Tax Reform in the Ryan Budget

As the House Republican budget resolution has come out and alternatives will be sure to follow, CRFB is rolling out a blog series looking at all the budget resolutions that come up and taking a closer look at the one that's out there now. In this blog, we will look at Chairman Paul Ryan's (R-WI) tax reform plan.

One important component of Chairman Ryan's budget is the inclusion of a couple of detailed parameters. Whereas last year's budget simply called for reform with a 25 percent top rate, this year's budget includes some more specifics. In particular, the budget calls for reform that would:

  • Renew the tax cuts set to expire at the end of 2011
  • Reduce individual income tax rates to two brackets of 10 and 25 percent
  • Repeal the AMT
  • Reduce the corporate tax rate to 25 percent
  • Switch to a territorial system of international taxation
  • Broaden the tax base "to maintain revenue growth consistent with current tax policy"

Worth noting in these parameters is that Chairman Ryan is far more specific about his tax cuts than about how he will pay for them. His numbers and descriptions make it clear that his target is revenue neutrality with current policy (including the revenue provisions scheduled to go into effect as a result of the Affordable Care Act). Under this approach, revenue would rise to 19 percent of GDP sometime in the 2020s -- where Congressman Ryan would cap it thereafter.

However, no specific measures have been proposed to achieve these targets. Yesterday, Tax Policy Center estimated the cost of enacting the policies proposed in the Ryan budget. According to TPC, these policies (in addition to repealing the taxes in the Affordable Care Act, which is at least implicit in the document) would cost more than $4.6 trillion relative to current policy and about $10 trillion relative to current law. That makes these tax cuts relative to current policy about as large as the spending cuts specified in the budget.

TPC Estimate of Provisions in the Ryan Budget (billions)
  2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013-2022
10/25 Brackets -$151 -$211 -$224 -$237 -$251 -$265 -$280 -$294 -$310 -$326 -$2,549
Repeal AMT -$34 -$49 -$54 -$60 -$65 -$70 -$75 -$81 -$88 -$94 -$670
Corporate Provisions -$62 -$110 -$114 -$112 -$119 -$118 -$117 -$114 -$116 -$118 -$1,101
Repeal PPACA Taxes -$7 -$12 -$26 -$31 -$34 -$37 -$39 -$42 -$45 -$47 -$321
Total, Tax Cuts
-$255 -$383 -$418 -$440 -$470 -$491 -$511 -$531 -$558 -$585 -$4,641
Unspecified Base Broadening $255 $383
$418 $440 $470 $491 $511 $531 $558 $585 $4,641
Total as Claimed in Budget
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

If these tax cuts were enacted without base broadening, according to TPC's analysis, revenue would only reach about 16 percent of GDP by 2022, well below the 18-19 percent targets from the budget document. 


Of course, TPC's estimate doesn't include Congressman Ryan's plan of "getting rid of distortions, loopholes and preferences that divert economic resources from their most efficient uses." Though he hasn't named specifics, it is possible to reduce the tax rates to the levels described in the budget and still achieve revenue neutrality. On the corporate side, as we've shown, it would require wiping out virtually all tax expenditures and then either using money from pass-through businesses or taxing certain normal business expenses such as interest or advertising.

On the individual side, it would require moving very heavily in the direction of something like the "zero plan" put forward by the Fiscal Commission. That approach showed it was possible to enact revenue-positive tax reform with rates of 8 percent, 14 percent, and 23 percent by eliminating all tax expenditures in the code. Given his revenue targets are lower than the Fiscal Commission's, Congressman Ryan wouldn't have to go quite that far to achieve revenue neutrality. But he would need to go pretty far in that direction and couldn't avoid eliminating or deeply reducing popular deductions and exclusions for mortgages, charitable giving, employer health care, and retirement, to name a few. His task would also be made slightly harder since the zero plan taxes capital gains and dividends as ordinary income, while the Ryan budget would keep the preferential rates (or at least has not indicated that it would change those rates).

The bottom line is that while the tax plan in this budget can be achieved as a matter of policy, it would require many hard choices which have yet to be spelled out. And if policymakers do try to enact the dessert without the vegetables, the deficit and debt numbers from the Ryan budget would look quite different and far less responsible.