In the last few days, there have been a series of liberal attacks on the tax proposals in Paul Ryan’s fiscal roadmap. For the most part, they’ve been based on this Tax Policy Center report, which suggests that the Ryan version of the tax code would only raise revenue equal to 16.8 percent of G.D.P., rather than the 19 percent that’s required, under the roadmap’s assumptions, to keep the budget balanced. Here’s the statement Ryan issued in response:
The tax reforms proposed and the rates specified were designed to maintain approximately our historic levels of revenue as a share of GDP, based on consultation with the Treasury Department and tax experts. If needed, adjustments can be easily made to the specified rates to hit the revenue targets and maximize economic growth. While minor tweaks can be made, it is clear that we simply cannot chase our unsustainable growth in spending with ever-higher levels of taxes. The purpose of the Roadmap is to get spending in line with revenue – not the other way around.
This is the right way to look at it overall, I think. What the Ryan roadmap does on taxes is propose a framework — a simplified but still progressive income tax, a consumption tax, and the end of the corporate income tax — that he argues, plausibly, would be more growth-friendly than the current tax code. It’s this structural shift that’s the meat of his proposal, not the specific rates; once you have the structure in place, you could move the rates around to get the amount of revenue you need.
But as you decide how to move them around, the more significant part of the liberal critique comes into play — namely, that as currently designed, the Ryan framework makes the tax code too regressive. Some of this is because it zeroes out Obama’s stimulus tax credits, counting them as reduced spending rather than higher taxes. But mostly, so far as I can tell, it’s because a consumption tax is regressive by its nature, and adding one alongside the income tax leaves middle-income and working-class Americans paying more to Uncle Sam.
There’s also the specific problem of families. As Ramesh Ponnuru has noted, the Ryan plan’s “alternative, simpler tax structure … would have a child allowance smaller than current law, which already makes it too small. The effect would be to shrink the overall tax burden but to leave families with children paying a larger share of it.” Ramesh calls this “lousy policy and politics,” and I agree.
Many conservatives, though, would say that these aren’t problems at all. Some on the right would argue that family-friendly tax policy is an economically inefficient form of social engineering. (You can find one rebuttal to that argument here). More importantly, a lot of conservatives would welcome a slightly more regressive tax code — on the grounds that under the current system, too many Americans don’t pay any federal income taxes at all.
The problem with this argument, which has become a recurrent conservative talking point, is that it looks at the federal income tax in isolation from the rest of the taxes Americans pay. Once you factor in payroll taxes, state and local taxes, etc., you’re left with a tax code that’s still progressive, but in which each income quintile’s tax burden matches up roughly with their share of national income. If you’re a flat-tax rigorist, this is obviously still a long way from your ideal. But if you’re concerned about the challenges facing middle and working-class America — challenges that look more severe in the shadow of the Great Recession — then asking them to bear a higher share of the tax burden across the next half-century seems like a very bad idea.
There are various ways that the Ryan plan could be amended to address this issue, while leaving its overall design intact. The proposed income-tax exemption, which stops at $25,000 for married couples, could be raised to leave more income untaxed, with the difference made up by a slightly higher rate on high earners. (This would push the plan in the direction favored by Yale’s Michael Graetz, who’s argued for an income tax that starts at $100,000 for joint filers.) A generous, Ponnuru-style child tax credit would dramatically reduce tax liability for many low and middle-income families. There could be a consumption tax rebate (or “prebate”) for Americans below a certain income threshold. And there are other ideas as well.
But the bottom line is this: Paul Ryan has attempted, admirably in my view, to sketch out a vision of the welfare state that forestalls the massive tax increases that will be required if we remain on our current fiscal trajectory. But as a matter of policy and politics alike, this vision only make sense (and only stands a chance of appealing to the broader public) if it forestalls tax increases for everybody — and especially for those Americans who stand to have a very difficult time of it, if current trends persist, in the 21st century economy.
