While I was away on vacation, my favorite New York Times columnist Paul Krugman wrote a scathing attack on my boy Paul Ryan's
Roadmap for America's Future. The article was entitled
The Flimflam Man, and asserted that Ryan was intentionally trying to mislead the American people and was hence a flimflam. The article ended with this doozy:
So why have so many in Washington, especially in the news media, been taken in by this flimflam? It’s not just inability to do the math, although that’s part of it. There’s also the unwillingness of self-styled centrists to face up to the realities of the modern Republican Party; they want to pretend, in the teeth of overwhelming evidence, that there are still people in the G.O.P. making sense. And last but not least, there’s deference to power — the G.O.P. is a resurgent political force, so one mustn’t point out that its intellectual heroes have no clothes.
But they don’t. The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future.
Krugman's whole thesis is that Ryan's plan is so absolutely, unequivocally useless that he is attempting to defraud the electorate by offering it up as a potential solution to our long term fiscal woes caused from vastly expanding entitlement payouts when baby boomers begin to retire. Krugman expoused the following four major attacks on the Ryan plan in making this assessment. They are 1) The CBO did not score the revenue portion of the Roadmap when it scored the budget effects of the plans spending cuts, 2) The proposed tax cuts would vastly outweigh any revenue savings negating any positive effect on the budget, 3) The fundamental tax reforms proposed by Ryan would benefit the rich while increasing taxes on the middle class and poor, 4) The plan would end Medicare. I will address each of these criticisms in kind, and show why Mr. Krugman, rather than Mr. Ryan is the one without any serious ideas of how to avert the looming fiscal disaster that is entitlement spending.
1) The CBO did not score the revenue portion of the Roadmap when it scored the budget effects of the plans spending cuts
Well, I have to give it to Mr. Krugman here, he is right on this one. But Mr. Krugman says "At Mr. Ryan’s request, it produced an estimate of the budget effects of his proposed spending cuts — period. It didn’t address the revenue losses from his tax cuts." But the truth is very different than Krugman's assertion that Mr. Ryan asked the CBO to ignore the revenue side of his plan. The fact is that it is not part of the CBO's job description. The CBO only estimates spending levels NOT revenue. That is for the office of the Joint Committee on Taxation (JCT), not the CBO. Ryan asked the JCT to score his plan early in the year, however, there was this trillion dollar entitlement that was being force fed through every conceivable procedural loophole in Congress that happened to take up all their time. For this reason they turned down Mr. Ryan's request because his plan was still only in the early planning stages. So although the revenue side was not scored by a government accounting agency, I believe it is extremely misleading and dishonest of Krugman to assert that this was done at Mr. Ryan's request as a tactic to mislead the public.
2) The proposed tax cuts would vastly outweigh any revenue savings negating any positive effect on the budget
Mr. Krugman references a study by the Tax Policy Center (TPC), a left leaning joint venture of the Urban Institute and the Brookings Institute (both left leaning themselves) that determined that although Ryan's plan would effectively reduce spending, the tax cuts would cost approximately $4 trillion of additional revenue over the first decade it takes effect relative to the tax rates that are currently in place (Note that it used the comparison scenario as one in which ALL the Bush tax cuts are allowed to expire). This is evidence, according to Mr. Krugman, that Ryan's plan would do little to curb the deficit, as the TPC estimated that using their revenue projections coupled with Mr. Ryan's spending cuts the deficit would remain at approximately $1.3 trillion in 2020.
There are so many things I have to say about this I don't know where to start. First and foremost, you have to take into account exactly what Mr. Ryan's revenue side of the plan actually is: fundamental tax code reform. He would eliminate almost all deductions, exemptions and tax credits that are used disproportionately by the rich to shield income from taxation. He would create only two personal income tax rates: 10% on the first $50,000 of taxable income, and 25% on everything above that. One of the few exemptions he does allow to remain is a very generous standard deduction and personal exemption that would equal approximately $39,000 for a family of four, in order to protect poor workers from being taxed until their income reaches a level where they can effectively support themselves. He would also eliminate taxes on interest, capital gains and dividends, which would greatly decrease the incentives to invest and hire thereby spurring economic growth. Lastly, he would eliminate the corporate tax, which at 35% is second in the industrialized world only to Japan, and replace it with a business consumption tax (similar to a value added tax) at 8.5%. This would make U.S. business more competitive while also forcing eliminating any tax benefit for corporations located overseas. To eliminate the competitive disadvantage on American businesses and products, the BCT is not imposed on U.S. exports when they leave the U.S., while instead it is imposed on foreign imports when they enter the U.S. Current WTO rules prevent a corporate income tax from being border adjustable, so this fundamental reform is one of the few realistic ways of addressing the issues regarding the competitive tax disadvantage faced by many U.S. based corporations.
Now like I said, this is serious tax reform on a level unprecedented since the advent of the income tax. Therefore, it is extremely difficult to forecast how it will affect revenue levels. Mr. Ryan has repeatedly stated that his goal is to create a simplified tax system that still maintains historical levels of revenue which is approximately 18% of GDP. The income and corporate tax rates in the plan are outlined above were put in place with that goal in mind. According to the study done by the TPC, these taxation levels would only amount to about 16% of GDP and hence the revenue shortfall that Mr. Krugman cites as evidence of the plans lack of credibility. However, there are also serious questions regarding the accuracy of the TPC's forecasts. Mr. Ryan addresses the criticism that his proposal would cost trillions in revenues
on his website here, but here are his main points:
- It is always important to examine the underlying baseline against which a plan is measured in these statements.
- The tax plan in the Roadmap is designed to generally track the CBO’s “alternative fiscal scenario” baseline for revenues. As a result, the Roadmap has fully accounted for any “revenue loss” that results from CBO’s “alternative fiscal scenario.” As noted above, this baseline assumes that all of the 2001/2003 tax provisions are extended and the AMT is permanently patched for inflation (i.e. current tax policy as we know it is extended in future). In contrast, the so-called “current law” baseline assumes much higher revenue amounts because all of the 2001/2003 tax provisions are repealed after this year, as dictated under current law, and the AMT is not indexed for inflation, allowing it to hit more and more middle-class taxpayers each year.
- As a result, CBO’s current law baseline for revenues is $3 trillion higher over 10 years than its alternative fiscal scenario, meaning that any proposal aiming to track current tax policy would automatically be judged as losing $3 trillion in revenue relative to current law.
- The current-law revenue baseline already builds in a host of tax increases that virtually no policymakers are proposing. Relative to this current law baseline, any tax plan that doesn’t implicitly raise taxes significantly is labeled a major revenue loser. It is telling, for instance, that the Tax Policy Center scored Presidential candidate Obama’s tax proposals and concluded that it would “lose” over $2.9 trillion in revenue over 10 years, relative to current law.
As you can see, relative to any serious proposal other thank allowing the entirety of the Bush Tax cuts expire and allowing the alternative minimum tax to hit millions of more American's per year, almost any plan is going to lose revenue. As Mr. Ryan correctly notes even Mr. Obama's plans to soak the rich would lose nearly $3 trillion of revenue according to the TPC analysis, which is not all that far off from is $4 trillion prediction for Mr. Ryan's plan (NOTE - I just want to say is a little disheartening to live in an age where a difference of $1 trillion is not that much). Additionally, the TPC analysis is admittedly done in static terms. Under their analysis cutting taxes as proposed by Mr. Ryan will do nothing to spur increased growth and will hence not bring in any additional revenue due to this growth. Now I'm not saying that tax changes such as these will completely pay for themselves, but they absolutely will grow the economy and increase total taxable revenue faster than the alternative. This will make up for at least part of the shortfall outlined above. Additionally, although the TPC has a great deal of experience and expertise in analyzing personal income rates and their effects of revenues, they are not sure exactly how the BCT would affect revenues relative to the current corporate income tax, for this reason they made several assumptions that negatively affected in effectiveness and hence forcasted lower revenues. In their defense this is extremely hard to judge because of the sheer size and nature of the tax changes outlined by the plan, but it does add uncertainty to their analysis. Lastly they made a number of assumptions regarding subchapter S and other similar pass through tax business associations that they would take all their income through tax free dividends rather other avenues such as wages. Admittedly this would be possible under the current version of the plan, although it is highly likely that because it has now been identified, this loophole would be eliminated before final passage of the bill Therefore the revenue estimates should be revised upwards.
In conclusion regarding the revenue shortfall that Krugman uses to attack the plan, it was based on an analysis that would undoubtedly reach the conclusion that it lost revenue compared to a politically untenable scenario. It is also biased in favor estimating the revenue on the low side. And lastly and most importantly, this is nothing more than a proposal. The taxation numbers put forward by Mr. Ryan were designed to hit a long term revenue target of 18% of GDP. If these estimates prove to be off, which the arguably are not or are very close if not, Mr. Ryan has repeatedly stated that he would be willing to adjust the plan to meet that target. In the end I think Mr. Krugman's main beef with the plan is that he believes the historical average of federal revenue at 18% of GDP is too low, but instead of stating his obvious belief that the government knows how to spend money better than you do, he callously attacks a serious proposal using numbers he knows fit his argument but are not realistically relevant.
3) The fundamental tax reforms proposed by Ryan would benefit the rich while increasing taxes on the middle class and poor
Mr. Krugman claims that "The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half, giving them 117 percent of the plan’s total tax cuts. That’s not a misprint. Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population." First and foremost, Mr. Ryan's plan would allow anyone and everyone to choose whether to pay through the current tax system or his simplified tax system listed above. Therefore it is simply not true that taxes would be raised on anyone. Mr. Krugman either ignores this fact or hasn't done his homework for one of his articles. Secondly, although the marginal tax rates would come down the most for the rich, the elimination of exemptions and other deductions which are mostly utilized by the rich would offset that partially a leading to less of a decrease in their effective tax rates. But what is important here is that a dramatic simplification of the tax code whereby marginal rates are lower leads to more incentives for marginal production - i.e. growth. By incentivizing people to work you will get more of it and the prosperity associated with it. A simpler tax code will also have the added benefits of simplifying enforcement and make it harder for anyone to hide income.
4) The plan would end Medicare
Although the plan would restructure Medicare in a way that would give the individual consumer more control, it would not end the program. There is only one sure fire way that Medicare would be destroyed and that is to do nothing. Look at the percentage of federal revenue that would be required to fund social security and Medicare if they remain on their current paths (for an ominous look at the impending disaster, check out the
National Center for Policy Analysis' Website):
Now here is what Mr. Ryan's policy does to ensure the solvency of Medicare according to his website:
- It preserves the existing Medicare program for those currently enrolled or becoming eligible in the next 10 years (those 55 and older today) - So Americans can receive the benefits they planned for throughout their working lives. For those currently under 55 – as they become Medicare-eligible – it creates a Medicare payment, initially averaging $11,000, to be used to purchase a Medicare certified plan. The payment is adjusted to reflect medical inflation, and pegged to income, with low-income individuals receiving greater support. The plan also provides risk adjustment, so those with greater medical needs receive a higher payment.
- The proposal also fully funds Medical Savings Accounts [MSAs] for low-income beneficiaries, while continuing to allow all beneficiaries, regardless of income, to set up tax-free MSAs.
- Based on consultation with the Office of the Actuary of the Centers for Medicare and Medicaid Services and using Congressional Budget Office [CBO] these reforms will make Medicare permanently solvent
- Modernizes Medicaid and strengthens the health care safety net by reforming high-risk pools, giving States maximum flexibility to tailor Medicaid programs to the specific needs of their populations. Allows Medicaid recipients to take part in the same variety of options and high-quality care available to everyone through the tax credit option.
Now I'll admit that this would change how Medicare is structured by giving the consumer the power of choice to determine what plans best fit their needs. However, to claim that it would end Medicare is disingenuous at best.
In conclusion, to claim that Mr. Ryan's proposal is not a serious one is absolutely absurd. It addresses the impending collapse of social security and Medicare by making both programs permanently solvent while also giving consumers choices about how their coverage is structured, as well as how their social security income is invested. It restructures the tax code to promote work, savings and is highly beneficial to long term investment. Lastly, and unfortunately, it is the only serious proposal made by any member of Congress or of the executive that will prevent the looming fiscal crisis with regards to entitlements. Calling it unserious and fraudulent is itself an unserious statement, and it is further evidence that Paul Krugman is not a legitimate commentator. Even the TPC, whose numbers Krugman cited in his attack and are pretty hostile themselves to the plan,
issued this statement on Friday defending Mr. Ryan's proposal and calling it "a useful contribution to the debate." I guess some people will buy Krugman's argument that the government knows what best and that we can tax only the rich to pay for everything without any adverse consequences. However, both Mr. Ryan and I believe that it is time for the American people to see a serious proposal that is fair, simple, and moves away from the expanding culture of dependency towards the qualities that this country was founded. The same principles that made it into the greatest country the world has ever seen - freedom, liberty, hard work, self dependency and the power of the individual to choose what is best for them. Please visit the
Roadmap for America's Future and decide for yourself.