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.

10Comments

  1. Michael Bindner  ::  11:48 am on April 12th, 2011:

    Raising dividend and capital gains rates back to 25% would be progress over the temporary status quo.

    Closing loopholes on housing, however, would better to toward increasing the child tax credit to $500 per month per child, which is doable if you end the mortgage interest and property tax deductions and consolidate the child exemption into a refundable credit.

    If you give that kind of credit, a consumption tax would be affordable. It would also solve the demographic problems in Social Security and Medicare in the long term.

    A 27% Business Receipts Tax (33% before the health insurance exclusion and the child tax credit), a 13% VAT and progressive income tax on high income earners, starting at $100,000 per couple at 4% and going to 28% in $75K increments would fit the bill rather nicely.

  2. Michael Bindner  ::  11:51 am on April 12th, 2011:

    You could likely cut the VAT and BRT rates a bit by eliminating some programs that would no longer be necessary if the child tax credit were also extended to TANF recipients, who should be paid the minimum wage to become literate at the tenth grade level and by cutting defense spending – however in order to make the system look for cuts, taxes must be raised first. After the higher taxes are in force, lawmakers will become really serious about finding budget cuts.

  3. Jack B  ::  5:05 pm on April 12th, 2011:

    Michael- it sounds like you have a lot of kids.

  4. Ed Bradford  ::  5:29 pm on April 12th, 2011:

    Seems to me if a Fair or Flat tax is implemented, GE would be paying something like 15% of their REVENUES. Until the 71,000 pages of IRS loopholes is completely eliminated, the whack-a-mole loophole business with politicians and lobbyists will continue unabated. When all can understand how much money GE is paying in taxes, then all these discussions about robbing from the rich, 47% of Americans pay zero federal income taxes, corporations pay zero tax will disappear.

    Why does anyone support an IRS that alone costs $10B+ to operate and maintain and screws poor people much more often than rich people.

  5. Michael Bindner  ::  11:58 pm on April 12th, 2011:

    Why would GE pay anything under the Fair Tax – they sell most of their stuff wholesale. The people who sell their stuff will collect the fair tax. They may some amount of gross pay to let the supply chain be more competitive, but not too much since their employees must still pay Fair Tax on what they buy.

    It would be better to be a bit more organized in where taxation takes place by enacting both a VAT (to stop avoidance scams) and a Busienss Receipts Tax – with net wages going up by the same rate as the VAT and gross wages going down by the same rate as the business receipts tax – although some peoples wages will likely be cut by more because they pay more tax while others may not see any “gross wage” cuts.

  6. Michael Bindner  ::  12:06 am on April 13th, 2011:

    Just the one. My own scheme would raise income subject to tax by $9K, which at a 15% marginal rate is $1,200 in additional taxes. The child exemption is worth $3K, or about $400 in credits – so I would make out in the scheme I propose to the tune of $3,400 in higher net income – a bit less than $300 per month. With mortgage principal modification, someone in my boat would likely be able to dump the current house and move up to a townhouse with a second (or even a third!) bathroom.

  7. Beeker25  ::  10:26 am on April 13th, 2011:

    Ryan’s plan is a continuation of the supply side economic theory that tilts the tax breaks to the wealthy and corporations. It even have talking points built in for the rest of the Republicans to follow. You are seeing it put out by McConnell, Krauthammer and many posts.

    I like to see more of a flat tax with one or two specific interest deductions for primary home only and education expenses. The Fiscal Commission has recommendations for the interim until the debt is brought down to a sustainable level and with a fairer tax code in place.

    Part of the problem with coming up with the tax that works is dealing with the details that ultimately picks winners and losers.

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  10. Scott Solombrino  ::  9:58 pm on June 13th, 2011:

    I am a life long republican. And I have to say that I am very disappointed in the Ryan Plan. It throws the little tax payer under the buy and exercises a decided vagueness in addressing taxation. As a business man who DOES NOT outsource any labor, I am tired of competing with other employers who not only do, but receive an incentive for doing so.