House GOP Would Need $5.7 Trillion in Tax Hikes to Offset Ryan Rate Cuts

By :: March 15th, 2013

House Budget Committee Chair Paul Ryan’s (R-WI) fiscal plan promises to balance the federal budget in 10 years, make major cuts in income tax rates for both individuals and corporations, and raise the same amount of revenue as current law. If House Republicans want to do all three, they will have to eliminate trillions of dollars in popular tax preferences.

The Tax Policy Center estimates that cutting individual rates to 10 percent and 25 percent, repealing the Alternative Minimum Tax and the tax increases included in the Affordable Care Act, and cutting the corporate rate from 35 percent to 25 percent would add $5.7 trillion to the deficit over the next decade. Thus, if House Republicans want to cut these taxes and still collect the revenues they promise, they’d have to raise other taxes by $5.7 trillion.

The tax cuts described in Ryan’s budget would generate a huge windfall for high-income taxpayers. On average, households would get a cut of $3,000. But those in the top 0.1 percent of income, who make $3.3 million or more, would get a whopping $1.2 million on average--a 20 percent increase in their after-tax income.

By contrast, middle-income households would get an average tax cut of about $900. Those in the bottom 20 percent (who make $22,000 or less) would get $40 and one-third of them would get no tax cut at all.

Some important caveats here: TPC did not estimate the revenue effects of a Ryan tax proposal since the budget does not include an actual plan. Rather, it modeled generic tax cuts that follow the outline of what his budget describes. And because his plan does not identify any tax increases, TPC modeled only the tax cuts.

The Ryan budget anticipates sufficient cuts in tax preferences so that a rewritten tax code raises the same amount of money as current law. But it leaves the details to the House Ways & Means Committee, which could make major changes in the budget panel's plan.

TPC included in its revenue estimates two Obamacare tax increases on high-income households—the additional 0.9 percent Medicare tax and the new 3.9 percent tax on investment income. However, we excluded other provisions from the 2010 health law, including revenue the House budget would generate by eliminating insurance subsides or roughly the same amount Treasury would lose if other provisions of the 2010 health law are repealed.

Could Ways & Means find $5.7 trillion in tax preferences? It is hard to imagine.

For instance, OMB projects about $1.8 trillion in tax expenditures in 2017 under current law. TPC figures Congress would have to cut about $539 billion in that year to cover the revenue lost through Ryan-like rate cuts. That would slash deductions, credits, tax exclusions, and preferential rates by nearly 30 percent.

But that underestimates the size of the necessary tax hikes. There are three reasons why:

The first that the simple act of lowering rates makes tax expenditures less valuable. With a top rate of 39.6 percent, a $1 deduction is worth 39.6 cents to a top bracket taxpayer and Treasury loses the same 39.6 cents. If Congress cuts the top rate to 25 percent, the deduction would be worth less and eliminating it would produce fewer dollars for the Treasury.

The second problem is that people will change behavior as they lose tax benefits, and that will reduce the amount of money government will collect. Take away my mortgage interest deduction and, if I can afford it, I’ll just pay off my mortgage.

The third problem is that many tax expenditures are untouchable. For instance, does anybody really want to tax combat pay? Or imputed rent on the value of owner-occupied homes? Will Republicans raise rates on capital gains? If not, other preferences would have to take a bigger hit.

Finally, because the rate cuts are so regressive, House Republicans would have to heavily skew offsetting tax increases to high-income households if they want to keep the distribution of taxes roughly what it is today. And that will be another heavy lift.

In the end, the Ryan budget is only half-a-plan. It outlines politically attractive tax cuts but says nothing about the tax increases necessary to pay for them. It leaves us with little more than a black box. The TPC numbers show just how big that box is.

29Comments

  1. Analysis: GOP fiscal vision prioritizes enormous tax cuts for rich over deficit  ::  11:53 am on March 15th, 2013:

    […] nonpartisan Tax Policy Center has just completed its analysis of the Paul Ryan budget, and it confirms once again just how regressive the GOP fiscal vision […]

  2. Vivian Darkbloom  ::  12:01 pm on March 15th, 2013:

    Let’s cut through the partisan rhetoric Howard is presenting here. It should not be too hard to understand, but the Ryan plan does not propose to “cut taxes”. It’s actually pretty simple:

    -Simplify the individual rates to two rates—10 percent and a *goal* of an upper rate of 25 percent;

    -Eliminate the AMT;

    -Reduce the corporate tax rate to 25 percent;

    -Simultaneously reduce tax expenditures so that the net effect on revenues (on a static basis) is zero.

    The basic framework is sound economically and policy-wise. It’s hard enough political work to eliminate tax expenditures and enact real tax reform, but the TPC is apparently trying its best to work against that. The plan is clearly that if there is insufficient political will to eliminate sufficient tax expenditures to reduce the top rate to 25 percent, it won’t go that low. You won’t, however, read that here from the non-partisan TPC.

    Despite that very simple and reasonable approach to reform, Howard and the TPC seem to have a hard time netting those two simultaneous policy actions. He writes:

    “The tax cuts described in Ryan’s budget would generate a huge windfall for high-income taxpayers.”

    Whoa, not so fast. Not to mention the fact that the attached TPC “estimate” says it is not just preliminary, but “very preliminary”. I didn’t read that in the blog post.

    One has to read this post carefully to draw the conclusion that if the tax plan calls for reduction in rates —what Howard calls a “tax cut” primarily for the rich and offsets that by eliminating tax expenditures in the same amount, those tax expenditures are likely going to come from the same class of folks. So, let’s not be so quick out of the rhetorical box to call these “tax cuts”—for anyone, particularly based on your “very preliminary estimates”. Let’s look for that “huge windfall for high-income taxpayers” quote to be picked out (likely as intended by Howard) in the mainstream press. Then, the TPC, after all the headlines are out, will innocently claim they are being misunderstood. (I already see that WAPO has wasted no time here).

    And, there’s this:

    “The first that the simple act of lowering rates makes tax expenditures less valuable. With a top rate of 39.6 percent, a $1 deduction is worth 39.6 cents to a top bracket taxpayer and Treasury loses the same 39.6 cents. If Congress cuts the top rate to 25 percent, the deduction would be worth less and eliminating it would produce fewer dollars for the Treasury.”

    This is silly and I wish the TPC would finally get over it. So, what if we were to reduce the order of the computation and first eliminate the tax expenditures and then the rates. That would reduce the value of the tax rate reduction.

    Second, let’s assume that half of all outstanding tax expenditures are eliminated. Even if we accept the idea that those tax expenditures are eliminated the moment *after* the tax rate reduction takes effect (and not the moment before) those tax expenditures that are *not* eliminated are also now worth less due to the lower rates. One needs to focus not only the value of tax expenditures that are eliminated, but on the value of those that are not eliminated as well. Reducing rates also does the latter. The calculation of the effect of a simultaneous rate reduction and tax expenditure elimination is not a two-step process—it is a iterative one and therefore one should rather focus on the net result and not on one’s artificial (and politically-skewed) construct of which comes first.

    The continuous and one-sided approach to these issues and the highly-charged partisan rhetoric that appears in these blog posts suggests to me that folks at the TPC are not at all interested in tax reform. They seem to be more interested in destroying any chance of reform before they’ve even completed their own “estimates”.

  3. Paul Ryan's 'gifts' | GossipGossip  ::  12:47 pm on March 15th, 2013:

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  5. Think Tank Dismantles The Ryan Budget, And Shows How Tax Cuts Overwhelmingly Benefit The Rich | Filmspot.lvFilmspot.lv  ::  2:58 pm on March 15th, 2013:

    […] “hard to imagine” Ryan’s budget plan working out to be revenue neutral, the TPC’s Howard Gleckman wrote in a blog post accompanying the […]

  6. The Path to Poverty 3.0 Has a $5.7 Trillion Hole In It | BobCesca.com | Liberal Politics Blog and Podcast | We Cover the World  ::  3:30 pm on March 15th, 2013:

    […] Tax Policy Center has crunched the numbers and found that Paul Ryan would need to somehow account for $5.7 trillion in missing revenue to make […]

  7. P. Urusha  ::  4:06 pm on March 15th, 2013:

    Yes, let us cut through the partisan rhetoric as Vivian promised to do but did the reverse.

    Paul Ryan wants to destroy the safety net for poor and disabled Americans and will tell any lie in order to do it. He then wants to give the proceeds to the richest or the richest Americans. He has no moral compass and any American who supports his plan is either filled with greed and hatred for the poor, or has been deceived.

  8. SteveinCH  ::  4:32 pm on March 15th, 2013:

    Is there some way in which you think your post does not constitute rhetoric?

    The budget presented by Congressman Ryan proposes to grow spending on Medicare by 6.0 percent per year from 2014 to 2023, Medicaid by 2.1% per year, and SS by 5.8% per year.

    In what way is this “destroy[ing] the safety net?”

    As for and any American who supports his plan is either filled with greed and hatred for the poor, or has been deceived., if that’s not rhetorical excess, I’m not sure what is.

  9. Michael Bindner  ::  5:07 pm on March 15th, 2013:

    The only way I foresee Ways and Means doing this is by including some form of consumption tax, either the misnamed FairTax, a VAT or a VAT-like Business Income Tax, which would essentially make labor taxable for employers rather than employees. Now that would be news, and welcome news at that for those of us with lower incomes.

  10. Romney Campaign-Endorsed Tax Policy Center Makes Womp Rats Of Paul Ryan’s Budget – OnyxBook  ::  6:12 pm on March 15th, 2013:

    […] From the Tax Policy Center’s Howard Gleckman: […]

  11. Quaker in a Basement  ::  6:40 pm on March 15th, 2013:

    Now see here, my good man. Clearly the TPC has neglected a key factor in its calculation. Nowhere do I see that the TPC has accounted for the effect of Free Market Magic on potential revenues. With the simple application of Free Market Magic, lower marginal rates produce an instantaneous bounty of federal revenue which can be returned to taxpayers as further cuts in marginal rates. Why, before you know it, Free Market Magic can drive marginal tax rates into negative territory! Just think of it! The federal government will actually be able to pay Job Creators to build a Galtian paradise…and still have an infinite supply of revenue left over!

    Really. Sometimes it’s like you liberals don’t know the first thing about economics.

  12. Quaker in a Basement  ::  6:45 pm on March 15th, 2013:

    The budget presented by Congressman Ryan proposes to grow spending on Medicare by 6.0 percent per year from 2014 to 2023,

    And what is the expected growth in the number of Medicare beneficiaries over the same time period? And anticipated inflation of medical costs? What about that? Will a 6% annual increase be enough to sustain current levels of benefits?

    Spending. Benefits. These are not the same thing.

  13. SteveinCH  ::  7:00 pm on March 15th, 2013:

    Beneficiaries are forecast to grow at 3 to 3.5% per year if one believes the Census. Medical inflation is also running 3 to 3.5% per year if one believes the CBO.

    So let’s take the high side and say, with no efficiency improvements at all, Medicare should grow at 7% per year. It is really cruel to assume 1% efficiency improvement per year as the Medicare population continues to grow?

    Of course, on the low side, there’s no need for any efficiency at all.

    And, there is nothing sacrosanct about the current level of benefits is there?

  14. Quaker in a Basement  ::  7:37 pm on March 15th, 2013:

    And, there is nothing sacrosanct about the current level of benefits is there?

    And there it is.

  15. SteveinCH  ::  8:00 pm on March 15th, 2013:

    @Quaker

    Way to duck the argument. If the natural growth rate of Medicare is between 6 and 7%, is growing it at 6% really eviscerating it?

    Doubt you’ll answer but it never hurts to ask.

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    […] Ryan’s magic asterisk is really only worth $5.7 trillion, according to new numbers from the Tax Policy Center. But I was right about the big story: this magic asterisk is worth about $1 trillion more than […]

  17. Mark-NC  ::  11:19 pm on March 15th, 2013:

    Great snark!

  18. Saturday Late Morning Reads | Sky Dancing  ::  10:40 am on March 16th, 2013:

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  19. Report: House GOP Would Need $5.7 Trillion in Tax Hikes to Offset Ryan Rate Cuts | The Moderate Voice  ::  12:57 pm on March 16th, 2013:

    […] To many GOPers, Paul Ryan is a kind of mantra, whether what he says adds up or doesn’t. It increasingly is clear his budget doesn’t add up: […]

  20. apetra  ::  1:09 pm on March 16th, 2013:

    The Left loves to make up fake tax increase proposals “found” in the details of plans from the right of center.

    No sale. The right of center, in fact the broad center mainstream, is adamantly opposed to more tax increases on top of the new Obamacare and Obama fiscal cliff taxes.

    The right of center would cut more, not raise taxes, if the numbers in their first draft don’t work.

  21. Report: House GOP Would Need $5.7 Trillion in Tax Hikes to Offset Ryan Rate Cuts | The Penn Ave Post  ::  1:48 pm on March 16th, 2013:

    […] To many GOPers, Paul Ryan is a kind of mantra, whether what he says adds up or doesn’t. It increasingly is clear his budget doesn’t add up: House Budget Committee Chair Paul Ryan’s (R-WI) fiscal plan promises to balance the federal […]

  22. Stephen Bushi  ::  4:48 pm on March 16th, 2013:

    Instead of calling the top 1% “job creators”, let’s call them what they really are, “cash hoarders” sitting on billions, perhaps trillions of dollars, and controlling most of the wealth of this country. Our economy can not survive further deterioration in our gross maldistribution of wealth and income unless we return to a feudal society. According to Reagan’s “trickle down” effect, and if the top 1% were really truly “job creators” then with the amount of cash they have accumulated and the amount of income they take in there should not be an unemployment problem in this country. Why do all the Republican proposals involve plans to facilitate even greater cash hoarding. Let’s modify our tax structure to improve the incomes of the poor and middle class A dollar in the pocket of a poor or middle class person does much more to help our economy than a dollar in the pocket of a wealthy person
    Let’s use common sense and recognize that public education, fire departments, police departments, and infrastructure are more important than tax breaks for private jet owners, and other tax loop holes that only benefit the wealthy.
    Instead of restricting health care through higher eligibility ages for Medicare, or other restrictions of access to medical care to “save” Medicare, why not take more logical actions like abolishing any laws or regulations that interfere with Medicare negotiating with pharmaceutical companies for the cost of medication; or doing away with “facility fees”, “resort community fees”, gross markups on the costs of medications and medical supplies charged by hospitals; putting reasonable limits on the patent protected profits allowed to suppliers in the critical health care industry. Health care is much to important to be treated strictly as a business with a profit motive as its driving force. If the business community is concerned with government interference then maybe we should do away with patent protection, a form of government intervention, altogether for drugs and medical supplies and equipment. Then, if we made the unfair medicare tax less regressive by making it a flat tax on all income including capital gains and with no income cap we would have real medicare reform. If we did all these things then we could easily afford our current Medicare system and perhaps even have a surplus with which we could recreate a contingency fund and eventually pay back part of the national debt or lower the medicare tax rate perhaps for people with incomes below $110,000, putting more money in the pockets of the true job creators instead of the cash hoarders.

  23. Blog Archive » House GOP Would Need $5.7 Trillion in Tax Hikes to … – Let You Know Everything  ::  4:02 am on March 17th, 2013:

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  25. Paul Ryan still insists his budget is ‘what people want’ | Hotspyer.com  ::  1:22 pm on March 18th, 2013:

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