Paul Ryan's Tax Philosophy Explained

In a new paper, USC law professor, Ed Kleinbard, has pored through Paul Ryan’s “Roadmap for America’s Future,” including  100 pages of legislative language, to gain insights into the VP candidate’s tax philosophy.  The Roadmap would represent a radical change in our tax system–massively cutting taxes on people like Governor Romney because capital gains and dividends would be entirely exempt from tax, and raising taxes on middle-income households because there’s a new cash flow tax on businesses (basically, a VAT) that would translate into higher prices or lower wages.

Despite all the detail in the Ryan plan, it shares one feature with the Romney campaign proposal in that it doesn’t explain how it would offset the cost of the large tax cuts specified.  When Ryan made the proposal, he instructed the CBO to assume that the plan would keep tax revenues at 19 percent of GDP (slightly higher than the historical average) even though the pieces specified would fall far short.  Also, as Kleinbard notes, Ryan proposed the plan when he was a member of the minority and it had no chance at all of getting a hearing, much less being enacted.  It didn’t matter back then that it was politically impossible.

Nonetheless, I found Kleinbard’s analysis fascinating and worth a read.  Here is his summary:

The purest articulation of Paul Ryan’s fiscal belief system is his 2010 Roadmap for America’s Future. The tax provisions of this extensive proposal would convert the current personal and corporate income taxes into two consumption taxes, and repeal the gift and estate tax.

This report explains how the Roadmap, like Herman Cain’s 9-9-9 Plan, would operate in practice like a large new payroll tax. The Roadmap would directly immunize the highest labor income earners from this tax through a large reduction in the top rate of the Roadmap’s labor earnings tax, compared with current law or policy. Unlike the 9-9-9 Plan the Roadmap further would largely immunize “old” capital from the efficient (if arguably unfair) imposition of consumption tax when that capital was consumed, by providing a write-off of existing depreciable basis. And finally the Roadmap would reduce the tax burdens on the most affluent capital owners further by eliminating the gift and estate tax.

For these reasons, it is not surprising that the Roadmap contemplates an extraordinarily large redistribution of tax burdens from the affluent to middle-class and lower income Americans. For middle-class families, tax burdens would increase on the order of 50 percent. At the same time, the Roadmap’s reprioritization of government spending also would be regressive in its impact. Proponents of the Roadmap or plans like it must explain how any projected increase in economic growth will compensate the majority of Americans for shouldering more tax burdens while receiving smaller government benefits.

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TPC Removes the Veil from Romney Tax Plan: The Governor is not Amused

The Tax Policy Center (TPC) caused a kerfuffle on Wednesday when they released a studythat showed that the mostly unspecified parts of Mitt Romney’s tax cut proposals would amount to a giant tax increase on low- and middle-income households. The problem is that Romney has promised large tax cuts that would mostly accrue to the well off and also that the plan would close enough unspecified loopholes so that it doesn’t increase the deficit. However, the only tax breaks and loopholes large enough to offset the cost of the high-end tax cuts disproportionately benefit the middle class. Thus, their taxes would go up on balance.

The Romney campaign responded by calling the TPC “biased” and the study “a joke.”

As Yogi Berra would say, it’s déjà vu all over again. In 2008 (when I directed the TPC), we published a study which, among other things, concluded that Senator McCain’s proposal to allow taxpayers to opt for an alternative flat-rate tax system would add trillions to the deficit and convey a huge tax cut to millionaires. The McCain campaign insisted that the optional alternative tax would be revenue neutral, which could only be true if millions of people would opt for the alternative even though they would pay more tax. That defies logic, but logic has never been a hallmark of political campaigns.

In 2008, both candidates complained that TPC had made up stuff to fill in the giant gaps in their tax plans—all clearly labeled as our assumptions, but still not the actual plans. (Both campaigns, however, were also willing to fill in many, although not all, of the missing pieces when we pointed them out). The critique was that we made assumptions that were not part of the campaign proposals, but the campaigns would not tell us what assumptions we should have made. It’s kind of a Catch-22. Both sides criticized us for making unwarranted assumptions, but the campaigns would not tell us what the actual policies were beyond the unrevealing sound bites.

It is happening again. Governor Romney has done what politicians like to do, which is talk about how he plans to cut our taxes. His plan would cut tax rates by 20 percent across the board (the top rate would fall from 35 to 28 percent and the bottom bracket from 10 to 8 percent); he’d repeal both the AMT and the estate tax; and he’d exempt investment income from tax for couples making under $200,000 (singles under $100,000).

So far, it just sounds like President Bush’s tax plan on steroids, but unlike President Bush, Mr. Romney promises that his plan would not increase the deficit or make the tax system less progressive. He says that he would close unspecified loopholes to make up the lost revenue. He also proposes to eliminate the Obama tax cuts, which disproportionately help those with low incomes, but insists that low-income people won’t see an increase in tax burdens.

The Tax Policy Center on Wednesday basically said that the plan doesn’t add up. TPC tried hard to find loophole closers that could make up the revenue lost from Romney’s plan while preserving the current distribution of tax burdens. They assumed that tax breaks such as the deductions for mortgage interest, charitable contributions, and state and local taxes, and the tax exclusion for employer sponsored health insurance would be entirely eliminated for high-income people. This would be difficult or impossible to implement, but the study’s authors were trying to craft the best possible scenario for the Romney plan. Nonetheless, high-income taxpayers still got a substantial net tax cut under the plan, meaning that tax breaks would also have to be trimmed for those with lower incomes. TPC also gave Romney the benefit of the doubt by assuming (unrealistically) that the plan would significantly boost economic growth and thus produce more tax revenues, but, still, there were not enough high-end loophole closers to offset the super-sized tax cuts the plan would bestow on the rich. Thus, revenue neutrality would require tax increases on the middle- and lower-income groups. And, some really popular tax breaks—such as the mortgage interest deduction and the tax break on employer-sponsored health insurance—would have to be curtailed or eliminated. There are good policy reasons to cut those tax breaks, but those cuts are politically impossible.

There is, in fact, one giant tax break that could be curtailed to offset the effect of the rate cuts: the lower tax rates on capital gains and dividends. (They are the main reason Mr. Romney was able to pay an average tax rate of 13.9 percent in 2010.) Taxing gains and dividends the same as ordinary income, which Ronald Reagan’s Tax Reform Act of 1986 did and two bipartisan debt reduction plans proposed, might have provided the magic bullet to pay for the rate cuts without cutting overall taxes on the rich, but Romney has ruled that out. Indeed, his plan would set the tax rate on investment income to zero for those with modest incomes.

Aside from listing some tax breaks he would not touch, Mr. Romney is mum on which large tax expenditures he would like to eliminate to make his plan work. An advisor said that “it would be up to Congress to help fill in the blanks.”

Well, TPC has given them a head start on the job, and it’s just not possible to do it in a way that meets all of Mr. Romney’s promises. Either the plan will raise taxes substantially on low- and middle-income households or it would balloon the deficit.

TPC’s blogger Howard Gleckman explains that TPC’s analysis really just shows something not too surprising—that Mr. Romney will not keep all of his campaign promises.

Thus, the right question to ask Romney is not whether he wants to raise taxes on the middle-class. The right question to ask is which of his campaign promises he will abandon.

Romney won’t, of course, answer that question.

But his campaign’s attack on the TPC’s credibility is unlikely to stick either. Doug Holtz-Eakin (John McCain’s policy director in 2008) chose Donald Marron, TPC’s director, as his deputy at the CBO and George W. Bush appointed him to the Council of Economic Advisers. Donald is also off-the-charts smart and scrupulously honest, characteristics he shares with the study’s authors and the other TPC scholars.

As David Firestone of the New York Times pointed out:

The Tax Policy Center, if anything, comprises a gang of raging moderates from both parties who have infuriated ideologues for years by simply telling the truth about the tax system.

Good work, TPC.

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The Hidden Taxes of Underfunded Government Services

Waiting in line to get a number to wait some more at DMV.

I am writing this while waiting at the DMV in Syracuse, NY. More than half of the service windows are closed, hinting that there was once a time when more people worked here and lines were shorter. I know the state has cut services to deal with a budget shortfall without raising taxes, but I view my time here as a particularly onerous tax. I know that I'll be working late tonight making up the time spent here and I'd be willing to pay a lot to avoid that. That's the hidden tax my political leaders imposed on me to avoid an explicit tax. Right now that looks like a bad deal.

There are other hidden taxes. Crumbling roads create hassles and wear and tear on vehicles. I once ruptured an oil pan when I hit a deep pothole, which cost hundreds of dollars to repair, plus towing costs, plus the time my wife wasted coming to fetch me and I spent waiting for her and, later, the tow truck. And for bicyclists like me, potholes can cause injury or death. I'd pay a lot to avoid those hidden taxes.

Underfunding education lowers our productivity, as does skimping on basic research and development. And cutbacks on law enforcement can entail huge financial and human costs.

By all means, we should make government more efficient and cut wasteful programs and services.  We absolutely have to figure out how to cut spending on entitlement programs like Medicare.  But we should be spending more money on some programs and services because they'd save taxpayers much more in hidden taxes than they cost in explicit taxes.

Put differently, we are the richest country in the history of the world.  Why do we aspire to third world public services?

[When my number was finally called, I asked the DMV person whether staff had been cut.  She was surprised by the question, but, after a moment's hesitation, said, "Well, when people retire they aren't replaced. So I guess that's a cut."]

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Jindal Fears Higher Taxes on People Who Don't Buy Chevy Volts... Like in Louisiana

Louisiana Governor Bobby Jindal and Santa Claus both punish the naughty and reward the nice. (Photo credit: Wikipedia)

Louisiana Governor Bobby Jindal inadvertently illustrated the point I made in my last post when he explained why he wasn't going to implement Obamacare.

“It really raises the question of what’s next, what’s allowable,” Jindal said on a Republican National Committee Conference Call. “Taxes on people who refuse to eat tofu or refuse to drive a Chevy Volt…this whole ruling I think is ridiculous. It’s a huge expansion of federal power.”

Well, bad news, governor.  People who don't own a Volt already pay higher taxes. Purchasers of hybrid and electric vehicles in 2012 got a $7,500 tax credit.  Put differently, I paid $7,500 more in taxes because I didn't buy a Volt or some other qualifying car.

I'm not a big fan of this credit, even though I would love for people to use less fossil fuels, because I don't think the government is smart enough to pick the right technologies to subsidize. A carbon tax would make much more sense. But the government taxes us more for doing stuff not on the approved list all the time.

Ironically,Louisiana also offers a state tax credit for alternative fuel cars (including Volts), which Governor Jindal signed into law in 2009 .

I guess he wasn't such a freedom lover back then.

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