiest Americans. His budget proposal would simultaneously cut tax rates for the rich and corporations while slashing programs for the poor and elderly: he would shift many federal low-income assistance programs to state governments and would transform Medicare into a premium support system that will shift health care costs to seniors if health care inflation cannot be controlled.
Although I agree that spending cuts are necessary to meet our fiscal challenges, so too are additional revenues, for many reasons. They are the only way to get shared sacrifice from the wealthiest Americans. They could reduce the draconian spending cuts that Ryan proposes. Until he specifies which popular tax breaks he would eliminate, the Republican’s budget is clearly a win for the rich and a loss for everyone else.
Lastly, it is worth highlighting that Ryan is gaming the system in creating budget estimates. His budget proposal is too vague to be scored, so he simply told the Congressional Budget Office to determine the effect of his budget proposal **assuming** the proposal achieves its stated goals for spending and revenues. This is not the same as the usual approach – which involves asking CBO to determine whether the proposal actually achieves its stated goals. Instead, Ryan dictates the assumptions he wants and walks away with a seemingly favorable CBO report. This is smoke and mirrors. Ryan may not be the only politician to use the system this way, but that doesn’t make his actions any more forthright or reveal anything informative about this plan.
Kansas state Rep. Pete DeGraaf, left, a Mulvane Republican, confers with Rep. Jim Howell, a Derby Republican, during a House debate on a proposed $14.1 billion state budget, at the Statehouse in Topeka, Kan.Kansas is debating proposals to sharply eliminate or reduce its state income tax, a move the Maag argues could have a disastrous impact on low and middle-income families. (John Hanna/AP)
Getting rid of state income tax? Bad idea.
Oklahoma, Nebraska, and my home state of Kansas are debating proposals to sharply reduce or eliminate their personal income tax. That raises important questions about how they’ll make up the revenue. And it’s bad news for low-income families, who may end up paying higher taxes and losing critical safety net programs.
In 2009 (the latest year for which data are available), income taxes accounted for 27 percent of revenue in Kansas, 24 percent in Nebraska, and 17 percent in Oklahoma, according to TPC’s State and Local Finance Data Query System (SLFDQS). Even if these states desire smaller government, it seems unlikely they’ll be able to make ends meet without the income tax as a significant source of revenues.
If other states without an income tax are any guide, it may mean these states will move to replace lost revenues with property and sales taxes, according to a report released by the Center on Budget and Policy Priorities.
That may be problematic. Low- and middle-income families tend to spend a greater proportion of their income on sales and property taxes than higher-income families. That’s because they typically spend more of their income on basic goods, while higher income families have the luxury of saving a larger share of their money. Many states with an income tax – including Kansas, Nebraska, and Oklahoma – exempt families in poverty from the income tax. Without an income tax, these states lose an easy way to exempt low-income families from some tax. And even if income taxes are just scaled back considerably, the case with some proposals, opportunities to support low-income families dwindle. In the end, states that don’t have a personal income tax system tend to rely more on low- and middle-income families to pay for government.
None of these states is so flush with cash that large cuts ought to be considered. In 2010, Kansas raised its sales tax and cut spending to cover a projected shortfall. Nebraska projects a surplus this year, but enacted substantial budget cuts in the two prior years and Oklahoma is just starting to turn the corner on year over year revenue declines in FY09 and FY10.
Before going through with tax reform that could seriously limit or eliminate state incomes taxes, states ought to undergo a thorough analysis of exactly how much lost revenue will need to be replaced, and should give constituents an idea of how the replacement revenues will be raised – or what services will be cut. It could cause people to think a lot differently about the possibly exciting elimination or reduction of their state income tax.
This chart shows three different measures of government spending from 2007, before the financial meltdown. The left figure is what the government includes on its official books. (Tax Policy Center)
The federal government spends a lot more money than you think
When we talk about the federal budget, we usually rely on the government’s official definition of “spending” which is to say the amount of money that’s run through federal agencies.
But, in reality, the federal government spends a lot more than that. Using a broader definition of spending, which includes hundreds of billions in dollars of tax subsidies, my Tax Policy Center colleagues Donald Marron and Eric Toder have concluded that government spends 30 percent more than it admits.
Just take a look at the above chart.
It shows three measures of spending in 2007 (Donald and Eric picked 2007 so they wouldn’t get tangled in the stimulus, financial market and auto bailouts, and all of the other temporary outlays that government made in response to the 2008-2009 financial meltdown).
The column on the left shows how much spending shows up on government’s official books. The one in the middle includes what Donald and Eric call Spending-like Tax Preferences (SLTP): Tax subsidies that substitute for spending. Often, Congress dropped these initiatives into the tax code solely to hide the fact that they are spending.
Take the mortgage interest deduction. Instead of giving homeowners a tax subsidy, Congress could just as easily have had the Federal Housing Administration or some other agency write every homeowner a check to lower their monthly mortgage payments. Now, it may be more efficient to run this subsidy through the tax code. But a tax deduction is no less a subsidy than that check.
This is policy that fails what the lawyers like to call the duck test: If it looks like spending and quacks like spending, it is spending– even it resides in the Internal Revenue Code.
The last column adds another $230 billion in user fees and premiums (which government bean-counters like to call negative spending or offsetting receipts). By adding them back, the study shows the gross cost of programs such as Medicare, not just the part that is unfunded by those fees and premiums.
Add it all up and, in 2007, the government didn’t spend $2.7 trillion–the number that appears in the federal budget—it really spent the equivalent of $3.5 trillion.
Keep in mind that Eric and Donald didn’t include all tax expenditures in their calculations. They left out provisions such as low tax rates on capital gains, the step-up in basis for gains at death, 401(k)s, and accelerated depreciation of plant and equipment, none of which are quite equivalent to spending. That made their calculation of spending smaller than it might have been.
But they included many other well-known tax preferences, such as the exclusion for employer-sponsored health insurance, and deductions for mortgage interest, most state and local taxes, and most charitable gifts, as well as the Earned Income Tax Credit (the government already does treat the refundable portion of such credits as spending).
This study is important for two reasons:
First, it provides a much more transparent look at how big government actually is.
Second, it creates an interesting perspective when you look at plans to cut tax rates while scaling back these tax preferences. Looked at through Donald and Eric’s prism, trimming many of those subsidies is not raising taxes at all, but cutting spending. And maybe, just maybe, framing them that way may make those cuts possible.
House Budget Committee Chairman Rep. Paul Ryan, R-Wis., center, and others, leave a news conference on Capitol Hill in Washington, where he discussed his budget blueprint. (Jacquelyn Martin/AP)
Shocker: Paul Ryan's budget means more big tax cuts for the rich.
No surprise here, but the tax cuts in Paul Ryan’s 2013 budget plan would result in huge benefits for high-income people and very modest—or no— benefits for low income working households, according to a new analysis by the Tax Policy Center.
TPC looked only at the tax reductions in Ryan’s plan, which also included offsetting–but unidentified–cuts in tax credits, exclusions, and deductions. TPC found that in 2015, relative to today’s tax system, those making $1 million or more would enjoy an average tax cut of $265,000 and see their after-tax income increase by 12.5 percent. By contrast, half of those making between $20,000 and $30,000 would get no tax cut at all. On average, people in that income group would get a tax reduction of $129. Ryan would raise their after-tax income by 0.5 percent.
Nearly all middle-income households (those making between $50,000 and $75,000) would see their taxes fall, by an average of roughly $1,000. Ryan would increase their after-tax income by about 2 percent.
Ryan would extend all of the 2001/2003 tax cuts, and then consolidate individual rates to just two—10 and 25 percent. In addition, he’d repeal the Alternative Minimum Tax, reduce the corporate rate from 35 percent to 25 percent, and kill the tax provisions of the 2010 health reform law.
Earlier this week, TPC projected the tax cuts in Ryan’s budget would add $4.6 trillion to the federal deficit over the next decade, even after extending the 2001/2003 tax cuts, which would add another $5.4 trillion to the deficit.
Ryan argues that eliminating or scaling back deductions, credits, and exclusions ought to be part of the GOP fiscal plan. But he won’t say how.
Cuts in those tax preferences could make a big difference in determining who wins and who loses from the tax portion of his budget. But until House Republicans describe which they’d cut, there is no way to estimate what those base-broadeners would mean.
In truth, unless Republicans raise taxes on capital gains and dividends, it is hard to imagine the highest income households getting anything other than a windfall from this budget. Other tax preferences, such as the mortgage interest deduction, are just not that valuable to them.
And since no high-profile Republicans want to raise taxes on gains and dividends (and many would cut investment taxes even further) this budget would likely result in a huge tax cut for those who need it least. That’s not a great way to start an exercise whose stated goal is to eliminate the budget deficit.
House Budget Chairman Paul Ryan shows a copy of the "FY2013 Budget - The Path to Prosperity" during a news conference at Capitol Hill in Washington March 20, 2012. Gleckman argues that Ryan's proposal proves you can't balance the budget by only cutting spending. (Jose Luis Magana/Reuters )
Why Ryan's budget is music to Democrat's ears
Paul Ryan may not have intended it, but his 2013 budget is the strongest argument I’ve seen for why any serious fiscal plan must include new revenues. It’s far more convincing than partisan Democratic complaints.
Ryan says he wants to balance the budget only by cutting spending. But he proved with hard, relatively specific numbers (on the spending side, at least) that he can’t get there from here. And if you take the second page from the Republican hymnal and add huge tax cuts to the mix, you may find yourself headed off in just the wrong fiscal direction.
Ryan’s fiscal math work only works with rapid, historic changes in government—something Congress doesn’t do well and the public struggles to accept (health reform anyone?). It would force Republicans to make one career-killing vote after another. Tea-partiers might rejoice, but there is stuff in this budget that is political death for senators and any House members running in swing districts.
Let’s look a few:
Medicare. Ryan’s budget includes a version of the premium support plan he designed with Democratic Senator Ron Wyden (D-OR). But while a system where seniors get subsidies to buy health insurance on the private market might make economic sense, it is wildly unpopular. Some surveys show 70 percent of those asked favor the current system.
According to the Congressional Budget Office, Ryan would dramatically cut federal spending for new enrollees over time. It figures that by 2050 the federal share of Medicare costs would be 42 percent lower under the Ryan plan than under CBO’s best guess of the future path of Medicare spending. In that year, CBO expects the feds would spend $19,100 in 2011 dollars on a typical 67-year-old. But it would spend only $11,100 under the Ryan plan. That suggests seniors would pay a lot more even if medical care becomes more efficient.
Medicaid: Compared to 2011, Ryan would cut other federal health spending (for Medicaid, the children’s health insurance program, and subsidies under the 2010 health law) in half from 2011 levels by 2050 (measured as a share of Gross Domestic Product). Compared to CBO’s best guess of the path of spending, that’s a 75 percent cut.
Everything else: Ryan would reduce spending for the rest of the federal government from 12.5 percent of GDP in 2011 to 3.75 percent by 2050. CBO estimates spending for these programs has never been lower than 8 percent at any time since World War II. Defense spending is 4.6 percent of GDP today and CBO notes it has never fallen below 3 percent during that period.
This implies Ryan and the GOP would either have to support unprecedented cuts in the Pentagon budget or leave almost no money for everything else the federal government does—highways, air traffic control, national parks, food safety, farm subsidies, and the like. Tough to imagine.
And for all of that, it still would take Ryan two decades to balance the budget.
Then, there are taxes. As TPC showed in its analysis of the tax provisions of the Ryan budget, he has dug for himself a fiscal hole of Grand Canyon proportions. He’d cut taxes by $4.6 trillion over 10 years, on top of the $5.4 trillion in revenue the government loses after he permanently extends the 2001/2003 tax cuts. To pay for those tax cuts, he’d either have to slash big, politically popular tax preferences such as the mortgage interest deduction or find even more spending to cut.
So the lesson from Ryan budget is clear: It is not possible in any political universe most of us reognize to cut spending like this budget implies. Of course, Ryan is a smart guy who knows this very well. So maybe he intended to send this message after all.
President Barack Obama discusses his oil and gas policies during a visit to a drilling site Wednesday, March 21, 2012 in Maljamar, N.M. Williams argues that Obama's 2013 budget doesnt; really do anything new, but it wouldn't be as financially problematic as Ryan's (AP Photo/Odessa American, Mark Sterkel) (Mark Sterkel/AP/Odessa American)
Will Obama's budget raise or lower taxes? Both.
Republicans like to say President Obama is a chronic, unrepentant tax-raiser. Obama himself used to say he was a tax-cutter but now touts himself as a fiscally responsible steward of the budget who would raise taxes—but only on the rich.
Who is right? The Tax Policy Center has just completed its analysis of tax proposals in Obama’s 2013 budget and found they both are. This is no surprise to budget geeks, but important for ordinary people to keep in mind, especially as we head into a season of both budget and campaign madness.
When Obama quietly sent his budget to Congress last month, he started off like the proverbial economist: He assumed the core of his plan was already going to happen. Almost all of the 2001-2010 tax cuts would be made permanent, the alternative minimum tax would be indexed from its 2011 level, and the estate tax would remain at its 2009 level. By itself, that baseline would add $4.5 trillion to the deficit over the next ten years, a pretty deep hole to dig if you want to show your deficit-cutting chops.
From there, the president proposes targeted tax cuts aimed at job creation and helping low-income families combined with substantial tax hikes for the rich and corporations. By the administration’s calculations, more than $2.1 trillion of tax hikes would offset roughly $400 billion of cuts and net about $1.7 trillion in additional revenues. That’s the bottom line Obama wants to hype, but the gain comes only after he gives away $4.5 trillion to get to his baseline.
Compared to the current law baseline, though, where almost all of the temporary tax cuts expire as scheduled at the end of this year, the president’s tax proposals would lose $2.8 trillion over the decade.
And relative to a current policy baseline—essentially this year’s tax rules with the temporary tax cuts still in place—the proposed budget would increase taxes by about $2.1 trillion by 2022. Because current policy would collect somewhat less tax than Obama’s baseline, the net revenue gain would actually be somewhat larger than the $1.7 trillion the budget claims.
By the current policy measure, Obama would raise taxes for about a third of households in 2015 and cut them for about one in six. For most of those who would pay more tax, the increase would be small, mostly just their share of higher business taxes. But almost all of the rich would end up paying a lot more: 98 percent of those in the top 1 percent would face tax increases averaging almost $110,000, primarily because Obama would let the Bush-era tax cuts expire for them.
Much of their tax hike would occur because Obama would raise their top rates to 36 percent and 39.6 percent. But nearly a third results from higher rates on capital gains and dividends and limiting tax savings from itemized deductions and other tax preferences to 28 percent.
However you measure it, Obama budget stands in stark contrast to the fiscal plan proposed yesterday by House Budget Committee Chair Paul Ryan (R-WI). Ryan would cut both individual and corporate tax rates well below today’s levels. He promises to make up the $4.6 trillion of the resulting lost revenue (over ten years, relative to the current policy baseline) by eliminating tax breaks. But he won’t say which ones.
Without the missing revenue raisers, Ryan’s fiscal plan lacks credibility. Obama’s budget lacks imagination and courage. It offers little that’s new and fails to address the country’s long-run fiscal challenges. But at least the president offers a complete package that doesn’t dig a deeper hole than the one we are already in.
House Budget Committee Chairman Rep. Paul Ryan, R-Wis., holds up a copy of his budget plan, entitled "The Path to Prosperity," Tuesday, March 20, 2012, during a news conference on Capitol Hill in Washington. (Jacquelyn Martin/AP)
Ryan's mystery meat budget
I am weary of mystery meat. The latest serving was dished out yesterday by House Budget Committee Chairman Paul Ryan (R-WI), who released a fiscal plan that airily promises both trillions of dollars in tax cuts and a nearly balanced budget within a decade, but never says how he’d get there.
Ryan isn’t saying that his budget implies cuts of $4.6 trillion in popular tax deductions, credits, and exclusions over 10 years, according to new estimates by the Tax Policy Center. And that ignores the $5.4 trillion in revenue lost from permanently extending the 2001/2003 tax cuts.
Ryan proposes big, specific spending reductions such as cutting Medicaid in half and slashing other federal spending (except for Social Security, Medicare, and Medicaid) by nearly 75 percent from current levels by 2050. But his budget still can’t add up without eliminating or sharply scaling back those popular tax preferences. Which ones, it seems, remain a state secret.
Ryan rolled out a 2013 budget that promises to replace the current individual rate structure with just two rates– 10 percent and 25 percent. He’d repeal the Alternative Minimum Tax and abolish the tax increases included in the 2010 health law. For business, he’d lower the corporate tax rate from 35 percent to 25 percent and shift to a territorial tax system, where multinationals would owe no U.S. tax on foreign earnings.
All of this would reduce tax revenues by trillions of dollars over 10 years. The Tax Policy Center estimates that a similar corporate rate cut, AMT repeal, and a two-rate individual system would reduce revenues by about $4.5 trillion through 2022, even after accounting for the $5.4 trillion cost of extending the 2001/2003 tax cuts. In 2022 alone, a Ryan-like plan would reduce revenues by about $600 billion.
To put it another way, TPC figures such a tax package would generate revenues of about 15.8 percent of Gross Domestic Product in 2022. His budget aims to collect about 18.7 percent. That means he’d have to find about $700 billion in new revenues by cutting tax preferences.
Keep in mind that TPC did not model the actual Ryan plan, since it is not specific enough to estimate. Instead, we looked at a plan with the elements of his proposal.
But the rough numbers are stark. And Ryan, who knows better, studiously avoids naming names when it comes to eliminating tax preferences. Oh, his budget includes a convincing and articulate explanation about what’s wrong with a tax system with high rates and a narrow base. He just doesn’t say what he’d do about it.
There is a disquieting echo here of President Obama, who so recently did such a great job explaining what’s wrong with our corporate tax system. The president happily proposed a politically popular cut in corporate rates to 28 percent, but identified offsetting tax increases that would cover only a fraction of the cost.
All of the major GOP presidential candidates have played the same black box game—promising huge rate cuts without ever saying how they’d pay for them.
Ryan asserts there is “an emerging bipartisan consensus for tax reform that lowers rates, broadens the tax base, and promotes growth and job creation.” Actually, he’s wrong. There is an emerging bipartisan consensus to embrace lower rates without ever saying how to pay for them.
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