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Paul Ryan’s Revenue Reforms Slash Taxes on the Rich

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Yesterday, Rep. Paul Ryan (R-WI) released his latest budget proposal, called “The Path to Prosperity,” which serves as an update to his plan from last year. The proposal, which is the draft of the fiscal year (FY) 2013 House budget resolution, is supposed to be a fiscal framework for the House for the coming year. However, the congressman’s tax plan is not a serious proposal for change.

Ryan slashes upper-income taxes while vaguely promising to get rid of unnamed tax breaks. The assumptions behind his economic growth estimates are fuzzy, and without strong economic growth, the Republican proposal could cause the national debt to balloon. What is clear is that the proposal would unquestionably cause income inequality to explode.

Ryan correctly highlights the sorry state of the federal tax code. It is overly complex, so complex, in fact, that Americans pay $160 billion a year for tax preparation assistance. When the nation is spending almost three times as much on tax preparation as on pharmaceutical research and development, as Ryan points out, something is wrong.

But his proposed “solutions” disproportionately benefit the wealthy. Ryan points out that the top one percent of taxpayers benefit the most from tax loopholes, and then proceeds to give these same taxpayers sweeping tax breaks by tripling down on the Bush tax cuts. Ryan’s proposal slashes the top personal income tax rate by ten percentage points, from 35 to 25 percent. The other five tax rates would be condensed into one bracket of ten percent. Ryan does not stipulate the incomes subject to the different tax rates, but the end result is clear: the upper class will receive a massive tax break, and the tax code’s progressivity, in which those earning more pay more in taxes, would essentially disappear overnight.

At the same time, Ryan would repeal the Alternative Minimum Tax (AMT), an additional tax upper-income taxpayers pay now if their taxes are below a certain level. Because the AMT was not indexed to inflation, it is starting to hit more middle class families (not just the wealthy), but there are ways to re-target the tax without repealing it entirely. The AMT greatly increases the progressivity of the tax code, and currently brings in about $600 billion over ten years. Erasing it from the tax code would both decrease revenues and increase inequality.

Ryan would also cut the corporate tax rates. To reform the corporate tax code, Ryan uses the plan put forward by the House Ways and Means Committee chairman, Dave Camp (R-MI), which proposes cutting the corporate tax rate by ten percentage points, to 25 percent, and closing loopholes. This move, by itself, would decrease revenue, since the Joint Committee on Taxation recently estimated that the corporate tax code could not be lowered below 28 percent without losing revenue, even if Congress got rid of all the loopholes to pay for it.

Ryan would also change to a “territorial” tax system, which essentially only taxes corporate profits that are generated in the United States. According to Citizens for Tax Justice, such a change would only encourage companies to move more of their activities off-shore, cutting job growth and costing the government tens of billions of dollars in lost revenue each year.

The Republican budget resolution does not specify how these tax cuts would be paid for. Ryan writes that “[this] budget would eliminate tax subsidies … to lower rates,” but doesn’t name a single loophole or credit that he would eliminate. Slate economics writer Matt Yglesias complained that Ryan’s lack of details reached new levels of “tax reform vagueness.”

By slashing tax rates, abolishing four tax brackets, eliminating the AMT, and lowering the corporate tax – all without specifying any offsets – Ryan’s budget could likely drastically lower the amount of revenue the government collects. The Tax Policy Center noted that policies such as Ryan’s, if not offset, could cost as much as $4.5 trillion over the next ten years. In 2022 alone, Ryan would need to eliminate about $700 billion in tax breaks to make up the gap in revenues.

Ryan assumes that his budget will keep producing the same amount of revenue despite his massive tax cuts, but does not provide the details for how he arrives at that conclusion. He even told Congress’ budget scorekeeper, the Congressional Budget Office, that his budget would produce revenues equal to 19 percent of the economy each year by 2030. To add up, Ryan’s budget probably employs dynamic scoring, a discredited concept that predicts tax cuts will pay for themselves through economic expansion. But such economic growth is unlikely. Instead, Ryan’s budget would likely cause the national debt to skyrocket even higher.

The Ryan budget resolution is in stark contrast to the President’s budget, released in early February. The President would restore higher tax rates on the wealthy (let the Bush tax cuts on higher income households expire), which Ryan extends permanently; institutes new measures to ensure the nation’s wealthiest pay their fair share; and has targeted by name a number of tax loopholes to close. Instead of severe cuts in domestic discretionary spending and entitlement programs, President Obama proposed new revenue streams, targeted investments to promote economic growth, and selected cuts to both social services and defense programs. This approach would begin to increase tax fairness and to reduce inequality. The Ryan Republican plan does just the opposite.

For more on revenue options that Congress could choose, visit We Have Choices and voice your preferences.

Image by Flickr user SpeakerBoehner used under a Creative Commons license.

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