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.

Jason Reed / Reuters
US Rep. Paul Ryan (R-WI), chairman of the House Budget Committee, speaks at the 2011 Fiscal Summit on Solutions for America's future in Washington May 25, 2011. Ryan has outlined a two-part tax policy reform, but the two components cancel each other out, writes guest blogger Diane Lim Rogers.

On Wednesday I attended the Peter G. Peterson Foundation’s “Fiscal Summit”–what felt like the fiscal policy world’s version of the Oscars, complete with stars like Bill Clinton, Paul Ryan, and two-thirds of the cast formerly known as the “Gang of Six” (now five), and even video presentations of the deficit-reduction proposals from six think tanks that felt amazingly similar to the clips from the Best Picture nominees.

President Clinton set the tone by encouraging an emphasis on the positive. Instead of painting doomsday scenarios about what would happen if we don’t get our act together and reduce the deficit, he said we ought to emphasize what we have to gain from fiscal responsibility–you know, just little things (just kidding) like a strong economy and a more secure future for our kids and grandkids.

And in terms of the variety of proposals from the variety of participating think tanks, both the Wall Street Journal’s David Wessel, and the Tax Policy Center’s Howard Gleckman point out that while there are deep philosophical differences between the most liberal (Economic Policy Institute) and most conservative (Heritage Foundation) groups in terms of their views on the optimal size of government, they still all came up with mathematically consistent proposals that would actually reduce the deficit. Heritage’s plan cuts spending the most in order to support a lower level of taxation (around the historical average of 18-19 percent of GDP), while EPI’s raises taxes the most in order to support a larger government.

Keeping on the positive, both David and Howard note the areas of agreement across the six proposals in terms of specific policy ideas, both awarding the “common ground” prize to… [drum roll please]… reducing tax expenditures! David presents the award this way:

[H]ere’s the headline: All six would curb tax income-tax breaks, loopholes, deductions and credits, a.k.a. “tax expenditures” or “spending through the tax code” because Congress uses them as alternatives to explicit spending. “Until recently,” the Peterson Foundation observes, “tax expenditures drew little scrutiny outside budget circles, but the Bowles-Simpson commission put [them] at the center of the public policy debate.”

This unanimity points to the likelihood that any tax increases to which Republicans acquiesce in a deficit deal will curb tax expenditures rather than raise tax rates, perhaps even touching (while not eliminating) tax breaks for mortgages and employer-financed health insurance.

And Howard, this way:

How did they get there? They all would reduce or eliminate many tax expenditures, although most would preserve subsidies for charitable giving and mortgage interest in one form or another.

And while many commentators paint Paul Ryan’s (House Republican) plan as devoid of any tax-side solutions, that’s false. Ryan’s deficit-reduction plan actually contains two tax plans which only when combined happen to add up to a zero-added-revenue plan: the first piece which broadens the tax base by reducing tax expenditures and hence raises revenue, and the second piece which reduces marginal tax rates and hence loses revenue.

So Paul Ryan proposes to reduce tax expenditures and raise revenue, too–just before he proposes to cut tax rates and lose the gained revenue.

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):

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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