Sunday, February 28, 2010

The Paul Ryan Moment

If, to paraphrase Rahm Emmanuel, a good crisis leads to opportunities, one opportunity is for policy wonks to speak truth to the frivolity of politics as usual.
The public may be willing to listen to facts that it would otherwise prefer to ignore.

Thus, we have Paul Ryan's moment. As Robert Samuelson points out, a once obscure Congressman from Janesville, Wisconsin has done "something no one else in Congress or apparently the White House has done: design a specific plan to control long-term government spending and budget deficits." While I don't agree with everything in Ryan's Roadmap 2.0 (you can't eliminate capital gains tax and eliminate both the corporate income tax and tax on dividends), but it is, as the Economist put it "an honest and daring proposal." While his plan, like Obama's, will cut Medicare spending, it does so in order to return the plan to solvency and not to finance a new entitlement. Combined with Ryan's health care plan, it stands a better chance of "bending the cost curve" than Obama's top down approach.

Ryan's performance at the health care summit further burnished his image and saw him seizing Rahm Emmanuel's opportunity. Investor's Business Daily says that his criticisms of the Democrats' health care proposals are still awaiting a response.


Anonymous said...

Road Map 2.0 is neither honest nor daring. It is dishonest and foolhardy, as you yourself recognize.

Ryan proposes to eliminate the corporate income tax, the estate tax, the capital gains tax, and the tax on dividends. While Ryan nominally proposes two marginal tax rates, of 10% and 25%, that appear slightly progressive, in reality he is proposing those two rates only for employees. For business owners, Ryan is proposing a different marginal rate: 8.5%.

How is that? Say you are a brain surgeon, the owner of a small professional services firm. Under current law, you make $1 million a year, and pay a hefty chunk of that in income tax. Under Ryan's proposal, your service corporation would pay no federal income tax. And you would pay no income tax on any dividends you receive from your service corporation. Under Road Map 2.0, you will very quickly decide to take less out of your service corporation -- much less -- in the form of employee compensation, and much more out as untaxed dividends. (What's the 8.5% marginal tax? Although there's no income tax, either on the corporate income or on the dividends, under Ryan's plan the service corporation would have to pay a consumption tax of 8.5% on its gross receipts in excess of its expenses. So that's the brain surgeon's new marginal tax rate.) So now the brain surgeon's nurse and his physician's assistant will pay marginal taxes of 10% and 25%. The doc himself? 8.5%.

It gets worse. Under current law, one of the inequities that has been criticized is that hedge fund managers are able to take most of their paycheck home in the form of "carried interest," treated as capital gains and taxed only at 15% marginal capital gains rates. So you've got people making up to $1.7 billion a year -- yes, that was "billion" with a "b" -- being taxed at marginal tax rates of 15%. This is why Warren Buffett has pointed out that his secretary pays higher marginal tax rates than he does. How do things get better for the hedge fund manager under Ryan's plan? Let's not pay any taxes at all! No taxes on my $1.7 billion -- they are all capital gains!

But hasn't the Congressional Budget Office said that Road Map 2.0 would eliminate the budget deficit? No, and here is where Ryan and his partisans are being particularly dishonest. Ryan's office submitted Road Map 2.0 to the CBO and asked it to analyze its impact on the budget deficit. But here's the kicker. They asked the CBO to assume that Road Map 2.0 would generate 19% of GDP in federal tax revenues. On that assumption, the CBO said Road Map 2.0 would eliminate the budget deficit. You know the old story about the two economists who find themselves at the bottom of a well. Said the one to the other, "how do we get out of here?" Answered the second: "Assume a ladder."

The tax proposals in Road Map 2.0 would result in massive tax planning scheming, as taxpayers restructured transactions to take advantage of tax-free dividend and capital gains rates. Ordinary working stiffs would face higher effective tax rates (among other things, employer-provided health insurance would become taxable). Rich people, at least those who own businesses, would be able largely to avoid taxation. Tax revenues would decline dramatically, and the budget deficit would balloon.

These defects in Road Map 2.0 are visible really pretty much on first glance for anyone who has more than a minimal understanding of tax policy. You see them, Rick. And yet for Ryan to roll this out as a serious proposal is fundamentally deceptive. It can't possibly work, he either knows that (or ought to), and he proposes it nonetheless.

Rick Esenberg said...

Right, we've been through all of this. Whether or not you are right would require you to look at an actual bill that may or may not address these problems. But, as you also know, I am (as I suggested in the post) perfectly willing to address these possibilities - as I think would have to happen if it were ever to pass. Addressing them would - at least as you are inclined to see the matter - make it more rather than less likely that the plan would hit 19% of GDP. Your problem with Ryan's plan is hardly limited to these things.

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Dad29 said...

I think the Russki is right.

AnotherTosaVoter said...

A> It'll never happen politically.

B> It puts your party in the interesting position of lambasting cuts to Medicare on the one hand while supporting its evisceration on the other.

Actually they were already in that position, but you know.

Dad29 said...

It puts your party in the interesting position of lambasting cuts to Medicare on the one hand while supporting its evisceration on the other

Eviscerating, how?

Are you claiming that Ryan's Med're plan will reduce Med're availability? That Med're patients will no longer get services?

Anonymous said...

Don't worry, Dad. You'll still get your Medicare. It's those of us who are under 55 that'll get the shaft. We'll get a voucher initially worth $11,000 to buy private insurance. If that's not enough to buy a quality plan (for example, because of a preexisting condition that makes a patient high risk), it's too bad, so sad. Ryan proposes that the States enact high risk pools to handle costly, medically needy old folks who wouldn't be adequately covered with an $11,000 policy, or who would be declined coverage. And he, generously, proposes that the feds would even donate one-tenth of the cost of the high risk pools. The other 90%? That's up to the States to figure out.

This is Ryan's federalism in action: let's take a federal problem (the looming insolvency of the Medicare system) and fix it, by delegating it to the States. The fifty States can go bust instead. And the individual old folks who won't be able to afford medical care.

As public choice theory teaches, problems should be devolved to the smallest, most local unit possible.

Anonymous said...

No, it's not public choice theory, it's the Catholic social doctrine of subsidiarity that teaches that the looming insolvency of Medicare should be dumped on the States. Right, Professor?

Anonymous said...

Let's see, responses to Ryan's critique of the Democratic proposal: "Millions of seniors who have chosen Medicare Advantage . . . will lose the coverage that they now enjoy." How about this for a response: Under your plan, Congressman Ryan, everyone under age 55 will lose coverage under Medicare. I guess that's OK because they don't now enjoy it?

Jennifer said...
This comment has been removed by the author.
Dad29 said...

This is Ryan's federalism in action: let's take a federal problem (the looming insolvency of the Medicare system) and fix it, by delegating it to the States. The fifty States can go bust instead. And the individual old folks who won't be able to afford medical care.

Assuming that your synopsis is correct ad arguendam, all Ryan did is copy the ObamaCare formula, which does exactly the same thing with MedicAID.

Try consistency for a change.

John Foust said...

Dad29 agrees with the Russian who said "Dip into the exotic peace, where the electronic money become reality! We for you to always greet!"

So how come Medicare doesn't have death panels?

Maybe they aren't so bad. A friend of mine put some of those death panels on his roof last fall and he says his heating bill went down 30% this winter.