Wednesday, March 28, 2012

Thoughts on Paul Ryan’s Tax Proposals (and miscellanea)

CBO’s analysis

“At the request of the Chairman of the House Budget Committee, Congressman Paul Ryan, the Congressional Budget Office (CBO) has calculated the long-term budgetary impact of paths for federal revenues and spending specified by the Chairman and his staff. The calculations presented here represent CBO's assessment of how the specified paths would alter the trajectories of federal debt, revenues, spending, and economic output relative to the trajectories under two scenarios that CBO has analyzed previously. Those calculations do not represent a cost estimate for legislation or an analysis of the effects of any given policies. In particular, CBO has not considered whether the specified paths are consistent with the policy proposals or budget figures released today by Chairman Ryan as part of his proposed budget resolution.”

As pointed out by Ezra Klein, many of the assumptions underlying the paths specified by Paul Ryan and his staff are unrealistic. The story would be a lot different if CBO were told to conduct a real analysis.

Just consider taxes. He instructed CBO to assume revenues would stabilize at 19% of GDP in the long-run. But his plan includes numerous tax cuts specified in detail, to be offset by other revenue policy changes that he left unspecified. How realistic is it that he could actually achieve 19% while repealing the AMT, extending the Bush tax cuts, reducing the income tax rates to 10 and 25 percent, cutting the corporate rate to 25%, etc.?

First, those tax cuts he wants are actually very expensive…

Tax Policy Center

“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.”

6 comments:

Patrick_L said...

Is it theoretically possible to pay for that much tax cutting?

Committee for a Responsible Federal Budget (http://crfb.org/blogs/tax-reform-ryan-budget)

"Though he hasn't named specifics, it is possible to reduce the tax rates to the levels described in the budget and still achieve revenue neutrality. On the corporate side, as we've shown, it would require wiping out virtually all tax expenditures and then either using money from pass-through businesses or taxing certain normal business expenses such as interest or advertising.
On the individual side, it would require moving very heavily in the direction of something like the "zero plan" put forward by the Fiscal Commission. That approach showed it was possible to enact revenue-positive tax reform with rates of 8 percent, 14 percent, and 23 percent by eliminating all tax expenditures in the code. Given his revenue targets are lower than the Fiscal Commission's, Congressman Ryan wouldn't have to go quite that far to achieve revenue neutrality. But he would need to go pretty far in that direction and couldn't avoid eliminating or deeply reducing popular deductions and exclusions for mortgages, charitable giving, employer health care, and retirement, to name a few. His task would also be made slightly harder since the zero plan taxes capital gains and dividends as ordinary income, while the Ryan budget would keep the preferential rates (or at least has not indicated that it would change those rates).

The bottom line is that while the tax plan in this budget can be achieved as a matter of policy, it would require many hard choices which have yet to be spelled out. And if policymakers do try to enact the dessert without the vegetables, the deficit and debt numbers from the Ryan budget would look quite different and far less responsible."

So as CRFB points out, on the individual side it’s definitely theoretically possible, while it’s a maybe on the corporate side. (For a slightly more pessimistic view on the corporate side, see Gleckman over at TPC http://taxvox.taxpolicycenter.org/2011/11/02/mission-impossible-cutting-the-corporate-tax-rate-to-25/)

Patrick_L said...

But while the revenue losses on the individual side are at least theoretically recoupable, Congress’ own research arm in the last week released a report detailing how difficult (and implausible) this would be in reality.

(http://www.washingtonpost.com/business/economy/tax-breaks-would-be-tough-to-cut-congressional-research-says/2012/03/23/gIQA11A4VS_story.html)

“The analysis in this report suggests there are impediments to base broadening by eliminating or reducing tax expenditures, because they are viewed as serving an important purpose, are important for distributional reasons, are technically difficult to change, or are broadly used by the public and quite popular. Given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening. This amount could have a significant effect on reducing the FY2014 budget deficit—reducing the projected $345 billion deficit by 30% to 43%. This additional tax revenue, however, is equivalent to about 6% to 9% of projected FY2014 individual income tax revenue, and, consequently, would not allow for significant reductions in tax rates (about a one or two percentage point reduction for each bracket).”

As Bruce Bartlett (prominent former Republican tax expert involved with the 1986 tax reform effort) points out (http://www.thefiscaltimes.com/Columns/2012/03/23/The-Ryan-Budget-Plan-More-Fantasy-Than-Reality.aspx#page1), coming up with enough revenues to offset the rate cuts would require base broadening AT LEAST the size of that done in the famous 1986 reform- the holy grail and constant example raised by modern supporters of tax reform. Of course, making this comparison and assuming it’s just as possible this time around ignores that the 1986 reform involved tackling less politically salient tax provisions. Now we’re left with ones like the health insurance exclusion, mortgage deduction, etc. For instance, Eric Cantor last year admitted that “Honestly, there’s not a lot of support for getting rid of the mortgage deduction on Capitol Hill.” The 1986 reform also included distributional shifts whereby taxes on capital income and corporations were increased. Both of these latter elements are completely anathematic to modern Republicans like Paul Ryan.

So whether Paul Ryan & Republicans could pay for these tax cuts seems unlikely- and definitely extremely difficult. But he probably couldn’t also maintain revenue neutrality at the same time, given how regressive the tax cuts he specifies are (http://www.cbpp.org/cms/index.cfm?fa=view&id=3728), while the tax expenditures he seems likely to even consider closing are actually quite proportional (http://www.offthechartsblog.org/chairman-ryans-misleading-chart/).

Patrick_L said...

In other words, even if Republicans could somehow raise enough revenues to pay for these additional tax cuts, it would likely require them shifting taxes from high-income households to middle- and low-income ones. This at the same time Ryan’s plan focuses the large majority of his spending cuts in the first decade on government programs for those with low-incomes (http://www.cbpp.org/cms/index.cfm?fa=view&id=3723), and by 2021 would likely lead to between 31 million and 44 million fewer people nationally being insured by Medicaid, relative to current law. (http://www.offthechartsblog.org/ryans-rx-for-medicaid-would-add-millions-to-the-uninsured-and-underinsured/). This outcome of Ryan’s plan isn’t difficult to understand or predict, since modern Republican fiscal policy rests on a few widely observed ideals- there’s a “spending problem” so revenues can’t be part of the solution, defense spending shouldn’t be touched, current retirees shouldn’t be affected, and deficits are an immediate problem that needs to be addressed. All that leaves for significant fiscal policy change in the near-term is government spending on low-income populations (including Medicaid, of which most expenses go to the disabled and low-income beneficiaries, not the poor women and children who are the greatest number of beneficiaries but are actually quite cheap to insure).

And in the long-run, CBO noted that Ryan’s “specified path for spending on all federal programs other than Social Security and the major health care programs would cause such spending to grow much more slowly than in CBO’s two scenarios―and to decline sharply as a share of GDP, from 12½ percent in 2011 to 5¾ percent in 2030 and 3¾ percent in 2050. By comparison, spending in this category has exceeded 8 percent of GDP in every year since World War II. Spending for defense alone has not been lower than 3 percent of GDP in any year during that period.”

Given Republicans’ stated opposition to defense cuts (Ryan’s budget attempts to reverse the defense sequester cuts) and that Republican-allied groups like Heritage insist or presidential candidate Mitt Romney insist that 4% of GDP is a more acceptable level, it’s safe to assume that Ryan is implicitly proposing allocating less than 1% of GDP to all federal government activities outside health care, Social Security, and defense. This category of spending has exceeded 1% of GDP since before 1930! (OMB Historical Tables), and disproportionately goes to programs benefiting low-income Americans.

Patrick_L said...

In other words, Ryan’s plan is almost certainly regressive on both the revenue and spending sides- hitting low-income, and to a lesser extent, middle-income households disproportionately. This is why William Gale, in the first link cited in this post, remarked:
“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.”

All of this at a time of rapidly rising market-income inequality (pre-tax and government transfers) at levels far higher than any other comparably-developed nation, with the United States’ government doing less than nearly all other developed nations (exception: Switzerland) to reduce inequality and the federal government’s progressivity actually declining in recent decades. (See http://www.oecd.org/document/40/0,3746,en_21571361_44315115_49166760_1_1_1_1,00.html ; http://www.cbo.gov/publication/42729) Relative social mobility has stagnated in the U.S. in recent decades (http://www.bostonfed.org/economic/wp/wp2011/wp1110.pdf) and is lower in the U.S. than in many other developed countries- particularly Scandinavian ones (Creating an Opportunity Society by Ron Haskins and Isabel Sawhill), and as a result- unsurprisingly- what data there is suggests that what mobility there is in the U.S. does not offset its higher income inequality in any given year (http://lanekenworthy.net/2008/07/20/is-the-us-a-high-inequality-country-if-mobility-is-taken-into-account/). This suggests that lifetime income inequality is also higher in the U.S. than in other developed countries. All of this suggests that the U.S. is NOT a society marked by higher levels of opportunity- just higher levels of inequality. I’m not sure I see the logic in Paul Ryan’s approach: reducing the progressivity of the federal government in a nation with (an increasingly) less progressive government system, higher inequality, and only typical mobility compared to other developed nations. We also are the only developed nation without near-universal health insurance coverage of its population, something which Paul Ryan makes doubly sure won’t happen by his cuts to the Medicaid program and lack of alternative policy proposals that would insurance more than a few million people.

Patrick_L said...

But we’ve gotten away from the tax issue… So the Paul Ryan specified revenue levels appear extremely implausible considering the specific tax policy changes he proposed and the amounts of revenue loss they would cause. Thus, the CBO-produced debt estimations for the Ryan plan seem extremely optimistic, since lower levels of revenues would lead to higher annual deficits, increased interest payments, and less debt reduction. This doesn’t even take into account the already-mentioned politically implausible spending scenario assumptions he told CBO to make as well (that “other non-defense” spending could be cut to 1930 levels, that Medicaid could be cut by a third- not including the health care law expansions- by the end of the decade, that Medicaid/CHIP’s long-term growth rate could be held equal to the CPI when medical inflation has exceeded the CPI in every single year but one for the past half-century!, etc.) His emphasis on tax rate cuts, to be paid for by unspecified base broadening that he suggests shouldn’t include raising taxes on capital income (that is disproportionately earned by those with high-incomes), thus results in likely revenue-losing tax reform that also is likely regressive. This is then layered on top of his extremely regressive spending cuts. This only further reinforces the point that Paul Ryan’s tax proposals are seriously flawed at a time of such high deficits.

P.S. Btw, Paul Ryan argues (http://www.dailykos.com/story/2012/03/26/1078029/-Paul-Ryan-short-on-specifics-when-it-comes-to-his-new-tax-nbsp-plan- ) that it’s not disingenuous for him to leave unspecified the politically treacherous base broadening tax reforms necessary to make his proposals match the revenue levels he told CBO to assume because the Ways and Means Committee, not the Budget one, is the institutional body responsible for writing revenue legislation. This argument is bunk, because this reasoning clearly didn’t stop him from feeling it was within his role to specify very specific tax policies (that coincidentally are the politically popular ones because they are solely tax cuts): that there would be two brackets at 10 and 25%, that the corporate rate should be lowered to 25%, that the AMT should be eliminated, etc. Apparently it’s only appropriate for Paul Ryan to suggest deficit-increasing tax policy changes, not deficit-reducing tax policy changes. An attitude one would clearly expect and hope for from such a very responsible and courageous “fiscal conservative” like Paul Ryan.
Paul Ryan. Not Serious.

Patrick_L said...

P.P.S. And you would have thought that after last year’s Heritage Foundation fiasco (for more details, follow links within here http://www.econbrowser.com/archives/2012/03/assume_a_can_op.html), where analysts there initially projected that Ryan’s budget would miraculously eventually lower unemployment to 2.8% (which in the real world U.S. economy would likely require shooting the unemployed), Ryan would have learned his lesson to not put out absolutely ridiculous and laughable economic projections. But apparently not. Likely in response to conservative attacks on his budget for not eliminating the debt until at least 40 years from now, he felt prompted to put out an analysis (http://budget.house.gov/UploadedFiles/Altgrowthscenario3222012.pdf) showing the debt trajectory if you replaced CBO’s “pessimistic” numbers with his more REASONABLE numbers that take into account the economic growth sure to result from his policy reforms due to supply-side effects. (The document’s misuse and misrepresentation of the results of some of the academic papers that it cites is… amusing.) This dramatically! heightened economic growth shockingly! results in faster debt reduction. Of course, these effects are uncertain and definitely far larger in magnitude than actually supported by the academic literature and historical experience.

Some people never learn.