Obama to Challenge Ryan Deficit Plan on Tax Cuts
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The Fiscal Times
April 11, 2011

On Wednesday, President Obama plans to offer a counterproposal to Rep. Paul Ryan’s new plan to solve the federal government’s long-term deficit problems. Ryan, chairman of the TK,   offers only two concrete proposals: deep cuts in Medicare and Medicaid and a tax cuts for high earners and corporations. The vague rhetoric from the Wisconsin Republican includes slashing discretionary spending, closing unnamed tax loopholes and limiting federal revenues to 19 percent of the nation’s gross domestic product despite the accelerating retirement of the baby boom generation which will be drawing on both Social Security and Medicare.

Obama, according to David Plouffe, a senior White House advisor, will not accept tax cuts on the backs of average Americans.  "Under the Republican Congressional plan, people earning over 250,000 get over a trillion dollars in tax relief. So this is the important thing. You're making a choice. You're asking seniors and the middle class to pay more. You wouldn't be having to do that if you weren't giving the very, very wealthiest in this country just enormous tax relief," Plouffe said on "Meet the Press."

One key part of Obama's plan will be to raise taxes on joint income filers with taxable income of $250,000 or more, Plouffe said. For most households that would mean gross income of $315,000 or more. Obama proposed that last year but in December went along with a Republican demand to extend all of President George W. Bush’s tax cuts for middle class and high income taxpayers.

Any set of program cuts that would put the federal budget on a sustainable long-term path will be politically painful. But Ryan has left the president lots of room to preserve much of the safety net for the country’s most vulnerable citizens. Yes, Medicare costs have to be curbed, but not by shifting so much risk to beneficiaries.

Plouffe said Obama would “use a scalpel not a machete. And, obviously, this is a distinction with the congressional Republican plan that was announced this week.”

Ryan didn’t mention a single program to be eliminated. However, he proposed that discretionary spending, both defense and non-defense, be cut in half over the next decade—that is, to 6 percent of GDP from 12 percent. That would eviscerate both the U.S. military and most non-defense services provided by the government.

He’s equally silent about how he would change the income tax code except to reduce the top income tax rate to 25 percent from today’s 35 percent—a rate that under current law would go up to 39.5 percent again in 2013.

All this, Ryan predicts, would generate an economic boom that would drive unemployment, now 8.8 percent, below 3 percent.

“Wow,” exclaimed Brookings Institution economist Isabel Sawhill. “The Mad Hatter has joined the Tea Party. No mainstream economist can do anything other than laugh at the audacity of the claims.”

Ryan’s plan, what there is of it, is not a “budget,” as the Washington Post, among others, has referred to it. It’s an ideological wish list that would shift much of the burden of rising health care costs to older Americans, many of whom won’t be able to pay for it.

Politically, the biggest beneficiary of this plan in next year’s elections ought to be Obama. His eventual Republican opponent, and GOP candidates for the House and Senate, will find it difficult if not impossible to walk away from Ryan’s proposed changes in Medicare. After all, his plan is his party’s only thing on the table.

Actually, the overall plan, “The Path to Prosperity,” is so sketchy that it less a defined path than a vague direction. That’s a common failing among many politicians who claim to be fiscal conservatives but who never identify the programs they are willing to cut.

The first step to counter Ryan attack on Medicare and Medicaid must be to preserve Obama’s Affordable Care Act, which Ryan and most of his colleagues are determined to repeal.

The ACA would extend health insurance coverage to tens of millions of uninsured Americans while offering a variety of ways in which to slow the sharp upward spiral in health care costs. Instead of finding ways to reduce health care inflation, Ryan wants to force retirees to buy private coverage from insurance companies whose middleman profits will only add to the costs while paying a portion of the premiums.

Economist Alice Rivlin of the Brookings Institution, the first director of the Congressional Budget Office, said recently, “There’s a great deal in the Affordable Care Act in terms of research, pilot programs, alternative payment structures, alternative delivery systems, research on the effectiveness of treatments that is needed.”

“We need to keep the Affordable Care Act and strengthen the parts that hopefully give us more cost-effective care in the future. If you just control the federal spending without changing the delivery system, you just get cost shifting.”

Rivlin, who has been working on various long-term fiscal fixes, said the premium support Ryan proposes for Medicare increases at a “much, much too low” rate and it doesn’t preserve fee-for-service Medicare as an option.

Once the public understands how Ryan and the Republicans want to change Medicare, there’s likely to be a backlash.

Questions asked recently by the Pew Research poll found that 65 percent of respondents opposed making changes in Social Security or Medicare to reduce budget deficits. Some 59 percent of Republicans opposed it, as did 61 percent of independents and 75 percent of Democrats.

None of the candidates for the Republican presidential nomination, announced or otherwise, has specifically endorsed Ryan’s plan, but none has disavowed it either. Certainly none is likely to oppose the deep tax cuts proposed.

One of them, former House Speaker Newt Gingrich, had praise for the package. “Paul Ryan is going to define modern conservatism at a serious level. You can quibble over details but the general shape of what he’s doing will define 2012 for Republicans,” Gingrich said on Bill Bennett’s radio show.

Quibble over details? There aren’t any details except for tax cuts and Medicare changes, but Gingrich likes that “general shape.” So do most of the other potential candidates, including former Massachusetts Gov. Mitt Romney, who said in a statement,  “He is setting the right tone for finally getting spending and entitlements under control.”

No, Ryan is not setting the right tone, nor is the Republican majority in the House. They are putting the modest economic recovery in jeopardy by pushing for large, immediate spending cuts. Unfortunately, Obama has given up on defending additional spending to spur economic growth.

The president has an opportunity this week to counter Ryan’s plan but he also has to be honest and acknowledge that raising taxes on that group won’t be enough for the long term. Some tough spending cuts are needed, and so are some increases in middle-class taxes, not in rates but in closing loopholes such as deductions for interest paid on mortgages up to $1 million. 

Related Links:
Imbalanced Budget:  Ryan Gives Wealthy a Free Pass (The Fiscal Times) 
Weekly Standard: Ryan v. Obama-- A Great Debate (NPR)
New Republic: In Deficit Plan, Obama Must Stay Firm (NPR)

covered the Federal Reserve and the economy for 25 years at the Washington Post before joining Bloomberg News in 2004. In 2009 he began writing freelance pieces for, among others, Thomson Reuters, and is widely recognized for his ability to interpret the Fed.