On Tuesday, House Budget Committee Chairman Paul Ryan (R-WI) introduced a budget for fiscal year 2013. It proposes massive changes not merely in the path of federal spending, but the very nature of government and society. There is too much in it to analyze in one column, so I want to focus on one aspect: tax policy..
The chapter on taxes in Ryan’s proposal is mostly a rather banal rehash of well-known problems with the tax code: it’s too long, too complex, etc. It then jumps to a two-page summary of his proposed reform: reduce the top individual income tax rate and the corporate tax rate from 35 percent to 25 percent, have just one other tax bracket of 10 percent, repeal the Alternative Minimum Tax, and shift the corporate income tax from a worldwide system to a territorial system.
There are virtually no details. For example, we have no idea what income level the new tax brackets would apply to. Consequently, it is impossible to score the Ryan plan accurately. The Tax Policy Center took a stab at it by assuming that the current 10 percent bracket would stay the same and the 15 percent bracket would be abolished, as well as all rates above the current 25 percent bracket. It estimates that this provision would reduce revenues by $2.5 trillion over the next 10 years. The total revenue loss of all provisions would be $4.6 trillion.
Ryan offers only the sugar of rate reductions without telling us what the medicine of base broadening will be.
Another key part of the Ryan plan is a broadening of the tax base to recoup some of the revenue lost from cutting tax rates. Base broadening could be accomplished by abolishing or limiting the use of tax deductions and exclusions that reduce the amount of income subject to tax. According to the Tax Policy Center, the total amount of such “tax expenditures” is about $1.1 trillion this year.
Ryan says nothing whatsoever about what tax expenditures he would abolish. He offers only the sugar of rate reductions without telling us what the medicine of base broadening will be. Ryan says only that he would broaden the base sufficiently so that federal revenues will be in their historical range of 18 percent to 19 percent of the gross domestic product. Revenues will be 16.3 percent of GDP this year according to the Congressional Budget Office. Ryan is therefore presupposing a tax increase of 1.7 percent to 2.7 percent of GDP.
Any tax reform plan that simply asserts it will collect a certain percentage of GDP in revenues while specifying the rate structure but not defining the tax base is fundamentally dishonest, in my opinion. The CBO was simply ordered to assume that Ryan’s numbers are legitimate. For the sake of argument, I will make the same assumption.