Revisiting Revenue in Ryan's Roadmap
There has been a lot of talk about revenue levels under Paul Ryan's "Roadmap for America's Future" recently. Not only from us (here, here, and here) and Congressman Ryan, but also from the Tax Policy Center (here, here, and here), the Center on Budget and Policy Priorities (here and here), the Heritage Foundation, E21, the New Republic's Jonathan Chait, and others.
Although many observers (including TPC and CBPP) contend that Ryan's Roadmap would not raise the amount of revenue he has claimed, the intentions of Ryan's plan are clear -- to bring the debt under control without increasing taxes relative to current policy (or beyond 19 percent of GDP for that matter).
Based on these revenue targets, Ryan's plan would balance the budget around 2060, and eliminate the debt by 2080. But it accomplishes this goal only through dramatic spending cuts -- and, problematically, only after first letting debt held by the public hit upwards of 100 percent of GDP. Although a tremendous improvement from current policy (and even current law), this level of debt is dangerous, and would leave us little fiscal flexibility over the next several decades.
As we've said before, it may be too late to control the debt through spending cuts alone.
But what if Representative Ryan were a little less strict about his revenue limits? According to our calculations, small increases in revenue, combined with the Congressman's spending plans, can make a big difference.
If we enacted the Roadmap spending plan, but let revenues remain as under current law (including letting all the Bush tax cuts expire and ceasing to patch the AMT), debt would begin to fall in only a couple of years. By 2025, it would decline to 50 percent of GDP, by 2040 it would drop to 30 percent, and by 2050 it would be gone altogether.
Of course, under current law taxes will increase significantly -- to 26 percent of GDP by 2080. But what if we instead capped taxes at 20 percent of GDP? Above the historically average, but below the record levels under President Clinton. In that case, debt would hold steady around 60 percent of GDP through 2040, drop to 40 percent after 2050, and disappear soon after 2060.
Even under the tax plan in President Obama's budget, which renews most of the Bush Tax Cuts and continues to patch the AMT, debt would peak at 70 percent of GDP and be eliminated by 2065.
The bottom line is that, if accompanied by Congressman Ryan's ambitious spending plan, a little bit of revenue can make a big difference in terms stabilizing the debt. This is especially true if Members of Congress find themselves unwilling to cut spending by the levels Mr. Ryan has proposed.
That said, it is quite clear that revenues cannot be all or even most of the long-term solution. The Tax Policy Center has already shown the massive (and perhaps untenable) income tax increases which would be necessary just to get us through the next decade. But what if we didn't rely on rate increases alone? What if we reduced tax expenditures, implemented an energy tax, etc?
Well we did a little thought experiment. Congressman Ryan showed the spending levels necessary to eliminate the debt (by 2080) under current policy revenue levels (capped at 19 percent of GDP). So we tried construct a "reverse roadmap" which raised the necessary revenue levels to meet Congressman Ryan's annual debt targets, assuming current policy spending.
Our findings are unfortunate for those who think we can maintain our current spending path. To simply keep up with Ryan's Roadmap -- which still means letting debt rise to 100 percent of GDP -- revenues would have to rise from a historical average of 18.1 percent of GDP, to 22 percent in the early 2020s, 24 percent by 2030, 30 percent by 2050, and 40 percent by 2080. In other words, would have to more than double as a share of the economy.
That's certainly a roadmap to somewhere -- but probably not a place this country should or can go.