Assume a Can Opener
Word is getting around that CBO has blessed a major budget reform plan proposed by Representative Paul Ryan (R-WI) as, in the words of National Review Online, “a roadmap to solvency.” It isn’t true.
Even Washington Post blogger Ezra Klein, who normally does a terrific job with this stuff, reports Ryan’s plan “erases the massive long-term deficit.” That’s not true either. All this confusion is due to a letter written on Jan. 27 from CBO director Doug Elmendorf to Ryan. In that 50-page document, CBO suggests the plan could eliminate the deficit in 50 years and, even more impressively, eliminate the debt by 2080.
But, and this caveat is a whopper, CBO assumed this wonderful outcome would occur only if the revenue portion of Ryan’s plan generated 19 percent of GDP in taxes. And there is not the slightest evidence that would happen. Even though Ryan’s plan has a detailed tax component, his staff asked CBO to ignore it. Rather than estimate the true revenue effects of the Ryan plan, CBO simply assumed, as the lawmaker requested, that it would generate revenues of 19 percent of GDP.
You know the old joke: Two economists are stranded on a desert island with only canned food to eat. But they have no way to open the containers. What do we do,” asks one. “Assume a can opener,” replies the other.
When it comes to Ryan’s plan, CBO has, in effect, assumed the can opener.
That’s not all. CBO does not actually analyze many of the specifics of Ryan’s plan. Rather it looked only at what Doug called a “highly stylized” version of Ryan’s tax and Medicaid reforms.
In fairness, the CBO letter is filled with such disclaimers. In the second paragraph, it says, “This analysis does not represent a cost estimate for this legislation.” It couldn’t be more clear, but this is Washington, where nobody ever gets to the second paragraph. And, despite the caveats, the CBO letter does include a table that shows what would happen to the deficit, given all the heroic assumptions it made.
I have written before that Ryan deserves kudos for thinking about deficit reduction so broadly. In his “roadmap,” Ryan bravely tackles entitlement spending and recognizes the need for tax reform. I disagree with most of the details of what he’d do, but he gets a shout-out for trying.
Ryan would reduce future Social Security benefits and create voluntary private accounts, much like the old Bush plan; turn Medicare into a voucher program starting in 2021; and cap spending for Medicaid, now an open-ended entitlement.
On the tax side, it would make some huge changes. Ryan would: turn the current exclusion for employer-sponsored health insurance into a refundable credit; allow people to choose to pay either under the current income tax system or a two-rate, broad-based alternative; replace the corporate income tax with a business consumption tax, and exclude from tax dividends, capital gains, interest, and estates.
We don’t have any idea what this plan would do to revenues, but in some ways it resembles former GOP presidential candidate Fred Thompson’s campaign plan. TPC figured that scheme would reduce tax revenues by between $6 trillion and $8 trillion over 10 years. Unless Ryan can achieve unrealistically large cuts in spending as well, this is not exactly a roadmap to solvency in my book.
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[...] Not that it’s imposssible to be a conservative, or not to be a Democrat, but there’s no one with policy views left in the GOP. All fiscal conservatives, all foreign policy conservatives, and all small-government conservatives left the party in the Bush Jr. era, in light of its Medicare Part D and tax deferment policies, the Iraq invasion, and its education & drug policies. And people who cheerled all of this, like John Boehner, Mitch McConnell, and Paul Ryan, are in positions of power in the GOP. To the limited extent that they have policy proposals, they mostly involve bleeding the economy with leeches. [...]
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[...] it’s not all blue skies and sunshine for the Roadmap: Howard Gleckman of the Tax Policy Center analyzed the Roadmap and refuted Ryan’s deficit and debt eliminating claims: eliminating the deficit in 50 [...]
There is a good reason this “Roadmap” is only sponsored by 13 Representatives. You have to give him a bit of credit though, as being the only Republican to propose some tough choices and not ignore the fact that Republican-proposed tax cuts ARE NOT payed for. Either way, both parties are far from providing any form of policy that could help with consumer credit card relief, probably the biggest financial burden on the average American.
Using the best numbers I can come up with, I don't see how Ryan's numbers are that off the wall.
His 8.5% BCT looks like it is tax inclusive. Converting to tax exclusive the rate is 9.22%. Using the estimate that a 1% broad based VAT generates .4% of GDP in revenue — on 2007's $14.07T GDP you get revenue of $519B which seems more than enough to offset 2007's $395B in corporate income tax. If you keep SS and such taxes the same, Ryan only needs to net about 9.7% of GDP. Using data from US income returns and brackets and the current AGI definitions seems to show him well in the ballpark, and presumably AGI will rise due to fewer deductions.
So, back of the envelope, I don't see him being way off. Offhand I'm more worried about the BCT being more like a payroll tax that discourages employment.
If you want to sneer, fine. But I'd like a little more detail about why you assume his estimates are wildly inaccurate.
Plus, I don't think being low hurts his plan much. He is willing to see Fed taxes hit and maintain 19%, more than the recent average and close to all time highs. Fiddling with things so he does indeed pull in 19% doesn't invalidate his general ideas.
It might be an interesting exercise to “Fix Ryan.” In other words, lay out the tax rates required under his proposals to actually do what he promises. CBO can't do it, but it might be an intersting project for the research fellows you are about to hire using your Revenue Model.