Tax VOX
In this May 2012 file photo, an American Federation of State County and Municipal Employees union member wears a protest message on his shirt while rallying against the proposed pension legislation in Springfield, Ill. Gleckman argues that mandatory savings systems such as pensions are more effective than tax subsidies in promoting saving. (Seth Perlman/AP/File)
Mandates vs. tax subsidies: Which encourages more saving?
Most policymakers and economists agree that Americans don’t save enough. But which government policy does a better job encouraging saving and investment: tax subsidies such as 401(k)s, or mandatory savings systems such as traditional defined benefit pensions or auto-enrollment defined contribution accounts?
An important new study finds that if the goal is boosting total savings–as opposed to merely raising retirement savings—mandatory programs win hands down. Tax incentives do increase retirement savings, but largely by encouraging a limited number of sophisticated, high-income people to shift funds from taxable accounts to tax-subsidized retirement plans.
This conclusion isn’t new. For instance, my Tax Policy Center colleague Eric Toder looked at these alternatives in a 2009 paper.
But the new research is especially important because it is based on a huge sample –45 million observations—and on a series of government policy changes that tested whether tax subsidies or mandates were more effective.
The downside is that the study was not done on changes in U.S. policy—it measured reforms in Denmark. In addition, the nature of the changes themselves may complicate the results. Still, it is powerful evidence of how these incentives work.
The authors—Raj Chetty and John N. Friedman of Harvard and the National Bureau of Economic Research, and Soren Leth-Petersen and Torben Nielsen of the University of Copenhagen— looked at a series of highly-targeted savings reforms enacted in Denmark in the late 1990s. Their paper was presented at the Retirement Research Consortium conference in August.
In 1998, Denmark adopted a mandatory pension savings requirement that remained in effect until 2003. In 1999, the government cut a tax subsidy for contributions to 401(k)-like plans by top-bracket taxpayers.
When the government required people to contribute 1 percent of their gross earnings to a pension account, 90 percent of the direct impact of that mandate was reflected in total savings. By contrast, when the government trimmed the tax break for high-income people, their overall response was very small—they reduced total savings by only about 10 percent.
In effect, while high-income Danes contributed less to those retirement accounts that saw the tax subsidy cut, they put more into other pension plans that retained their tax benefit.
The results are powerful evidence of how mandates and tax subsidies can affect savings. But the study also raises lots of unanswered questions. Among them: Do Americans respond the same way as Danes and do the short-term effects found by the authors apply over the long-run?
At the RRC conference, Dartmouth economist Jon Skinner called the study a “landmark.” But in a response to a recent blog post about the results, Skinner argues this paper says nothing about the effectiveness of 401(k)s in the U.S.
Still, as U.S. policymakers think about incentives in the context of issues ranging from tax and health reform to long-term care insurance, they ought to keep these findings in mind. Tax subsidies don’t always accomplish what some policymakers hope they will. Remembering that lesson could prevent reformers from making some multi-billion dollar mistakes.
Balloons fall as Republican presidential nominee Mitt Romney and Republican vice presidential nominee, Rep. Paul Ryan's families take the stage at the Republican National Convention in Tampa, Fla., on Thursday, Aug. 30, 2012. According to Gleckman, the Republican convention's relative silence on tax issues indicates that tax reform is no longer a big part of Mitt Romney's election pitch. (Jae C. Hong/AP)
Where was tax reform at the GOP convention?
Yes, political conventions are costly anachronisms. But, with patience and time, one can learn quite a lot about a political party by watching, or reading, what the confab produces. Thus, a few thoughts about the GOP and fiscal policy as Republicans decamp from Tampa:
Mitt Romney: In last night’s acceptance speech, he sketched out his personal biography and delivered an effective brief on why we shouldn’t reelect President Obama. But, oddly, when it came to taxes Romney was nearly silent. And he said as much about what he would not do than what he would. A vow to not raise taxes on the middle class and a promise to reduce taxes on business was about it. Romney never mentioned tax reform, which had been a keystone issue for him earlier in the campaign.
His five-point job-creating plan included promises to achieve energy independence, enhance education and job training, reduce the deficit, enact new trade agreements, and encourage small business with lower taxes and less regulation. In this, the biggest of Romney’s campaign speeches, tax reform went the way of immigration reform. It was a non-issue.
Paul Ryan: The GOP’s vice-presidential pick is, sadly, not only running against Barack Obama and Joe Biden, he is running against himself. In his Wednesday night acceptance speech, Ryan was outraged that Obama cut $716 billion in future Medicare payments to hospitals and managed care companies to help fund the 2010 Affordable Care Act. “An obligation we have to our parents and grandparents is being sacrificed,” Ryan charged. Of course, the House budget written by Ryan just five months ago grabbed the same $716 billion from Medicare providers to reduce the budget deficit.
Ryan also blasted Obama for doing “exactly nothing” with the “urgent report” of Erskine Bowles and Alan Simpson, the chairs of the 2010 White House fiscal commission. Ryan, a member of the panel, voted against those urgent recommendations.
The GOP platform: I know, platforms are not to be taken seriously. Yet, they represent, in many ways, the aspirations of a party’s activists. The GOP platform, not surprisingly, endorses the outlines of Mitt Romney’s tax reform—extend the Bush-era tax cuts, cut marginal rates by 20 percent, repeal the estate tax and the Alternative Minimum Tax, and eliminate taxes on investment income for low- and moderate-income households.
But it goes far beyond that.
- It would preserve special tax treatment for charities and the deduction for contributions to those organizations—the only tax preferences the platform would explicitly protect.
- It endorses a constitutional amendment requiring a super-majority congressional vote for “any tax increase.”
- It says if Congress ever passes a value-added tax or national sales tax, it must also completely repeal the income tax.
- It explicitly rejects the idea that tax subsidies are a form of spending. This is, the platform says, an “insidious” interpretation that “means that any earnings the government allows a taxpayer to keep through a deduction, exemption, or credit are equivalent to spending the same amount on some program.” This view reflects the challenge Romney would face should he try to eliminate some of these subsidies to pay for his tax cuts.
The rhetoric and policy papers that came out of Romney’s convention won’t be the last word on taxes or fiscal policy. But these events are forums for candidates to make their best case for why they should be president. And, if this convention is any evidence, tax reform is no longer a major part of Mitt Romney’s argument.
Republican presidential candidate and former Massachusetts Governor Mitt Romney poses for a photograph with the flight crew from his campaign plane after arriving in Tampa, Florida August 29, 2012.In a column in the Wall Street Journal, Romney's economic adviser inadvertently confirmed that Romney's tax plan would cut taxes for the wealthy and raise them on the middle class, TaxVox argues. (Brian Snyder/Reuters/File)
Romney plan would cut taxes for the rich, Romney adviser confirms
In a recent paper, we showed that any revenue-neutral tax reform that included Governor Romney’s specific tax cuts and that met his stated goal of not raising taxes on saving and investment would cut taxes for households with income above $200,000 and would therefore necessarily have to raise taxes on taxpayers below $200,000. This was true even when we considered an unrealistically progressive way of financing the specified tax reductions, and even when we accounted for economic growth and revenue feedback.
Writing in Wednesday’s Wall Street Journal, Romney economic adviser Martin Feldstein attempts to contradict our finding. Instead, his analysis actually confirms our central result. Under the stated assumptions in Feldstein’s article, taxpayers with income between $100,000 and $200,000 would pay an average of at least $2,000 more. (Feldstein uses a different income measure than we do – see technical note at end.)
Taxes would rise on families earning between $100,000 and $200,000 in Feldstein’s analysis because he considers a tax reform that would completely eliminate itemized deductions for taxpayers with income above $100,000. In 2009, taxpayers earning between $100,000 and $200,000 claimed more than half of these itemized deductions. Eliminating itemized deductions would raise more in taxes from people in this group than they would save from the rate reductions and other specified features of Governor Romney’s plan.
While his results confirm our earlier finding, Feldstein employs several questionable assumptions that understate the revenue loss of Governor Romney’s tax cuts and overstate the revenue gains from reducing tax breaks and deductions. Under more reasonable assumptions, Feldstein’s version of the Romney proposals would not be revenue-neutral; instead it would result in large revenue losses. Specifically:
1. He assumes that each dollar of itemized deductions lost by households with income above $100,000 would generate 30 cents in revenue. However, the Romney plan has a maximum tax rate of only 28 percent and most households with income above $100,000 would face an even lower rate on some or all of the additional income from eliminating deductions.
2. He assumes that taxpayers earning more than $100,000 who currently itemize would lose not only their itemized deductions but also their ability to take the standard deduction. Normally, taxpayers have the option of itemizing their deductions or taking the standard deduction.
If the standard deduction were retained for all households, and denying itemized deductions was assumed to raise revenue at a more realistic average marginal tax rate of 24 percent under Romney’s plan, Feldstein’s proposals would fall about $70 billion short of revenue-neutral, even if taxpayers don’t change their behavior.
However, JCT and Treasury estimates consistently show that the revenue generated by eliminating such deductions would be even lower because taxpayers would change their behavior. For example, taxpayers with positive interest income would likely pay down their mortgages if the mortgage interest deduction were eliminated, thereby reducing their taxable investment income. Hence, the revenue available from eliminating these items is smaller than Feldstein’s static estimates suggest, even after using an appropriate average marginal tax rate.
3. Feldstein does not offer a specific way to pay for the costs of repealing the estate tax, instead pointing to “other base broadening changes” and arguing that the estate tax repeal could actually raise revenue on net. The estate tax raised $21 billion in 2009, and the JCT, CBO, and Treasury have consistently estimated that estate tax repeal would not only lose revenue but could actually lose more revenue than the listed estate tax revenues, because it would create opportunities for tax avoidance.
Taking the estate tax and other effects into account, Feldstein’s proposals come up at least $90 billion short of revenue-neutral.
Although Feldstein uses a different methodology than we did, his analysis reinforces our central finding about the distributional impact of Romney’s tax proposals: the net effect would be cutting taxes on households above $200,000 and thus requiring net tax increases on households with less income. More broadly, both our analysis and Feldstein’s show that Romney’s tax plan cannot accomplish all of his stated goals. Either taxes must rise on those with income below $200,000, or tax preferences for saving and investment will have to be reduced, or revenues will be cut, or promised tax cuts for high-income households will have to be reduced. Trade-offs exist and solutions are possible, but tax reform cannot do everything that it is sometimes asked to do.
In addition, both Feldstein and we use stylized reforms that could not be implemented in practice and that overstate the progressivity of any cut in deduction or exemption. Under Feldstein’s proposals, for example, taxpayers earning $99,999 would pay dramatically lower taxes than an individual earning only one dollar more—implying enormous marginal tax rates. Any realistic, practical plan to limit tax expenditure cuts to a high-income group would require a phase-in of the cuts or other accommodations, which would add to marginal tax rates, reduce the potential revenue gain, and make the resulting tax change more regressive.
Finally, the debate over what is or isn’t possible distracts from the more important question of what the Romney plan actually is. The governor could settle this issue quickly simply by describing how he’d pay for his tax cuts.
Technical note: Feldstein uses adjusted gross income as his income measure. We use cash income, which is somewhat larger than adjusted gross income. His group of households with AGI of $100,000 and up filed 12.4 percent of tax returns in 2009; our group of households with cash income of $200,000 and up will file 6.3 percent of all tax returns in 2015.
Commission on Fiscal Responsibility and Reform co-chairmen Erskine Bowles, left, and Alan Simpson, listen to remarks as the last session of the commission was held on Capitol Hill in this 2010 file photo. Simpson and Bowles included getting rid of tax-exemptions for municipal bonds in their tax reform plan for Presidnet Obama, and now the idea is gaining traction with conservatives. (Harry Hamburg/AP/File)
Should Congress get rid of tax-exempt municipal bonds?
As politicians and their allies look for ways to finance tax rate cuts, a surprising option is getting a great deal of attention among conservatives: The tax exemption for municipal bonds.
Mitt Romney’s economic adviser Glenn Hubbard, The Wall Street Journal editorial page, and the American Enterprise Institute’s Matt Jensen are among those who in recent weeks suggested limits on tax-exempt bonds. On Aug. 13, Journal editorial writers quoted Hubbard as saying the tax benefit of munis is “on the table” as Romney searches for ways to slash tax preferences.
And the idea is not new. For instance, the tax reform plan offered by the chairs of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson, would also limit the exemption.
Tax-exempt bonds are certainly worthy of discussion. Should the federal government subsidize state and local borrowing? Should it limit the subsidy to general obligation bonds only? If federal subsidies are appropriate, are tax preferences the most efficient way to deliver them?
The answers are not simple. Here are just a few issues worth thinking about:
The effect of lower rates on munis: The very act of lowering tax rates may reduce the attractiveness of tax-exempt debt. To the degree any reform cuts rates, state and local governments may have to pay more to borrow.
To see how it works, think about an investor who can buy either a taxable bond yielding 3 percent or a tax-exempt muni with the same risk and maturity.
In theory, if she’s in the 35 percent bracket a tax-free yield of 1.95 percent would be equal to a 3 percent taxable return. But if Congress cuts her tax rate by 20 percent, her after-tax return on the taxable corporate bond would rise. And to get an equivalent return, she’d demand a 2.16 percent yield on her tax-exempt muni bond, thus raising borrowing costs for the issuer. (In recent years the spread between taxable corporate bonds and tax-free munis has narrowed considerably, but the general rule still applies).
New bonds versus old: Policymakers have two choices here—curbing the tax-exemption for all bonds or for new bonds only. But it is a vexing choice.
First the money: Remember, a goal is to find revenue to help pay for rate reductions. The Tax Policy Center figures that repealing the tax-exemption for high-income investors would generate about $25 billion. But that’s if Congress eliminates the preference for all munis, including existing bonds. If lawmakers cut the exclusion for only new bonds, they’d have only a fraction of the money to play with, at least until all that existing debt matures or is refinanced. There are about $2.7 trillion in outstanding municipal bonds, but on average state and local governments issued only about $380 billion-a-year over the past decade.
Then, there is the politics. Is Congress really going to tell bondholders that those tax-exempts they bought in good faith (and at relatively low yields) are now going to become taxable? Imagine seniors with pitchforks.
On the other hand, if Congress limits the exemption for new bonds but lets old paper remain tax-free, states trying to borrow will be forced to compete for buyers with their own old (tax-free) debt. Imagine state and local finance officers with pitchforks.
Taxable bonds. In 2009, the Obama Administration created taxable Build America Bonds that provided state and local government a direct federal subsidy in lieu of the tax exemption. Investors liked them, but some local governments and many members of Congress did not, and the idea quietly died in 2010.
We may not have heard the last of these, however. If lower tax rates or curbs on the exemption make tax-exempt bonds less attractive, state and local issuers may find themselves rethinking their opposition to federally-subsidized taxable debt.
The fate of munis could be a key issue in any tax reform debate. If you’d like to learn more, check out an upcoming Sept. 21 panel discussion co-sponsored by The Tax Policy Center and George Mason University.
Congressional Budget Office projections suggest that the 'fiscal cliff' would push the US economy into recession, but deficits would plunge by 2016. Avoiding that scenario, however, could mean moving to dangerous levels of debt. (Congressional Budget Office)
Fiscal cliff vs. tax-cut extension is gloom or doom. Is there another way?
The Congressional Budget Office’s summer budget update charts two undesirable paths for the nation’s economic and fiscal health next year. Call them Gloom and Doom.
Gloom is what happens if the tax increases and government spending cuts scheduled to arrive in January actually occur. CBO says that would drive the economy back into recession in 2013 and push unemployment above 9 percent. But there’s some sunshine too: the federal deficit would drop sharply—by nearly half in 2013 alone—and would be under 1 percent of GDP by 2016 (dark blue bars in graph). The federal debt would decline from 73 percent of GDP this year to 59 percent in 2022. And the economy would resume growing in a year or so. Long-term gain for short term pain.
Doom occurs if Congress and the president agree to extend all of the expiring tax cuts and postpone the scheduled spending cuts for the next ten years. Short-term extension would prevent renewed economic collapse—the economy would maintain its slow growth and unemployment would continue its slow downward trend. But deficits would fall much less (the sum of the bars in the graph) and government debt would climb to nearly 90 percent of GDP in 2022.
Gloom and Doom aren’t new to the scene. Our recovery from the great recession has crawled at a painfully slow pace and any fiscal hit could stop it in its tracks. When faced with expiring tax cuts in 2010, President Obama and Congress agreed to extend the cuts through 2012, buying time for the recovery at a cost of two more annual deficits exceeding a trillion dollars. That set the stage for this year’s fiscal cliff.
Meanwhile we’ve had ample warning about our deficit and debt problems. Cutting taxes without controlling spending has proved to be a sure recipe for growing debt. Add burgeoning costs of Medicare and Medicaid, the demographic bulge of baby boomers collecting Social Security, and the cost of two wars, and the debt had to rise—and at an increasing pace. CBO has warned for years about the looming fiscal crisis, even before the recession piled on costs and slashed revenues.
We don’t really have to choose between Gloom and Doom. Combining smaller, well-timed parts of each would be a better alternative. We just need to figure out how to segue from not squelching our nascent economic recovery in the short run to accepting the fiscal discipline required to control deficits and bring down our national debt.
CBO’s update isn’t news. It’s just another reminder that we can’t continue to spend too much and tax too little, despite what presidential and congressional candidates might want us to think.
Anna Gesterak celebrates finding a wedding dress she likes at Filene's Basement during a "Running of the Brides" bridal dress sale in New York in this 2010 file photo. Getting married could help your tax rate, but depending on your circumstances, it could also increase your bill. (Lucas Jackson/Reuters/File)
Will getting married help or hurt your tax rate?
The federal income tax is not neutral when it comes to marriage. Get married and you and your spouse may pay less to Uncle Sam. Or you may pay more. It all depends.
Whether you get a marriage bonus—your combined tax bill goes down—or suffer a marriage penalty—you pay more as a couple—depends on various factors. Who has how much income from what sources? Who incurs deductible expenses? Who can claim children as dependents? And what tax preferences might you qualify for? It’s not always obvious whether walking down the aisle will make you winners or losers at tax time.
The Tax Policy Center’s new marriage bonus and penalty calculator shows whether a couple would pay more or less income tax if they are married and file jointly, compared with staying single and filing individual tax returns. Just enter information about income and deductible expenses (including which partner has each) and whether you have children (plus who’d claim them if you weren’t married) and the calculator shows how much income tax you’d pay if you were married and how much you’d pay if you weren’t.
The calculator considers many but not all factors that affect a couple’s tax liability. For example, it includes only three tax credits (the EITC, the child credit, and the child and dependent care credit). Other credits, such as those related to education, can also lead to marriage penalties but aren’t in the calculator. And it includes only the most common itemized deductions.
Marriage bonuses and penalties have coexisted for decades. Congress created widespread bonuses in 1948 when it instituted joint filing. Before that, everyone had to file his or her own return and marriage didn’t matter (except in community property states, but that’s a whole other story).
Marriage penalties didn’t appear until the 1960s, when Congress adjusted tax brackets to mitigate what some viewed as a singles penalty—a marriage bonus viewed from a single person’s perspective. (See the CBO report on marriage and the income tax that I wrote 15 years ago; it mostly still applies today.)
More recently, the 2001 tax cuts reduced marriage penalties—and increased bonuses—by adjusting some tax brackets and the standard deduction and coordinating thresholds for phasing out certain tax preferences. That fixed most of the problem for middle-income taxpayers but high-income, dual-worker couples still face a penalty because higher tax brackets for joint filers are less than twice as wide as those for single filers.
Marriage bonuses and penalties aren’t random. One-earner couples almost always get bonuses. Spouses with similar incomes, particularly those in higher tax brackets, almost always suffer penalties. Having children can magnify both outcomes, particularly for low-income families. And same-sex couples, who cannot file joint federal tax returns regardless of their marital status, have no choice about how they file but may still benefit if joint filing would impose marriage penalties.
The calculator makes it easy to determine the tax consequences of marriage. But I have two observations for any reader tempted to use a potential marriage penalty as an excuse for not getting married. Taxes aren’t the least bit romantic and, more importantly, your mother won’t be happy.
Republican presidential candidate, former Massachusetts Gov. Mitt Romney leaves after a news conference at Spartanburg International Airport, Thursday, Aug. 16, 2012, in Greer, S.C . (Evan Vucci/AP)
FAQs about recent analysis of the Romney tax plan
Tax Policy Center’s analysis of Governor Romney’s tax plan has elicited much comment and misinterpretation. In a new paper, Sam Brown, Bill Gale, and Adam Looney clarify what the original paper did and did not say by addressing in a Q and A format some of the questions that have been raised.
The authors reemphasize their conclusion that Governor Romney’s tax plan cannot meet all of his stated criteria: lower rates, repeal of the AMT and the estate tax, maintaining preferences for saving and investment, not raising taxes on the middle class, and revenue neutrality.
The authors also find that the basic conclusions are unchanged if two preferences for saving and investment— the tax exclusion for municipal bond interest and the exclusion of inside-buildup on life insurance vehicles—are added to the list of base broadening provisions that might be used to pay for individual income tax rate cuts.
Check out the new paper to see the authors’ responses to questions about their analysis
Grover Norquist, founder of the taxpayer advocacy group, Americans for Tax Reform, attends the Reuters Washington Summit in Washington in this June 2012 file photo. Tax reform at any level is hard, as Tracy Gordon found out last week sitting on the District of Columbia Tax Reform Commission. (Yuri Gripas/Reuters)
Tax reform, up close and personal
On Monday, I attended my first meeting of the District of Columbia Tax Reform Commission. The independent commission was authorized by the Tax Revision Commission Reestablishment Act of 2011 and is chaired by former DC Mayor Anthony Williams. It includes ten other members appointed by Mayor Vincent Gray and Council Chairman Kwame Brown.
I was appointed to the commission by Mayor Gray and am honored and delighted by the appointment. As someone who has probably thought about taxes more in theory than practice, I am really looking forward to this opportunity to engage in crafting a better tax system – by which I mean one that is simpler, fairer, and more efficient as well as contributing to the district’s economic prosperity and quality of life.
If these goals sound familiar, they should. Presidential candidates and members of Congress tout them whenever they talk about fundamental tax reform, which is often these days as the campaign heats up and the “fiscal cliff” looms.
But policymakers everywhere have struggled with tax reform, and with good reason. As TPC co-director Donald Marron pointed out yesterday, tax reform is hard.
Why? Because the characteristics of a good tax system are internally inconsistent. Think of London circa 1990, a very different place from site of today’s Olympics. As vividly captured in Joel Slemrod and Jon Bakija’s excellent Taxing Ourselves, on March 31, 1990, rioters set fire to luxury cars and smashed windows. Hundreds of police officers and demonstrators were injured, and hundreds of protestors were arrested.
The reason? A poll tax that would have fallen equally on all residents regardless of income or wealth, replacing a property tax that varied with home values. The poll tax was reviled and eventually repealed. But it had one advantage squarely in its column: it was efficient. As a per capita tax, it could not be avoided by sheltering income, working less, or buying stuff from the Internet. The only way to avoid it was by not being alive (or, less vividly, failing to register with your local elections official). In this case, the certainty in life was death OR taxes.
The problem was that efficiency conflicted with another goal: fairness. Many people think tax burdens should be progressive, or vary with ability to pay. However, this can contradict yet another goal: rewarding effort or economic competitiveness.
We have all these challenges and more in DC. There’s the District’s unique status as a state and local government, its special relationship to the federal government (which puts some revenue sources off limits), and its place in a regional economy that also includes heavy hitters like Maryland and Virginia. DC also struggles with providing services to a diverse population with high per capita income but also a high poverty rate.
Still, the last time anyone took a good look at DC’s revenue system was 1998. That’s the same year Google was founded. Mark McGuire was hitting the ball out of the park instead of Bryce Harper. The district was just emerging from insolvency and people and jobs were fleeing the city.
A lot has changed since then. Beyond the effects of a winning baseball team, the local economy rode out the recession better than other regions, thanks in part to a strong federal presence. Of course, that presence also leaves the district vulnerable to federal belt tightening and limits on local fiscal autonomy. So, it’s a good time to take a closer look at DC’s revenue system and see what we can do better.
Republican vice presidential candidate Rep. Paul Ryan R-Wis., reacts to audience applause during a campaign event at the Waukesha County Expo Center, Sunday, Aug. 12, 2012, in Waukesha, Wis. (Mary Altaffer/AP)
Resurrecting the Ryan budget
Already, the Romney campaign insists that voters should pay no attention to Paul Ryan’s fiscal agenda. It is the Romney-Ryan tax and budget plan, they say, not the Ryan-Romney plan.
Good luck with that.
Both Democrats and conservative Republicans will spend the next three months arguing otherwise. And like them or not, Ryan’s more comprehensive—and far more controversial—plans are likely to garner most of the attention.
After all, big ideas seem to make Romney nervous. Thus he ducks the pesky details. But Ryan charges ahead. He loves his ideas, and he wants to tell people why they should too.
Ryan has been nothing if not a fountain of policy: Social Security private accounts in 2004, his Roadmap for America’s Future in 2008, and his ambitious budgets in 2011 and 2012.
But, for Ryan, these ideas are about more than economics. They define the very relationship between people and their government. In my lifetime, only three presidential candidates—Bill Clinton, Barry Goldwater, and Adlai Stevenson—and one vp candidate—Jack Kemp–were as passionate about ideas as Ryan. (Of course, Goldwater, Stevenson, and Kemp all lost, while Clinton, the passionate centrist, won).
Ryan isn’t about winning political points, or power for its own sake. For him, controlling the levers of government is an opportunity to remake government.
In 2009, I interviewed Ryan at a Tax Policy Center forum. He was there to talk about tax reform, but he cast fiscal policy in much broader terms:
“We ought to have a safety net to help people who truly cannot help themselves…but [we]don’t want to turn it into a system in which people become dependent on the state, become complacent, substitute fear and dependency on benefits [for] liberty.…”
That’s why Ryan’s hot-button tax and spending agenda sometimes makes Republicans so uncomfortable. They are looking win elections. He wants to change the world and isn’t shy about saying how.
In his wonderful New Yorker biographical sketch, Ryan Lizza asked Paul Ryan about the difference between those who merely criticize and those who also offer alternatives:
”If you’re going to criticize, then you should propose…I think you’re obligated to do that,” he said. “People like me who are reform-minded ignore the people who say, ‘Just criticize and don’t do anything and let’s win by default.’ That’s ridiculous.”
For Ryan, it isn’t about deficits. It’s about low taxes and small government. Indeed, his fiscal plan cuts taxes so deeply that even with substantial spending reductions, he wouldn’t balance the budget until at least mid-century.
Over the past few years, Ryan has scaled back his tax reform. His original Roadmap would have collapsed today’s six tax rates to just 2 (10 percent and 23 percent), abolished all taxes on capital gains and dividends, replaced the refundable tax credits that provide the basic safety net for low-income working families with a bigger standard deduction, and dumped the corporate income tax for a consumption tax.
The most recent House budget, however, was more mainstream GOP fare. It would cut the top individual rate to 25 percent (Romney would cut it to 28 percent), tax investment income at no more than 15 percent (like Romney), and keep the corporate income tax but lower the top rate to 25 percent (as would Romney).
The Tax Policy Center estimates the revenue elements of the House budget would add about $4.5 trillion to the deficit over 10 years, and raise only about 15.5 percent of GDP in revenues.
Ryan would offset some of this by cutting back tax deductions, credits, and exclusions. Like Romney, Ryan won’t say exactly how. But unlike the man at the top of the ticket, I get the sense Ryan can’t wait to do so. In our 2009 interview, he spoke with great enthusiasm about how he’d defeat the lobbyists who protect these tax breaks.
In ’09, Ryan said he’d replace the tax exclusion for employer-sponsored health insurance with a refundable tax credit. GOP presidential nominee John McCain backed that idea in 2008, but Romney has, so far, been unwilling to go there.
Even more controversy will come on the spending side, where Ryan has consistently proposed deep cuts in government programs: He’d slash Medicaid by $800 billion over 10 years, shift Medicare from a guaranteed insurance program to one where seniors get a government subsidy to buy their own coverage, and chop all other spending from about 13 percent of Gross Domestic Product to about 4 percent. Here, again, Romney has been far less specific.
Like it or not, Romney now owns Ryan’s agenda. In a different world, Obama would present his own serious alternative deficit reduction plan, not just attack Ryan’s. If he did so, we might have the kind of fiscal debate so many of us hope for. But in the real world, Ryan’s ideas will be red meat.
Republican vice presidential candidate Rep. Paul Ryan (R-WI) gestures as he speaks at a campaign stop at Lakewood High School in Lakewood, Colorado, August 14, 2012. (Evan Semon/Reuters)
Low taxes, smaller government, but not a balanced budget?
Paul Ryan is often identified as a deficit hawk. And while he regularly talks about the importance of balanced budgets, that’s not what matters most to the GOP’s soon-to-be vice presidential nominee. Ryan’s holy grail is low taxes and small government, not fiscal balance.
Those priorities are clear in the fiscal plan Ryan wrote for the House Republicans last spring. Ryan, who chairs the House Budget Committee, was the architect of the House’s 2013 fiscal framework–a plan that wouldn’t balance the budget until after 2040.
In fact, looking at the next 10 years—the budget window that really matters to Congress—Ryan’s deficit would be roughly identical to the Congressional Budget Office’s baseline. At the end of the period, in 2022, they’d be exactly the same. In other words, Congress would achieve the same amount of deficit reduction by doing nothing as it would by following Ryan’s blueprint.
To be sure, that is significant deficit reduction–much more than President Obama has proposed and more than some think the economy can tolerate, at least in the near-term. Yet, the real story is in the level of spending and taxes that Ryan favors, not the gap between them.
CBO’s March, 2012 baseline projects a deficit in 2022 of about 1.2 percent of Gross Domestic Product. Ryan’s “Path to Prosperity,” which became the framework for the House budget, brought the 2022 deficit down to exactly the same 1.2 percent. No difference in the top line.
Now, look at revenues and spending under the two scenarios. Under the CBO baseline, the federal government would collect 21.2 percent of GDP in taxes and other revenues and spend about 22.4 percent. The Ryan budget would collect far less—about 18.7 percent of GDP in revenues—and spend much less—about 19.8 percent of GDP.
Thus, the deficit is the same but Ryan’s levels of taxes and spending would be dramatically lower than the CBO baseline.
Keep two very important issues in mind as you think about this: First, Ryan would collect that amount of revenue only by eliminating trillions of dollars of tax preferences, which he has not specified. In earlier fiscal plans, notably his Roadmap for America’s Future, Ryan would have scrapped just about all tax preferences (though he would have made capital gains and dividends tax-free). But his latest plan did not describe which subsidies he’d eliminate.
While he proposed specific individual and corporate tax rates and the repeal of the Alternative Minimum Tax, he left the heavy lifting of paying for it all to others.
Absent those offsetting tax increases, the Tax Policy Center figures Ryan’s 2013 budget plan would generate revenues of only about 15.8 percent of GDP in 2022. Without those base-broadeners, Ryan’s deficit in 2022 would balloon to about 4 percent of GDP.
That would be higher that the projected deficit under Obama’s fiscal plan, which CBO projects would be about 3 percent of GDP in 2022.
The second important issue to keep in mind is Medicare. Because Ryan (wisely in my view) would not begin changing Medicare until 2023, none of the cost savings from his plan to turn the program from a defined benefit system to a defined contribution program show up in those first 10 years. Over time, those Medicare changes would dramatically reduce federal spending, either by lowering overall costs or shifting those expenses to seniors, or both.
The other day, the Washington Post’s Ezra Klein noted that Ryan was less of a deficit hawk than advertised, and he used as evidence Ryan’s votes in favor of the bank and auto bailouts and, earlier, his support of President George W. Bush’s Medicare Part D drug benefit—all of which added significantly to the deficit.
Those are legitimate points, but you don’t need to dig up old Ryan votes to see where his priorities are. Just look closely at his 2013 budget.
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