What Does Paul Ryan Mean For Potential Tax Reform?
Now that Mitt Romney has made it official by naming Wisconsin Congressman Paul Ryan as his running mate in this November’s presidential election, the country turns its attention to the most pressing issue surrounding his appointment: who will do Ryan imitations on Saturday Night Live?
While I concede there’s no perfect match, it looks like this is a job for master SNL impressionist Bill Hader.
With that settled, we can move on to the next most pressing issue surrounding Ryan’s potential role as Vice President: how do his tax proposals mesh with those of Mitt Romney?
Normally, we wouldn’t have an answer for something like that, but because Ryan is the chairman of the House Budget Committee and a senior member of the Ways and Means committee, the public is fortunate to have had ample opportunity to gauge Ryan’s view on the tax law.
Much of the information can be gleaned from Ryan’s budget proposal, issued this past March. By and large, Ryan’s position on tax reform aligns neatly with those of Romney: he believes lower tax rates and a broader tax base will encourage growth and aid in deficit reduction.
Where Ryan differs from Romney, however, is that while Ryan would also call for the elimination of deductions and preferences as part of the base broadening overhaul, to the best of my knowledge Ryan’s budget does not call for tax reform to be revenue neutral; in other words, the eliminated deductions do not have to raise enough revenue to offset the loss in tax revenue cased by rate reduction. Instead, despite sweeping tax cuts, Ryan would add only $3.13 trillion to the deficit over 10 years — an amount less than half of the latest Obama proposal — by eliminating billions in government spending, primarily on “safety net” programs such as Medicare and food stamps.
This immediately makes any Ryan proposal more plausible than those Romney has posited, as large-scale deduction elimination would not be required. (see a detailed analysis of the hurdles Romney faces implementing his proposal here.) We’ll leave the argument as to whether making up the revenue deficit through decreased spending that primarily benefits the poor is good for the country to those smarter than I.
On to Ryan’s tax plan…here are the specifics that were set forth in his March 2012 budget proposal:
- Repeal Obamacare, including the 3.8% surtax on unearned income for taxpayers earning more than $250,000 that is slated to begin on January 1, 2013.
- Convert the current individual income tax structure into a simplified version containing only two tax rates, a 10% rate and a 25% rate.
- Broaden the tax base by eliminating deductions and preferences.
- While the budget appears silent on the issue, in an earlier tax discussion Ryan’s proposed to eliminate the tax on capital gains and dividends.
- Reduce the corporate income tax rate to 25%.
- Broaden the corporate tax base by eliminating deductions and preferences.
- Shift to a territorial international tax system whereby U.S corporations will only pay tax on profits earned by foreign subsidiaries in the foreign jurisdictions; the U.S would not tax the income earned abroad.
When the budget was released in March, the Tax Policy Center immediately went to work, crunching the numbers to quantify the cost of the tax provisions of Ryan’s budget proposal. Because the budget proposal was lacking in terms of specifics, the Center had to make some assumptions, including:
- All income currently taxed at 10 and 15% (up to $34,500 for single and $69,000 for MFJ) would be taxed at the new combined 15% rate,
- All income currently taxed above this threshold would be subject to the new consolidated 25% rate.
- No consideration was given to the elimination of deductions and preferences, as Ryan’s budget failed to specify or give any indication as to what deduction were “on the table.”
- The Tax Policy Center did NOT factor in a 0% tax rate on LTCG and dividends.
Working with these assumptions, the Tax Policy Center concluded the following when compared to a “current policy” baseline (the tax law as it is today is extended indefinitely)
- Between 2012 and 2022, Ryan’s proposal would result in reduced tax revenue of $4.8 trillion.
- $3.2 trillion of this lost revenue would be attributable to the individual income tax changes; the reduction in tax rates and the repeal of the AMT.
- The remaining $1.4 trillion in lost revenue would be attributable to the repeal of Obamacare and the change to the corporate tax provisions.
- Taxpayers earning more than $1,000,000 would enjoy an average tax cut of $264,000
- Those earning between $100K and $200K would enjoy an average tax cut of $2,818.
- Those earning less than $30K would experience an increase in average taxes (caused by the elimination of the 10% bracket) of approximately $150.
Compared to a “current law” baseline (the Bush tax cuts expire at year end and rates return to a 39% maximum for individuals)
- Between 2012 and 2012, Ryan’s proposal would result in reduced tax revenue of $10 trillion.
- Taxpayers earning more than $1,000,000 would enjoy an average tax cut of $406,000.
- Those earning between $100K and $200K would enjoy an average tax cut of $7,644.
- All taxpayers would experience an average tax cut, as under a current law baseline, the 10% bracket would be raised to 15% anyway, so the elimination of the 10% bracket has no impact on those earning less than the 10% threshold.
While Ryan’s proposal has been attacked by Democrats as a thinly veiled tax cut for the rich (and his nomination will surely add fodder for Democrats who have long accused Romney’s proposal of doing the same thing), with the nature of our progressive tax system, it’s nearly impossible to institute broad tax cuts without the wealthy enjoying a disproportionate benefit from those reductions. After all, those earning in excess of the current top bracket stand to benefit from a 10% absolute reduction in their tax rate from 35% to 25%, while many other taxpayers currently paying 15-20% will enjoy a nominal decrease to the 15% bracket (with some even experiencing an increase if they currently reside in the 10% bracket ) where the Ryan proposal has potential, however, is that because it does not need to be revenue neutral, any base broadening through deduction elimination could target high-income taxpayers and ONLY high-income taxpayers, bridging some of the disparity we see in the Tax Policy numbers. Such an approach would not achieve the “simplification of the tax code” promised by Ryan, but if he intends to broaden the base for all taxpayers while reducing the rates, we’ll be left with the same startling loss of progressivity we saw with the Romney proposal.
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