Perhaps the most remarkable feature of Rep. Paul Ryan’s widely discussed budget plan, which all but 4 House Republicans voted for on April 15, is that it cuts taxes for the rich and pays for it by raising taxes on the middle class.
Whatever one thinks about the economics of this, politically it is a nonstarter. Indeed, not only is there no public support for what Ryan is proposing, there is strong support for going in the other direction and raising taxes on the rich.
The tax side of Ryan’s plan says only that the top tax rate on individuals and corporations would be reduced to 25 per cent. It says nothing whatsoever about cutting taxes for anyone in the 25 per cent bracket or lower. According to the Tax Policy centre, the Ryan proposal would reduce federal revenues by $2.9 trillion over the next decade.
Ryan says that he would also broaden the tax base sufficiently that federal revenues would rise from 15 per cent of GDP to 19 per cent of GDP. But he doesn’t mention a single one of these supposed base broadeners specifically. However, we know that the largest tax expenditures benefit the middle class enormously. These include the exclusion for employer-provided health insurance, and the deductions for mortgage interest, state and local taxes, charitable contributions, and contributions to pension and retirement plans. Consequently, it is not surprising that an April 15 Gallup poll found that people oppose eliminating major deductions by a 2-to-1 margin, either to pay for lower tax rates or to reduce the budget deficit.
It’s conceivable that Ryan has thought of some way he has yet to disclose whereby the tax base would be broadened entirely by eliminating or scaling back tax preferences for the rich. For example, he could raise the maximum tax rate on dividends and long-term capital gains from 15 per cent to 25 per cent. But that would run contrary to the point of his exercise, which is to stimulate growth, saving and investment. Moreover, my guess is that the vast majority of the wealthy, who are the primary beneficiaries of the preference for dividends and capital gains, would much rather keep the rate on those forms of income at 15 per cent even if it means not reducing the top rate from 35 per cent to 25 per cent as Ryan proposes. That is because the richer you are, the more likely it is that dividends and capital gains represent the bulk of your income.
Ryan would have to eliminate $2.9 trillion in tax expenditures just to keep revenues from falling. If he also intends to raise revenues by 4 per cent of GDP, it’s really hard to see how this can be done without effectively raising taxes on the middle class. No wonder Ryan is keeping secret how he intends to pay for his tax cut for the rich while still raising the tax-GDP ratio. He has consistently refused to give the Congressional Budget Office details of how he plans to broaden the tax base and told it to simply assume that revenues will equal 19 per cent of GDP. I think this is dishonest because it allows people to think that taxes will be increased on someone other than themselves.
Ryan says that the House Ways and Means Committee will decide how to broaden the tax base. But it’s hard to see it cutting taxes only for the rich without also cutting taxes for everyone else. I don’t think the committee has ever in its history passed a tax cut that didn’t cut taxes for every income bracket approximately equally, even if it had to create refundable tax credits so that those who pay no federal income taxes will also get a “tax cut.”
It’s reasonable to assume that the era of big tax cuts that are not paid for in any way is over, especially given the April 18 warning from Standard and Poor’s that the U.S. credit rating is at risk unless significant progress is made quickly on reducing projected budget deficits. Therefore, congressional Republicans really have only four options.
1. They can raise taxes on corporations to pay for tax cuts for individuals as was done in the Tax Reform Act of 1986. However, both Republicans and Democrats want to cut the corporate tax rate to be more competitive with other countries, so this option seems like a nonstarter.
2. They can seriously go after the $1.1 trillion of tax expenditures. But it’s hard to see how enough revenue can be raised this way without going after politically popular deductions like that for mortgage interest. Given the dismal state of the housing market, there is no way homeowners will allow this.
3. They can cut spending by many trillions of dollars more than the Ryan plan proposes. But there is already growing opposition to his biggest budget cut, the de facto abolition of Medicare and its replacement by a voucher intentionally designed to pay less than the per capita cost of health care for Medicare beneficiaries. An April 20 Washington Post-ABC News poll found that only 37 per cent of people favour this proposal, with 60 per cent opposed. An April 18 McClatchy-Maris poll found that 80 per cent of people, including 70 per cent of Tea Party supporters, oppose cutting Medicare at all to reduce the deficit.
4. Finally, there is the option of ditching the tax cuts for the rich altogether and raising their taxes. The previously cited Washington Post-ABC News poll found that 62 per cent of people believe that higher taxes will be necessary to get the deficit under control versus only 36 per cent who think spending cuts alone will do the job. The same poll found an overwhelming 72 per cent of people favour raising taxes on the rich to reduce the deficit. The McClatchy-Maris poll found 64 per cent of voters favour higher taxes on the rich, including 45 per cent of Tea Party supporters.
I think option 4 is the most likely. There is simply no place in a deficit reduction package for big new tax cuts. We can’t even afford the ones we have, which is why former Federal Reserve chairman Alan Greenspan called for getting rid of all the Bush tax cuts in an April 17 interview. Nor does it make any sense to do significant deficit reduction without higher revenues making a contribution. As Reagan budget director David Stockman put it in an April 11 interview, “It is simply unrealistic to say that raising revenue isn’t part of the solution. It’s a measure of how far off the deep end Republicans have gone with this religious catechism about taxes.”
Ryan is starting to get pushback from his own constituents on his effort to cut taxes for the rich while slashing Medicare. On April 19, he was jeered at a town hall meeting in Milton, Wisconsin, by citizens demanding that the rich pay more. I think the more people learn the details of the Ryan plan, the more all Republicans are going to start hearing jeers from voters.