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Tax the Rich: The Battle Cry Paul Ryan Rejects

25 Apr 2011
Posted by Bruce Bartlett

Reprinted from The Fiscal Times

Perhaps the most remarkable feature of Rep. Paul Ryan’s widely discussed budget plan, which all but 4 House Republicans voted for on April 15, is that it cuts taxes for the rich and pays for it by raising taxes on the middle class. Whatever one thinks about the economics of this, politically it is a non-starter. Indeed, not only is there no public support for what Ryan is proposing, there is strong support for going in the other direction and raising taxes on the rich.
 
The tax side of Ryan’s plan says only that the top tax rate on individuals and corporations would be reduced to 25 percent. It says nothing whatsoever about cutting taxes for anyone in the 25 percent bracket or lower. According to the Tax Policy Center, the Ryan proposal would reduce federal revenues by $2.9 trillion over the next decade.
 
Ryan says that he would also broaden the tax base sufficiently that federal revenues would rise from 15 percent of GDP to 19 percent of GDP. But he doesn’t mention a single one of these supposed base broadeners specifically. However, we know that the largest tax expenditures benefit the middle class enormously. These include the exclusion for employer-provided health insurance, and the deductions for mortgage interest, state and local taxes, charitable contributions, and contributions to pension and retirement plans. Consequently, it is not surprising that an April 15 Gallup poll found that people oppose eliminating major deductions by a 2-to-1 margin, either to pay for lower tax rates or to reduce the budget deficit.
 
It’s conceivable that Ryan has thought of some way he has yet to disclose whereby the tax base would be broadened entirely by eliminating or scaling back tax preferences for the rich. For example, he could raise the maximum tax rate on dividends and long-term capital gains from 15 percent to 25 percent. But that would run contrary to the point of his exercise, which is to stimulate growth, saving and investment. Moreover, my guess is that the vast majority of the wealthy, who are the primary beneficiaries of the preference for dividends and capital gains, would much rather keep the rate on those forms of income at 15 percent even if it means not reducing the top rate from 35 percent to 25 percent as Ryan proposes. That is because the richer you are, the more likely it is that dividends and capital gains represent the bulk of your income.
 
Ryan would have to eliminate $2.9 trillion in tax expenditures just to keep revenues from falling. If he also intends to raise revenues by 4 percent of GDP, it’s really hard to see how this can be done without effectively raising taxes on the middle class. No wonder Ryan is keeping secret how he intends to pay for his tax cut for the rich while still raising the tax-GDP ratio. He has consistently refused to give the Congressional Budget Office details of how he plans to broaden the tax base and told it to simply assume that revenues will equal 19 percent of GDP. I think this is dishonest because it allows people to think that taxes will be increased on someone other than themselves.
 
Ryan says that the House Ways and Means Committee will decide how to broaden the tax base. But it’s hard to see it cutting taxes only for the rich without also cutting taxes for everyone else. I don’t think the committee has ever in its history passed a tax cut that didn’t cut taxes for every income bracket approximately equally, even if it had to create refundable tax credits so that those who pay no federal income taxes will also get a “tax cut.”
 
It’s reasonable to assume that the era of big tax cuts that are not paid for in any way is over, especially given the April 18 warning from Standard and Poor’s that the U.S. credit rating is at risk unless significant progress is made quickly on reducing projected budget deficits. Therefore, congressional Republicans really have only four options.
 
1. They can raise taxes on corporations to pay for tax cuts for individuals as was done in the Tax Reform Act of 1986. However, both Republicans and Democrats want to cut the corporate tax rate to be more competitive with other countries, so this option seems like a nonstarter.
 
2. They can seriously go after the $1.1 trillion of tax expenditures. But it’s hard to see how enough revenue can be raised this way without going after politically popular deductions like that for mortgage interest. Given the dismal state of the housing market, there is no way homeowners will allow this.
 
3. They can cut spending by many trillions of dollars more than the Ryan plan proposes. But there is already growing opposition to his biggest budget cut, the de facto abolition of Medicare and its replacement by a voucher intentionally designed to pay less than the per capita cost of health care for Medicare beneficiaries. An April 20 Washington Post-ABC News poll found that only 37 percent of people favor this proposal, with 60 percent opposed. An April 18 McClatchy-Maris poll found that 80 percent of people, including 70 percent of Tea Party supporters, oppose cutting Medicare at all to reduce the deficit.
 
4. Finally, there is the option of ditching the tax cuts for the rich altogether and raising their taxes. The previously cited Washington Post-ABC News poll found that 62 percent of people believe that higher taxes will be necessary to get the deficit under control versus only 36 percent who think spending cuts alone will do the job. The same poll found an overwhelming 72 percent of people favor raising taxes on the rich to reduce the deficit. The McClatchy-Maris poll found 64 percent of voters favor higher taxes on the rich, including 45 percent of Tea Party supporters.
 
I think option 4 is the most likely. There is simply no place in a deficit reduction package for big new tax cuts. We can’t even afford the ones we have, which is why former Federal Reserve chairman Alan Greenspan called for getting rid of all the Bush tax cuts in an April 17 interview. Nor does it make any sense to do significant deficit reduction without higher revenues making a contribution. As Reagan budget director David Stockman put it in an April 11 interview, “It is simply unrealistic to say that raising revenue isn’t part of the solution. It’s a measure of how far off the deep end Republicans have gone with this religious catechism about taxes.”
 
Ryan is starting to get pushback from his own constituents on his effort to cut taxes for the rich while slashing Medicare. On April 19, he was jeered at a town hall meeting in Milton, Wisconsin, by citizens demanding that the rich pay more. I think the more people learn the details of the Ryan plan, the more all Republicans are going to start hearing jeers from voters.

Corporations and Plutocrats Given a Tax Holiday as US Heads for

Corporations and Plutocrats Given a Tax Holiday as US Heads for Fiscal Trainwreck

http://www.wallstreetexaminer.com/blogs/winter/?p=3868


The option 3 was chosen in

The option 3 was chosen in Sweden in tax reform in 90s. All tax expenditure was cut, especially the deduction for mortgage interest rates. The tax base was broadend. Corporate taxes halved. Marginal taxation rates was halved. The plan was revenue neutral.

The middle class paid more in taxes but even though the marginal taxation rates were halved, high income earners paid more of their income in tax since they work longer and more. Instead of having 12 week vacation plus 4 weeks leave as compensation for overtime, they only had 5 weeks leave a productivity increase by 7 weeks. (my mother worked less than 7 months a year, she was an ordinary professional and had a marginal taxation rate of 85%.)

Tax the rich is as we know from the Swedish semi-socialist experiment 1968-1993 leads to a road to ruin. A cut in GDP of 40%, a collapse of the industrial base and an eradication of entrepreneurs.

We also know from US tax history that even though marginal taxation rates been over 85 %, tax revenue has been stable around 18 % i.e. letting the Bush tax cuts expire and raise rates will not raise more revenue or make the rich pay more taxes.

No choose the plan 3. In fact go with the Simpson Bowles plan as well as Sweden in the 90s by lowering tax rates and cutting tax expenditures.


"...letting the Bush tax cuts

"...letting the Bush tax cuts expire and raise rates will not raise more revenue or make the rich pay more taxes."

This is nonsense. All of the evidence shows that with marginal rates in the range that prevails today, tax cuts don't even come close to paying for themselves.

Otherwise I agree with you that it would be better to broaden the base than to raise rates. I think an overall limit on deductions (say, $50k) would be interesting, because it would mostly hit the rich instead of the middle class.


Problem...

You seem to (again) think the GOP and the DNC care about what their constituents think in between election cycles. Town halls may be changing tone now, but I'll wait and see how they go next year when FreedomWorks and MoveOn start busing in their useful idiots.


Let's hope you are right. One

Let's hope you are right. One thing I have noticed. Quite a few Americans of the most reactionary kind make comments on the Daily Telegraph (UK) site when it runs an article run about the US deficit. Most of them are woefully misinformed about rudimentary facts. Most seem to think Americans pay extremely high taxes and that the US government outspends most other governments in the world. I doubt many of them are really rich but they parrot ideas that support tax cuts for the rich and benefit cuts for people like themselves to an amazing degree.


Excellent post overall, but........

.........I have to disagree with this statement:

"For example, he could raise the maximum tax rate on dividends and long-term capital gains from 15 percent to 25 percent. But that would run contrary to the point of his exercise, which is to stimulate growth, saving and investment."

Creating a preferential tax rate for dividends and capital gains does not "stimulate growth, savings, and investment". It merely redirects existing savings towards investments that are preferentially taxed versus other potential investments. It likely has no effect whatsoever on growth.

An argument can be made that the "double taxation" of dividends (somewhat of a misnomer really) encourages corporations to rely excessively on debt, and that this might be a bad thing. The proper "fix" however, would be to eliminate the taxation of dividends at the corporate tax level rather than the individual tax level, since corporate officers rather than individual shareholders make corporate financing decisions.

Capital gains, IMO, ought to have their basis indexed to inflation and then have the adjusted gain taxed as ordinary income.

There's no shortage of excuses as to why investment income should be given preferential tax treatment over wage/salary income, and they all stink.


It's now obvious

That congress is filled with the wealthy or people that will become wealthy in industries they favor after leaving congresss. By what logic could these people raise taxes on themselves and all their friends? 90% of Americans could want a tax on, say, accumulated wealth but the possibility of congress doing something like this is zero. It's really come down to congress voting their personal book. And its shamelessly obvious now on both sides of the aisle.

In an unrelated note, the tax code should be simplified because its complexity and the frustration it generates discredits all government functions. Liberals are learning an extremely hard lesson (and it took this liberal until a few years ago to appreciate this fully) in that optics count: if liberals favor government action, government must repeatedly demonstrate that it works well, that bad things are killed, that programs that have no means to detect cheating are axed. Perhaps programs have a 5 year life with an escalating number of votes required to continue them. This would motivate people to be more realistic about what can be done and how much it would cost.


The GOP figured that they

The GOP figured that they could keep the angry white bigoted middle-class on board for tax cuts for the rich by convincing them it was only going to be the poor, racial and ethnic minorities, and other non-Real Americans who would pay for them. Now that they're realizing that *they* are gonna have to pay for them, they're getting angry.


Good ol' Lee Atwater & Karl Rove Incorporated

The Southern Strategy is alive and well in Mr. Bartlett's (former?) party when it comes to talks about fiscal responsibility and cuts to the social safety net.

From Wikipedia's Atwater page (my censorship added): "You start out in 1954 by saying, 'N*****, n*****, n*****.' By 1968 you can't say 'n*****' — that hurts you. Backfires. So you say stuff like forced busing, states' rights and all that stuff. You're getting so abstract now [that] you're talking about cutting taxes, and all these things you're talking about are totally economic things and a byproduct of them is [that] blacks get hurt worse than whites. And subconsciously maybe that is part of it. I'm not saying that. But I'm saying that if it is getting that abstract, and that coded, that we are doing away with the racial problem one way or the other. You follow me — because obviously sitting around saying, 'We want to cut this,' is much more abstract than even the busing thing, and a hell of a lot more abstract than 'N*****, n*****.'"

Much like the forgotten/ignored Reagan tax hikes, the GOP's long term policy of dog whistle hate speech seems to be only remembered by the far left today. The party of phony fiscal conservatism has honed it so well over the decades that they've expanded into Muslim boogeymen and Hispanics.


Changing The Tax Code

I hear these comments about changing the tax code and think the question is not that it is needed but how in H** can you get this done in the present environment. The Dems have no statesmen or any Rostenkowski's (who knew the code inside out). The Repubs have hacks like Ryan and Bacchus, who 20 years ago would have been told to sit down and shut up in either caucus. For that matter 20 years ago, if you voted against extending unemployment benefits when your district had +10% unemployment (Ryan) or if you were planning to delay implementation of regulations on financial instruments that bankrupted the largest county in your district (Bacchus), you would not even be reelected.

Changeing the tax code in this environment is not only impossible but any sausage that comes out of this grinder will be an abysmal faiklure IMO.


It's broken; but can/will we fix it?

I think the current political climate has become too dysfunctional to expect a rational outcome to our current predicament. For that matter Washington can not even agree on the problem. A reasonable person would conclude that we confront a "perfect storm" due to our past bad policy choices: tax cuts that we couldn't afford, a war that wasn't needed (Iraq), a new entitlement program and misleading accounting by including the SS surplus in revenues and not including interest payments to SS in expenses. All this and the worst global economic environment since the Great Depression.

The American Century has been a nice ride but sometimes a movie doesn't have a happy ending. My prediction is that we continue to lurch from one continuing problem to the next. Sometime in the next 5 to 7 years the dollar will lose its singularity as the global reserve currency, and then we become just another failed empire. We will learn that American Exceptionalism is easier to lose than keep.

And for the record my "reasonable" solution would be: 1) Let the Bush tax cuts expire; 2) add two new top marginal tax rates of 39% and 43% at about the 300-350K and 500K levels; 3) progressively remove preferential dividend and capital gains treatment starting at the 75K level; 4) "reform" SS by increasing the maximum income that is taxed, remove the ability to game the system (primarily spousal benefits) and increase the age to receive partial and full benefits; 5) reform Medicare by removing income cap, increase age of initial benefits and bring our costs of a "broken" medical system in line with the rest of the 1st world nations; 7) decrease defense spending to instead of about 45% of all global defense spending (the next 10 or so nations combined) to about 30% of global spending.

There are many, many ways to fix this problem that will not be excessively painful to any, one group. However, I have complete confidence that we will somehow snatch defeat from the jaws of victory,


Two observations

Bruce -

Wow - you got a lot of commentary on this one! I suspect Ryan's proposals will be a problem for Republicans in presidential electioneering, but I'm sure there will be plenty of swiftboating to counteract that.

People have a huge misunderstanding of "healthcare" - it's not really so much about "health" or "care", as it is about $$$$$. Having insurance so people don't typically know or feel costs directly, creates or allows huge distortions, like the same procedure costing $2000 in Northern Virginia, vs. $800 in Maryland.

Also, with commercially employed people's primary saving source being 401-Ks and IRAs et al, unless it was well structured increased taxes on dividends and capital gains would really hurt private America. The non-indexing for inflation is ridiculous, given that prices have changed so dramatically. There was a good piece in the WSJ re the "value" of a dollar - essentially how it has crumpled.


401ks and IRAs don get the reduced taxes now

When after 59and 1/2 you withdraw money from an IRA or 401k you pay regular rates today, unless its in company stock taken out in kind, at which point you pay regular rates on the basis and cap gains on the gains. The tax rates are on investments held in taxable accounts. So its primarily a help for those who have sizeable taxable accounts.


You also lose

step-up basis at death. 


Isn't not taxing the wealthy

Isn't not taxing the wealthy like not using Clydesdale horses to pull the beer wagon? I am not convinced that the contention by one wonk that the high income earners work longer and harder for their money: quite the opposite. Shifting the tax burden down is simply committing to pulling the beer wagon with Shetland ponies and declaring when the beer gets warm and skunky that spoiled beer is better for everybody because it wouldn't due to make the Clydesdales pull the big wagon just because they could.
Maybe the Clydesdales have become so used to not participating that they need to be trained up to pulling the wagon again. But it is what they were made to do.


capital gains

Many very wealthy people in this country don't care much about marginal income tax rates, because most of their income is preferentially taxed as capital gains and not as wages or other "ordinary" forms of income. For some of those people, their income comes from trading, i.e. selling a holding after a very short, sometimes measured in minutes, holding period. I would like to see a proposal and discussion on reforming the tax on capital gains along the following lines: redefine short term capital gains holding period as less than 90 calendar days and tax those gains at 75%; define an intermediate term capital gains holding period between 91 calendar days and 2 calendar years and tax those gains as ordinary income with an AMT-like minimum of 25%; finally redefine long term capital gains holding period as longer than 2 calendar years and tax those gains at 20%. Further, I would like to see a transaction tax on all naked short sales of 50%. Entirely too much of our marketplace energy is consumed in trading that actually adds little or no value to most INVESTORS but enriches traders. Let's get back to real investing and less speculating.




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