On March 9 the Tax Policy Center (TPC) released a preliminary analysis of the tax reform proposal contained in Rep. Paul Ryan’s (R-WI) Roadmap for America’s Future fiscal plan. The TPC analysis helps Ryan advance the tax reform ball considerably, but it also raises issues some of which need to be addressed by Congressman Ryan (R-WI), the author of the plan, and some by the TPC.
Perhaps most important of all is that the TPC analysis, along with a slew of commentary both favorable and unfavorable from other sources, confirms that the Ryan plan is a very serious, substantive foray into tax reform. The Ryan plan provides an intellectually sound, coherent and fundamental path to tax reform, and is part of a broader plan to resolve our long-term fiscal crisis. If it were otherwise, the tax reform component would be ignored.
The Ryan tax reform plan, which reforms both individual and business taxes to move toward lower tax rate systems, is intended to be revenue neutral over ten years when compared to a current policy revenue baseline; the TPC analysis suggests the plan is close to its target. It may even be closer than the TPC analysis suggests because of a pair of foibles in the TPC approach as well as simple differences in estimating methodologies.
What About the Economy?
The TPC analysis is a good first step, but critically leaves out some important information on economic effects. By way of analogy, imagine the Congressional Budget Office providing an analysis of health care reform and ignoring any references to the consequences for health care costs or whether the ranks of the uninsured would rise or fall. Policymakers want to know if the legislation would “bend the curve” and that it substantially reduces the ranks of the uninsured. Analysis lacking this information would obviously be woefully incomplete.
The TPC has done much the same by ignoring the stronger economy that would follow from enactment of the Ryan plan. As with health care reform and the uninsured, a fundamental motivation for tax reform is to improve economic performance, yet the TPC acknowledges its analysis is essentially static. Revenue forecasts aside, this is a substantial shortcoming of the TPC analysis that will hopefully be remedied in their follow-on work.
Foibles to Resolve
One foible in the TPC analysis is that it combines a rigorous methodology for assessing the revenue effects from the tax on individuals with a back of the envelope approach to estimating tax revenues from the new Business Consumption Tax (BCT) tax contained in the Ryan plan. If TPC does not have the tools for a rigorous assessment of the BCT, then so be it, but TPC should clearly indicate the difference in approaches and admit that its revenue forecast of the BCT carries an unusually high degree of uncertainty.
Another foible in the TPC analysis deals with the treatment of pass-through entities such as sole proprietorships. This is a difficult area and the TPC analysis usefully highlights an issue in the plan its designers may want to revisit. However, TPC arbitrarily assumes small business owners will take all their income in tax-exempt dividends rather than taxable wages. To be sure, this is a troubled area in the existing tax code, but the TPC assumption is most unreasonable, and creates an obvious downward bias in the total revenue estimate.
Finally, the TPC is known for its distributional analysis and it refers to distributional effects in its analysis. But where are the tables?
Tomorrow is the one-year anniversary of the American Recovery and Reinvestment Act, or as it is more accurately described, President Barack Obama’s Failed Stimulus. When President Obama signed the now $862 billion deficit-spending bill into law, the unemployment rate stood at 7.6% and the U.S. economy employed 133.5 million people. At the time President Obama promised the American people that, thanks to his stimulus, unemployment would never go higher than 8.2% and the U.S. economy would support 138.6 million jobs by December 2010.
At the one year mark unemployment is now 9.7%, after rising above 10%, and the U.S. economy has lost 4 million jobs leaving the White House 9 million jobs short of the 138.6 million they promised to deliver by December of this year. By any objective measure President Obama’s $862 billion stimulus must be judged as a complete failure. Undeterred by these facts, the White House Council of Economic Advisers (CEA) published a report on the economic effects of the Administration’s economic stimulus plan claiming that there are 2 million more jobs in the economy than there otherwise would have been had the President’s stimulus not become law. But as Heritage Policy Analyst Karen Campbell has documented, the CEA report relies on completely arbitrary benchmark projections that fail even basic standards of economic analysis. If the Administration had used other economic forecasts, the results would not have been as impressive – in fact, some would have shown that the economy lost more jobs after the stimulus package was implemented.
Armed with their CEA propaganda, President Obama is dispatching his Cabinet officials to 35 communities across the country this week to try and convince the American people that his Failed Stimulus is in fact, a success. The President faces an uphill climb: according to the latest poll from The New York Times only 6% of Americans believe the stimulus has created jobs and 48% of Americans believe it never will.
One might hope that after $862 billion in failed stimulus spending, that liberals in Washington would take a break from spending other people’s borrowed money. No such luck. The House has already passed a new $154 billion stimulus package and Majority Leader Harry Reid (D-NV) is pushing a$15 billion plan in the Senate, $13 billion of which is a temporary Social Security payroll tax exemption for new hires. This temporary tax break will further increase our Social Security system’s existing deficits, will cost $1 million per only eight temporary new jobs according to the Congressional Budget Office, and will do nothing to decrease long-term unemployment.
While this would be President Obama’s second stimulus, it would actually be this recession’s third. In February 2008, President George Bush passed an equally useless mix of temporary tax cuts and mortgage grantees for Fannie Mae and Freddie Mac totaling $168 billion. That stimulus did nothing to stop the recession and neither will President Obama’s second stimulus. Our nation simply can’t afford wasting hundreds of billions of dollars and deficit Keynesian stimulus spending every February. Now is a good time to stop.
Quick Hits:
- In a secret joint operation by Pakistani and American intelligence forces, the Taliban’s top military commander was captured several days ago in Karachi, Pakistan.
- As fighting in Marja carried into its third day, the number of Taliban fighters in the area has dropped by about half.
- Opposition to a European Union bailout of Greece, where the retirement age is 63, is growing among Germans, who can’t retire until age 67.
- Latinos who backed President Barack Obama are frustrated by the lack of amnesty for illegal aliens.
- According to the latest Rasmussen poll, 59% of likely voters say states should have the right to opt out of federal government programs they don’t agree with.