The Tax and Spend Spectator

A Time for Choosing—Really

Democrats claimed to be delighted that Republicans put their plans in writing. They have it backward.

By From the October 2012 issue

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WHEN RONALD REAGAN gave his “A Time for Choosing” speech on October 27, just days before the 1964 election between Barry Goldwater and LBJ, he correctly outlined two possible paths for the United States: up toward liberty or down toward statism.

The vote for Lyndon Johnson and his Democrat Congress was a choice to move further down the Road to Serfdom. But would a vote for Goldwater have put us on the opposite path? Goldwater was very lonely in the Republican congressional caucus. He had convinced a majority of GOP primary voters that the party could and should become a conservative party. But the Republican Party machinery and its congressional representatives had made no such decision. A President Goldwater would have faced a Congress uncertain about which direction to move.

The November 2012 election more closely matches Ronald Reagan’s speech. The choice is not simply between two men, Romney and Obama, but between two parties whose proposals would march the country in diametrically opposed directions.

Each side’s stance on taxes provides an illustrative contrast. A re-elected Obama can veto any effort to reform or reduce federal taxes. On January 2013, the Bush tax cuts of 2001 and 2003 end. The Alternative Minimum Tax (AMT) patch ends, and the AMT will begin to hit 31 million families. The top personal tax rate jumps to 43.4 percent, the capital gains rate jumps from 15 percent to 23.8 percent, the tax on corporate dividends increases from 15 percent to 43. 4 percent. And middle-class taxation?

The Obama 1.0 promise in 2008 was clear: 

I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.

The Obama 2.0 promise, first stated on August 8, 2012, in Grand Junction, Colorado, reads a little differently: 

Now, if your family makes under $250,000— which, by the way, is 98 percent of American families and 97 percent of small businesses— under my plan, your income taxes would not increase a single dime next year. That’s my plan.

One notes two changes. Americans of all incomes are on notice that Obama is only promising not to increase your income taxes. A value-added tax, a wealth tax, excise taxes, or import duties could be imposed tomorrow. And the promise to protect those under $250,000 a year has an expiration date of January 1, 2014. The promise only exists “next year”—2013.

Should Americans elect a President Romney and add at least tree Republican senators, to establish Republican control of the U.S. Senate alongside a continued GOP House, the path on taxes is clear. Romney has called for an across-the-board tax cut of 20 percent, which would bring the top individual rate to 28 percent. The House and most GOP senators have already voted for the plan proposed by Paul Ryan, which lowers the top rate to 25 percent.

Both Romney and a Republican Congress would be committed to shifting to a territorial tax. Under our present worldwide tax system, American firms doing business overseas must pay U.S. taxes on income earned abroad, even though they’ve already been taxed on that income by their host nation’s government. Foreign firms doing business in America pay our taxes but do not pay again at home. This, of course, puts all American firms at a disadvantage in worldwide competition. It has hurt us badly.

Obama opposed a two-year “repatriation,” which would have allowed American firms to bring overseas profits back to the United States taxed at a 5.25 percent rate, rather than the usual corporate rate, which can be as high as 35 percent. That would have brought an estimated $1 trillion back to the U.S., which would have greatly strengthened the economy and boosted Obama’s chances of winning in November. But he said no. He said “Hell, no.” He could not stand the thought of American businesses earning money without paying his vig.

Obama and the modern Republican Party offer starkly different paths on federal spending as well. The Congressional Budget Office was asked to score President Obama’s 2013 budget, looking out to 2050. In 2011, actual federal spending was 24 percent of GDP. That figure increases to 25.5 percent in 2023, 29 percent in 2030, and 34 percent in 2040. By 2050, spending directed by Washington would be fully 39. 25 percent of the economy. If you are calculating your tax bill, please remember to add your state and local taxes to this number.

By 2040, debt as a percentage of the economy reaches 194 percent, and in 2050 the CBO report shows an asterisk representing “greater than 200 percent of GDP.” The higher spending reflects Obamacare and the expansion of present entitlements as Baby Boomers retire into an unreformed Medicare and Social Security system. The CBO model assumes that the “fiscal cliff” of 2013 is avoided and the 2001 and 2003 tax cuts and AMT patch extended. Without those assumptions, economic growth would be lower and numbers worse.

RYAN'S PLAN, the “Path to Prosperity,” was scored by the CBO as follows: In 2023, a decade after hypothetical enactment, total tax revenues are 18.5 percent of GDP, the historical average for the past 30 years. Federal spending declines to 20 percent from the present level of 24 percent, and the annual deficit is less than 1 percent of GDP. Spending as a percentage of the economy falls to 18.8 percent by 2040 and 16 percent by 2050. And all these projections understate the Republican case, because they are done with static models that assume reducing tax rates would have zero impact on economic growth. (n.b.: The difference over a decade between an economy growing at 2 percent per year and one growing at 3 percent per year is $2.5 trillion in additional tax revenue.)

The Ryan budget plan also prevents America from becoming a European welfare state by reforming existing government programs rather than simply cutting expenditures. Specifically, the plan builds on two reforms we have already seen work well in the real world.The first is to block grant means-tested welfare programs. This was Ronald Reagan’s idea in 1972, and it was mocked by the left and many in his own party until it was passed (for the third time) by a Republican Congress in 1996 and signed by a terrified Bill Clinton, who had been informed by his consultant Dick Morris that he would be defeated in November if he refused. Every criticism of block granting welfare (Aid to Families with Dependent Children, or AFDC) was proven false. Fifty states were allowed to run AFDC programs without Washington’s micromanagement or federal rules to incentivize growing welfare rolls. Ryan’s budget would reform food stamps and Medicaid the same way. (Economist Peter Ferrara finds more than 185 meanstested welfare programs—many quite small—that could eventually be block granted.) If converting federally administered welfare programs to block grants is as successful as the previous effort in 1996, taxpayers will win, and the programs will be actually focused on helping those in need, rather than creating “learned dependence.” 

The second reform, moving from defined benefit to defined contribution retirement benefits, has been done in most private sector pension plans. Those cities, states, and unionized firms with defined benefit plans are the ones we read about in the newspapers suffering from unfunded liabilities and bankruptcy. The Ryan plan reforms Medicare for those under 55 by moving in that direction.

Democrats claimed to be delighted that Republicans put their plans in writing. Now, they chortled, the Republican vision would be vulnerable to attack.They have it backward. In the past, every election cycle Democrats would claim that Republicans wanted to gut/end/slash Social Security, Medicaid, and Medicare. Because there was no GOP plan, Democrats were free to invent their own straw man. But in 2000 and 2004, Bush ran on a plan to privatize/personalize Social Security for those under 55. Because the plan was written down, Democrats could not credibly scare anyone over 55. Younger voters wanted the option of a 40l(k) plan. Similarly, the Ryan plan denies Obama the option of using scare tactics, since its changes would not affect those over 55. And by making the advantages for younger Americans clear, Ryan will attract their support.

The Ryan “Path to Prosperity” or the Obama path to more of the same. Up or down. This November is truly a time for choosing.

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About the Author

Grover G. Norquist is the president of Americans for Tax Reform.