The Spectacle Blog

The GOP Budget and Tax ‘Black Box’

By on 4.7.11 | 11:40AM

Paul Ryan has framed his budget proposal as an opportunity to make a choice between two futures paths. One is the European socialist model, in which high taxes and regulation support a comprehensive welfare state. The other, is the free-market vision, with low taxes and light regulation generating high, broad-based growth. 

Ryan intends for the Path to Prosperity to represent the free-market alternative, and it's fair to say that most conservatives would agree that it is a good rough sketch of the best possible route out of the fiscal danger the country finds itself in. 

It's only an outline, however, and the details could determine whether it truly is a viable (politics apart) free-market plan, or unworkable -- or even just a vehicle for class warfare, as liberal critics have confidently asserted. 

One key feature of the proposal is that it reforms the tax system in such a way as to encourage economic growth without hiking revenues -- a goal that should have special appeal for free marketers. But as Ross Douthat notes, that the proposal's tax provisions are essentially a "black box." Ryan has listed certain goals and provided very broad principles for attaining them, but otherwise he gives no details. The general idea is to lower tax rates while broadening the tax base by eliminating tax loopholes, breaks, and credits -- an idea that everyone agrees is a good one. However, it's crucial which taxes rates are lowered, and which tax deductions and so-called expenditures are limited or eliminated. As Douthat explains, some deductions and expenditures favor lower-income earners, and others benefit high-income earners. Certain detractors have claimed that the Ryan plan would amount to a giant tax cut for the rich financed by cuts in government services for the poor. While that claim is not strictly true, the distributional effects of Ryan's tax reform could shake out in such a way as to make it more accurate. 

The key fact for understanding this issue is that while tax expenditures benefit the higher income brackets most of all, they increase after-tax income for everyone. The Tax Policy Center did a study on the effects of eliminating all individual income tax preferences, and found that doing so would reduce average after-tax income by roughly 11 percent. While the richest 0.1 percent would see their federal taxes go up about 50 percent (almost $1.5 million dollars) on average, the lowest fifth of income earners would also have their taxes nearly tripled, increasing by about $1000 dollars. Clearly the decisions regarding which preferences to eliminate could lead to very different outcomes: raising struggling workers' taxes by $1000 would be devastating. 

In other words, if done right, the GOP budget plan's tax provisions could be among the most important aspects of the plan, removing massive distortions and generating even higher growth than predicted by official forecasters. Without specificying just how the tax reform will play out, though, the GOP has opened itself to the critique that its plan is both unworkable and unfair. 

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