Is Paul Ryan’s budget plan good enough? Will it get the job done? After correctly noting that the Paul Ryan budget plan will not balance the budget for close to thirty years, a friend on Facebook recently asked why this plan was considered progress. Here is my promised response.
Paul Ryan’s plan has come under fire from conservatives lately who, I think, misunderstand its desired effect and purpose. Let’s start, however, by acknowledging that the House Budget’s Committee chairman’s plan is far from perfect. NRO’s Veronique de Rugy unflinchingly looks at the plan’s shortcomings and then notes:
Considering the situation we are in today, the size of government, the level of our debt, the continuous violations of our economic and personal freedoms, free-market advocates should be breathing fire everyday and fight for truly smaller government. This plan isn’t enough.
Please, understand that I am not ignoring the good things in this plan. But many people have already uncritically written about them. And let’s be honest, considering the circumstances, I was hoping for more, much more. Considering the level of compromises and the amount of watering down that Congress will do once they put their hands on this or any budget, the original document should have been much stronger.
It’s true. As our nation turns a blind eye to the fiscal cliff it is marching towards, the Ryan plan doesn’t balance the budget or fix many of the problems for several years. Why all the fuss then about how bold and daring Paul Ryan’s plan is? Because the Ryan budget is the starting point, not the end game; considering the past several decades of American fiscal policy and practice, it’s a dang fine starting point too. It cuts $5 trillion over ten years, lowers the deficit by $3 trillion in the same time period, eliminates the looming long-term debt disaster our country is headed on, and brings the debt-to-GDP ratio down to 62%. Here are four more reasons why Paul Ryan’s budget plan is better than some of its conservative critics are making it out to be:
1) Tax reform. Paul Ryan’s plan calls for much needed tax reform which will lead to better economic growth. When Ryan introduced his plan in the Wall Street Journal, he wrote:
Our budget also spurs economic growth with bold tax reform—eliminating complexity for individuals and families and boosting competitiveness for American job creators. Led by House Ways and Means Committee Chairman Dave Camp, our budget consolidates the current six individual income tax brackets into just two brackets of 10% and 25%.
We propose to reduce the corporate tax rate of 35%, which will soon be the highest rate in the developed world, to a much more competitive 25%. Our budget also shifts to a "territorial" tax system to end the practice of hitting businesses with extra taxes when they invest profits earned abroad in jobs and factories here at home.
Personally, I favor cutting taxes on the rich and everyone else, but that’s not the goal of the Ryan plan. The goal is to simplify the tax code and spur economic growth, and you can do that without changing the total revenue raised or who it is raised from. Ryan’s strategy is to eliminate tax deductions and credits while replacing the current six-rate income tax structure with two rates of 10 and 25 percent. The result would be less tax paperwork, more jobs and more investment, which would be good for everybody.
Liberals rail against the idea of cutting the top income tax rate from the current 35 percent, but Ryan’s lower 25 percent rate was not picked out of thin air. IRS data show that taxpayers with the highest incomes currently pay an average of about 25 percent of their income in income taxes. At the same time, middle-income taxpayers pay an average of roughly 10 percent. That is why Ryan’s two-rate tax structure of 10 and 25 percent would collect about the same amount of money from the same income groups as the current code if we got rid of the deductions and credits.
Ryan’s plan is not a single-rate flat tax, which would be the fairest and most efficient tax reform. However, a two-rate “flatter” tax would be a big step in the right direction
In other words, the Ryan plan introduces Americans to a flatter, simpler tax code that would spur job growth.
2) Paul Ryan’s plan is politically feasible. Yep, you heard that right. Despite all the moaning and groaning you hear from liberals on the issue, Ryan’s budget has far more support than any other plan out there from the Left or the Right. Consider the votes the House has taken on various budget proposals in the past week:
1. House Budget Committee (Ryan) budget: Passed 228-191
2. Democratic substitute budget: Failed 163-262
3. Republican Study Committee budget: Failed 136-285
4. Congressional Black Caucus budget: Failed 107-314
5. Progressive Caucus budget: Failed 78-346
6. Cooper/LaTourette (Simpson-Bowles) budget: Failed 38-382
7. Obama budget: Failed 0-414
In the real world political feasibility matters and it’s better to get half of what you want than nothing at all.
3) Social Security reform is not being ignored. The Ryan plan largely gives Social Security a pass, doing little or nothing to reform the sinking program. This isn’t because Ryan doesn’t understand the problems stemming from the popular-but-unsustainable entitlement program, but believes its problems should best be tackled separately. If SS reform was added to Ryan’s already controversial budget, it would take all the political capital in the world to pass it in D.C.
Ryan has been a fierce advocate for Social Security reform in the past, proposing different plans for its reform as far back as 2004. When Bush made it a signature issue in his second term, Ryan was one of the few Republicans who publicly backed the idea. This is not an idea he abandoned over time either. In 2008, he wrote a piece in the Wall Street Journal describing how the entitlement could be placed back on a path to financial solvency and sustainability.
Understanding that Ryan is not ignoring our country’s largest entitlement program but wishes to tackle it separately, our debt and future deficits should be expected to come down accordingly. Ryan’s promises on this matter are seemingly credible due to his past positions and votes.
4) The CBO’s flawed analysis. Finally, one has to remember how the CBO scores tax cuts and hikes: By static analysis. The problem with most liberal analysis of tax cuts and hikes is that they assume all changes in tax policy happen in a vacuum. That is to say, how the economy grows or reacts to these changes is never taken into account. Yet, this is not how the real world works. The type of static analysis listed here assumes the economy would have made the same recovery as it did from 2003-2007 if Bush’s tax cuts had never been implemented.
For instance, using this static analysis, liberals cannot explain why tax revenues actually increased from 2004 until the economic downturn in 2008. Washington Examiner columnist Byron York observes:
As far as tax cuts are concerned, Bush did indeed cut taxes for the wealthy -- along with everybody else who paid income taxes. But does Brown remember that tax revenues actually increased in the years after the Bush tax cuts took effect?
Revenues fell in Bush's first two years because of a combination of the tech bust and the start of the tax cuts. But then things took off. After taking in $1.782 trillion in tax revenues in 2003, the government collected $1.88 trillion in 2004; $2.153 trillion in 2005; $2.406 trillion in 2006; and $2.567 trillion in 2007, according to figures compiled by the Office of Management and Budget. That's a 44 percent increase from 2003 to 2007. (Revenues slid downward a bit in 2008, and a lot in 2009, when the financial crisis sent the economy into a tailspin.) "Everybody talks about how much the Bush tax cuts 'cost,'" says one GOP strategist. "We're saying, no, they led to a huge increase in revenue."
This is not unusual. There have been several times throughout history when tax rates have been cut followed by an increase in tax revenue. Esteemed economist Thomas Sowell notes, “As far back as the 1920s, Secretary of the Treasury Andrew Mellon pointed out that the government received a very similar amount of revenue from high-income earners at low tax rates as it did at tax rates several times as high.”
While at first glance lower tax rates equaling higher tax revenue might seem to be a paradox, it can be easily explained. Several small businesses file as individuals. Small businesses are the largest source of employment in our country. If we taxed the "wealthy" any more, these companies would have to lay more people off and stop hiring. This would reduce the number of people paying into the system and increase the number of people taking out of the system (e.g. unemployment benefits). Thus lowering the tax rates increases employment and therefore leads to an increase in tax revenues.
Of course, there are other reasons as well. Sowell explains:
…high tax rates drive investors into tax shelters, such as tax-exempt bonds. Today, as a result of globalization and electronic transfers of money, “the rich” are even less likely to stand still and be sheared like sheep, when they can easily send their money overseas, to places where tax rates are lower.
Money sent overseas creates jobs overseas — and American workers cannot transfer themselves overseas to get those jobs as readily as investors can send their money there.
This is the problem with the CBO analysis of Paul Ryan’s proposed budget. It uses static, not dynamic, analysis of tax cuts, failing to note the expected economic growth to accompany such tax reform.
To conclude, Paul Ryan’s plan is an excellent starting point to keep off financial ruin and fiscal insolvency for our country. The mushrooming debt facing our country might be the biggest crisis we’ve faced since World War II. It threatens our livelihoods, our prosperity, and our children’s future. Passing Paul Ryan’s plan does not solve all of this overnight, but it places our country on much sounder footing going forward and gives conservatives a springboard from which much more can be accomplished.