Ryan’s Tax Plan is not 1986-Style Reform

By :: April 12th, 2011

Charles Krauthammer (Washington Post, April 8, 2011) writes that the “most scurrilous” criticism of House Budget Committee Chairman Paul Ryan’s fiscal plan is that it would cut taxes for the rich. This would, he says, be akin to making the same claim against the Ronald Reagan-Bill Bradley 1986 tax reform. Krauthammer goes on to assert that Ryan’s plan is “classic tax reform” that … broadens the base by eliminating loopholes.

The facts are otherwise. The Ryan plan, at least what we know of it, would inarguably cut taxes for the rich. It in no way resembles the 1980s tax reforms of either President Reagan or Senator Bill Bradley and Representative Dick Gephardt. And it most assuredly fails to eliminate loopholes.

Ryan proposes to reduce the top individual and corporate tax rates from 35 percent to 25 percent. And his plan does call for eliminating tax expenditures in general terms. But the Ryan budget does not offer a single specific proposal to eliminate any tax break. This is hardly a repeat of the original 1980s tax reform plans. The Bradley-Gephardt and Reagan tax plans differed in detail, but the original versions of both plans included specific provisions for eliminating tax preferences to pay for rate reductions and keep the income distribution fixed. In contrast, the Ryan blueprint explicitly proposes large rate cuts, but leaves the heavy lifting of paying for the rate cuts to the tax-writing committees.

It gets worse if you look at the detailed tax plan Ryan released last year—the “Roadmap for America’s Future.” That plan would also have reduced the top individual rate to 25 percent for individual taxpayers willing to give up most of their deductions. But big users of preferences could have chosen to keep their deductions and continue to pay at current rates. And the Roadmap also would have eliminated all taxes on corporate profits, interest income, dividends, capital gains, and inheritances and made up some of the lost revenue with a new consumption tax. As a result, the Roadmap would have placed almost the entire tax burden on wage earners. The Tax Policy Center last year estimated it would reduce overall annual tax payments to less than 17 percent of GDP and cut tax burdens for families in the top 1 percent of the income distribution to less than half of what they would pay even if all the Bush tax cuts were extended.

The 1986 Tax Reform Act also sharply reduced top tax rates, from 50 percent to 28 percent for individuals and from 46 to 34 percent for corporations. But, in contrast to Ryan’s Roadmap, the Reagan-Bradley reform eliminated significant preferences for investment income enjoyed by high-income individuals and corporations. Most notably, it taxed capital gains as ordinary income (dividends were already taxed that way), eliminated the investment tax credit and closed shelters then commonly used by high-income investors to escape tax. In a similar vein, the recent plans by the President’s Fiscal Commission and the Bipartisan Policy Center’s debt reduction task force would also balance cuts in tax rates with elimination of preferences for capital gains and dividends and removal or paring back of other tax benefits tilted towards the high end of the distribution.

Until we see the full details of the tax bill that the Ways and Means committee introduces, we cannot say how the House plan would affect either revenue or the distribution of the tax burden. But nothing suggests House Republicans are considering anything remotely resembling a repeat of the Reagan-Bradley tax reform act.

The late Senator Daniel Patrick Moynihan once famously remarked that “everyone is entitled to his opinion, but no one is entitled to his own facts.” Despite what Krauthammer says, Ryan’s plan is not Reagan-Bradley. All he has shown us is tax rate cuts for high-income individuals and corporations. We’ll see if the current Congress comes up with something that really does close preferences at the top end to pay for Ryan’s highly skewed rate reductions. That would be a welcome reversal from what we have seen so far.