Paul Ryan claims that he has proposed a neutral federal tax reform by replacing a system based on six tax rates by one based on only two: 10 percent and 25 percent. Ryan claims that he can raise $1 trillion per annum to finance these tax cuts simply by eliminating ‘special interest’ credits and deductions.
Unwilling to face the political backlash, Congressman Ryan refuses to name the tax break credits and deductions that he must eliminate in order to achieve such revenue neutrality. So let me say what he will not. If he disagrees, he has plenty of opportunity to explain his alternative scenario. Alternatively, Paul Ryan may choose to follow the usual cowardly politician’s path and say nothing about the bad news for many voters implicit in his proposal.
The non partizan Congressional Research Service, this week, released a report which identifies 20 top tax breaks, each as a percentage of the total loss to federal revenues projected for fiscal year 2014. This is as good a basis as any to confront Congressman Ryan with the opportunity cost of his proposed tax reforms.
1. Tax breaks that are technically difficult to remove
Some 40 per cent of the lost revenue would be difficult to capture under any circumstances because they take the form of in-kind benefits that cannot easily be enumerated on individual tax forms. Prominent among these are employer-provided health insurance and employer pension benefits, jointly accounting for some 30 percent of the total. These are not tallied in employee paychecks and would be very difficult to enumerate for purposes of federal income taxes.
2. Tax breaks that would have to go
Paul Ryan would have to eliminate virtually all other tax breaks in order to achieve fiscal neutrality for his reform proposal. These include all mortgage interest deductions (8.4 percent of the total), medicare exclusions (6.4 percent), earned income credit (4.9 percent) , state and local income tax deductions (4.5 percent), charitable contributions deductions (4.3 percent), tax exempt/tax credit bonds (3.6 percent), social security benefit exclusions (3.6 percent), capital gains on housing exclusions (2.3 percent), property tax deductions (1.4 percent), medical expenditure deductions (1.4 percent), individual retirement accounts (1.3 percent), and child credit (1.3 percent). In addition, personal allowances would have to be severely paired down in order to achieve full revenue neutrality against the 2012 expiration of the Bush tax cuts standard.
Now such a recommendation has a great deal going for it. It would eliminate a lot of tax distortions, especially those that exaggerate the demand for home ownership and stimulate healthcare cost bloating. It would restore incentives to create wealth and promote economic growth.
But the tax credits are highly specific and favored by large identifiable groups of voters. The tax rate deductions are dispersed across the population as a whole and, as such, are less salient in the political market-place.
As a vote-seeking politician, Paul Ryan seemingly favors the provision of concentrated over diverse benefits. If he can get away with both, then he is in the political paradise enjoyed by Republicans during the early noughties, a paradise that turned into hell in 2008, when the electorate finally caught on to the evil of spend and borrow Republicanism.
So which way will you twist, Mr Ryan, in the 2012 poilitical winds? Will it be a return to the naughty noughties? Or will you show more political courage than you have so far been able to muster and become a statesman rather than a politician? Come on, Mr. Ryan, you can steel yourself to take the plunge. There are plenty of opportunities outside of politics for a young man like you, should you be voted out of the Congress in 2012.