Paul Ryan budget: Does it show why we need to raise taxes?

Commentary about business and finance.
April 6 2011 6:35 PM

Taxing Our Patience

Paul Ryan's budget plan shows why we need to raise taxes, not cut them. 

Paul Ryan. Click image to expand.
Paul Ryan

Rep. Paul Ryan's grand plan to dig America out of its fiscal hole is an extreme exercise in small government by brute force. It slashes Medicaid, the health care plan for the poor and disabled, by giving states block grants that grow slowly to force them to cut care or kick people out. It makes drastic Medicare cuts for those under 55, turning the program into a voucher system in which seniors will have to pay more. It takes funding from Pell Grants, food stamps, and a host of other domestic programs. It also repeals the Dodd-Frank financial regulatory reform law, almost as an afterthought. By 2030 or so, it wrenches the country back into the black—but only by relying on huge cuts and eyebrow-raising revenue and employment projections.

Of course, balancing the budget is never easy. But, by mandating harsh program cuts without providing realistic new sources of tax revenue, the Ryan plan makes it unnecessarily hard. What the Ryan plan really shows—inadvertently, I am sure—is that balancing the budget will require raising taxes.

The tax details of Ryan's plan are murky. But in "The Path to Prosperity," he proposes reducing the number of individual tax brackets from six to some as-of-yet-unidentified number. He also cuts the top rate for individuals and corporations from 35 percent to 25 percent—the lowest top rate since 1931, before Social Security, Medicare, or Medicaid even existed. The plan additionally repeals tax increases included in Obama's health care law, like the 3.8 percent surtax on investment income.

Ryan pays for those tax cuts by eliminating loopholes and tax expenditures. The plan does not provide many details but implies just about all of them should go. For the corporate code, for instance, he proposes "scaling back or eliminating entirely the deductions and credits that have skewed corporate behavior and benefitted the largest corporations disproportionately."

The plan suggests that the improved tax system will help bring about more jobs, higher wages, general prosperity, and ponies for everyone. Unemployment will eventually fall into the 2 percent range. (Unsurprisingly, economists dispute these projections as Pollyannaish, if not ridiculous. Update, April 6, 10:20 p.m.: The projections were later revised upward.) Given the wage and unemployment projections the report relies upon, its revenue projections seem unlikely, too: Without so many people making so much fantastic money, tax revenue will be lower than projected, meaning an even more yawning short-term deficit than Ryan's proposal allows.

One way or another, tax cuts mean that Ryan needs to make bigger cuts to discretionary and mandatory spending programs, already slashed by trillions. The plan has the United States not only digging itself out of the enormous hole left by the wars in Iraq and Afghanistan, the recession, and the Bush tax cuts—but it has it doing so with no new sources of revenue to be had, and even less revenue than prescribed by current law.

There is the moral question of who should be paying to set America on a safe fiscal path. In Ryan's case, the answer is: the poor, disabled, and elderly, from the "hammock" of their safety net, in his terminology. His plan makes a regressive burden-shift, cutting taxes for the wealthiest Americans and slashing spending for the poorest. The Center for Budget and Policy Priorities estimates that two-thirds of the cuts over the next decade come from programs for poor Americans. "Actual program cuts produce net savings of $4.322 trillion" in the next decade, the think tank notes. "Cuts in low-income programs appear likely to account for at least $2.9 trillion—or about two-thirds—of this amount."

Ryan argues that raising the top tax bracket or adding new ones—taxing the 1,000,001st dollar a person earns at 50 percent, say—would prove counterproductive. "Creating new brackets and raising top rates is an idea that is often touted as a way to raise revenue," the proposal states. "Most economists, however, disagree. Economic theory suggests, and most empirical studies prove, that marginal tax-rate hikes … reduce economic output, while marginal rate reductions increase output."

Economists do agree that increasing marginal tax rates dampens the incentive to work. But they also agree that they raise revenue. The Laffer Curve bends, but not that far. And surely the rich don't need that 25 percent top rate in the way poor folks need programs like TANF and seniors need Medicare—about 90 percent of all American income gains since the 1970s have gone to the top 10 percent of earners.

Leaving aside morality, just think about math. Ryan calls the budget deficit an "existential threat" to the United States. He has scary charts. He talks a lot about a debt crisis, with the United States' investors losing confidence in the country and refusing to lend to it. But he does not actually balance the budget or tackle the debt until after 2030, at which point America has racked up about $14 trillion in new red ink. The problem gets worse before it gets better, in part because America's richest get a tax break beyond what the expiring Bush tax cuts give them.

The fiscally responsible choice is to raise taxes while also reforming entitlements, as any of the half-dozen more feasible and less cruel plans floating around do. (Just letting the Bush tax cuts expire—which would require no congressional action at all—would be a good start.) They might not be as bold. But they don't require magical thinking to make it all add up.

Annie Lowrey is a contributing editor for New York magazine. She can be reached at annie.lowrey@gmail.com.

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