Rep. Ryan’s Tax Roadmap Falls Short of His Revenue Goals

By :: March 9th, 2010

In his provocative Roadmap for America’s Future, Representative Paul Ryan (R-WI) figures that his broad tax code overhaul would eventually generate about 19 percent of Gross Domestic Product in revenues. But the Ryan plan would produce hundreds of billions of dollars-a-year less than that—about 16.8 percent of GDP—a decade from now, according to new Tax Policy Center estimates. Moreover, the plan would give a huge tax cut to the wealthy, while cutting taxes by little or nothing (and in some cases even raising taxes) for low- and middle-income people.

As a result, Ryan would likely fall far short of meeting his goal of balancing the budget and paying off the national debt by 2080, even if government spending were slashed to 1951 levels as he proposes.

Ryan’s plan is exceedingly ambitious. He’d remake Medicare, Medicaid, and Social Security and constrain future growth of nearly all other government programs. On the revenue side, he’d create an alternative tax system. Families and individuals could choose to continue to pay under the existing rules or select a two-rate structure that eliminates most current deductions and credits, repeals the Alternative Minimum Tax, and exempts all interest, dividends, and capital gains from the individual tax.

At the same time, Ryan would replace the corporate tax with a Business Consumption Tax, which is effectively a Value-Added Tax. Firms could expense all investment costs but could no longer deduct wages.

However, TPC found Ryan’s plan generates much less revenue than he projects. If all taxpayers chose the simplified system, it would produce about 16.8 percent of GDP by 2020, far below the 18.6 percent he figures for that year. If taxpayers chose the system most favorable to their situation, the Ryan plan would produce even less revenue—about 16.6 percent of GDP.

What does that mean in dollars? CBO’s most realistic projection of revenues (assuming  most Bush tax cuts are extended and many middle-class families continue to be exempted from the Alternative Minimum Tax)  figures the existing tax system would raise about $4.2 trillion in 2020. By contrast, Ryan’s plan would generate about $3.7 trillion, or $500 billion less in that year alone.

While TPC didn’t model the Ryan plan beyond 2020, the pattern of revenues it generates suggests it would be decades before it reaches his goal of 19 percent of GDP—very likely sometime after 2040.  

Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts. By 2014 people making in excess of $1 million-a-year would enjoy an average tax cut of more than $600,000. To put it another way, their after-tax income would rise by nearly 30 percent.

By contrast, the average taxpayer making $75,000 or less would pay higher taxes if they  chose Ryan’s two-rate alternative. If they chose the tax plan more favorable to them, they’d do a bit better. For instance, people making between $50,000 and $75,000 would typically get a tax cut of $157 in 2014, while those making between $40,000 and $50,000 would pay $128 more on average.

These estimates are subject to lots of uncertainty. For instance, we assumed Ryan’s 8.5 percent VAT—the new business tax—would generate about 4.3 percent of GDP in revenues. TPC’s Joe Rosenberg, who modeled the Ryan plan, believes that estimate is generous. But since no such tax currently exists, it is hard to know for sure.

One other caveat: TPC did not assume that taxpayers would change their behavior in response to this new tax structure. We know they would, of course, in some ways that would generate additional revenue and in others that would lose revenue. But because these changes are so uncertain, TPC did not include them in our revenue estimates. 

As I’ve written before, Ryan deserves kudos for highlighting the nation’s fiscal challenges and putting out a real deficit reduction plan. But it is hard to see how this one adds up. 

 

50Comments

  1. Anonymous  ::  10:13 pm on March 9th, 2010:

    I don't get. You all rail about tax expenditures, and then attack tax plans that only cut “taxes by little or nothing (and in some cases even raising taxes) for low- and middle-income people.” The law of large numbers says that if you reduce the percentage of a large number than the change will be larger than if you reduced the the percentage of a smaller number. So, yeah, cutting the tax rate on someone making $50,000 will accrue a lesser tax cut than if you cut the rate on someone making $1 million. That first cohort just don't have tax liabilities large enough to reduce to get an eyepopping number. The only way to do that, is of course, more and bigger refundable tax credits!

  2. Anonymous  ::  3:30 am on March 10th, 2010:

    Static analysis (i.e. ignoring behavior changes) is a major omission, especially so when one is analyzing a wholesale overhaul of the tax system, and especially when the focus of that overhaul is to improve the incentives to earn and report taxable income.
    Elasticity of reported taxable income is crucial to the Ryan plan. The fact that it's difficult to estimate does not excuse a complete failure to take it into account.
    And I'm no particular fan of the Ryan plan, by the way.

  3. Anonymous  ::  5:42 pm on March 10th, 2010:

    Now please take it to the next step. Make suggestions that would allow Ryan's plan to do what it says it would do, particularly with regard to holding taxpayers making under $50K harmless (through tax benefits) and in extracting more money from higher income taxpayers. We know that higher rates are needed under both the current law and simplified scenarios. Please tell us what those rates are.
    As far as dynamics, there are not really many good models for this that go too many years. The best is actually mine, where I regress the deficit/surplus + netinterest expressed as a percentage of GDP onto growth as a percentage of GDP the following fiscal year. Calculations are made for distinct regimes (the Reagan – Bush years, the Clinton years, the Johnson-Nixon years, the Bush II years) and it is apparent that the slope is positive for Democratic regimes (who can decrease the deficit and grow) and negative for Republicans (who must increase the deficit).
    There are vey good Keynesian reasons for this and they have to do with effectively extracting funds from the wealthy and putting them into circulation (either by taxation or borrowing). Such a dynamic model would show that the goal should be Clintonian taxation levels or higher – rather than what Ryan proposes.
    For extra credit, please run the model I describe and plug in tax numbers for Ryan that will maximize growth in that dynamic model.

  4. Anonymous  ::  8:30 am on March 15th, 2010:

    Anonymous: The TPC isn't stupid or ignorant. When it reports that low- to middle-income earners barely benefit, and that high-income earners collect a major tax cut, we are in fact already talking in relative terms. Read the document instead of assuming that the TPC didn't run its numbers correctly:
    “After-tax income would rise by 1.5 percent for households in the bottom quintile (the 20 percent with the lowest incomes) but change little for the next two quintiles and go up just 0.6 percent for the fourth quintile. In sharp contrast, the top quintile would see their after-tax income jump 11 percent. Within that group, the top 1 percent would gain an average of 26 percent and the top 0.1 percent a whopping 36 percent. The share of total taxes paid by the bottom 80 percent would rise from 35 percent to 42 percent, while the share paid by the top 1 percent would fall by nearly half from 25 percent to 13.5 percent.”
    The consequences of Ryan's plan on the distribution of taxation burdens, as assessed by the TPC, couldn't possibly have been stated any more clearly than that.

  5. Anonymous  ::  6:15 pm on March 17th, 2010:

    Last week the Tax Policy Center released an analysis indicating that Congressman Ryan’s Roadmap for America’s Future, falls short of replacing the federal government’s revenues over the next decade raising 16.6 percent of GDP rather than the 18.35 percent needed to replace revenues under CBO’s “alternative baseline,” which extends the tax law as it stands in 2009 along with indexation of the alternative minimum tax.
    Towards the end of the Bush Administration, while I was serving as Treasury’s Deputy Assistant Secretary for Tax Analysis, Treasury worked closely with Congressman Ryan to develop key aspects of his Roadmap plan. Absent the option to choose between the current and alternative tax systems, Treasury had estimated this plan to be roughly revenue neutral over the ten year budget window, although the plan differed somewhat from the recently announced Roadmap plan and economic conditions have changed considerably. Ultimately, this plan will, of course, need to be scored by the Joint Committee on Taxation, the official scorekeeper for the Congress.
    Developing a coherent and comprehensive tax reform proposal is difficult and painstaking work. As demonstrated in prior reform efforts, notably the Tax Reform Act of 1986, tax reform is a multi-year process by which many participants in the debate put provocative, forwarding leaning ideas. This is exactly what Congressman Ryan’s Roadmap, as well as the Wyden-Gregg Bipartisan Tax Fairness and Simplification Act proposal aim to accomplish.

  6. Anonymous  ::  11:51 pm on March 24th, 2010:

    Bob, I have been writing an alternative proposal and posting it here for many months. Please give it a look and see if TPC can score it in reverse (the elements are fixed with a goal of balance while the rates can be adjusted to do so). Thanks in advance. (I hope one does not have to be elected to have it assumed that one can come up with some good answers).

  7. Anonymous  ::  11:22 pm on August 27th, 2010:

    The Ryan plan is awful and as usual does nothing positive for the hard working middle class.
    “Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts. By 2014 people making in excess of $1 million-a-year would enjoy an average tax cut of more than $600,000. To put it another way, their after-tax income would rise by nearly 30 percent.
    By contrast, the average taxpayer making $75,000 or less would pay higher taxes if they chose Ryan’s two-rate alternative. If they chose the tax plan more favorable to them, they’d do a bit better. For instance, people making between $50,000 and $75,000 would typically get a tax cut of $157 in 2014, while those making between $40,000 and $50,000 would pay $128 more on average.”
    I am a struggling college student working a full time job as a fast food manager and most recently I had to take a job as a cam girl because tuition rose again. I really think it is about time there is a huge tax cut on the middle class so people like myself have a chance to finish college and have something to look forward to if we are not lucky enough to make 1 million dollars a yr.

  8. Anonymous  ::  2:56 am on September 11th, 2010:

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  9. Anonymous  ::  5:04 am on October 25th, 2010:

    Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me. – Robert

  10. Anonymous  ::  2:58 pm on October 25th, 2010:

    i don't think that it would solve the entitlements crisis through changes to Social Security and Medicare and Medicaid.seo

  11. Anonymous  ::  8:03 pm on November 1st, 2010:

    Imagine a tax system where the only tax credit was for health care making health insurance actually accessible to everyone all while filing your taxes could fit on the size of a postcard. Imagine retirement security that provides rates of return at 7 and 8% rather than the current 1 or 2%. Imagine a future where we could be prosperous once again while helping people of all the income levels. The Roadmap For America does this and Republicans should be campaigning on this plan for November. It puts us back on a sustainable path fiscally while restoring the principles that our nation was founded on. Paul Ryan 2012!

  12. Anonymous  ::  5:04 am on November 3rd, 2010:

    Any tax where the money is taken from the consumer BEFORE it can be spent retards growth. “Letting people keep their money” is more than a moral argument, it is a sound fiscal argument. The current with-holding system that removes the money from the marketplace before it can be spent creating demand (and jobs) is the problem.
    Thats why the National Retail Sales Tax makes so much sense.
    John

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