The Tax Policy Center is out with a new analysis of Rep. Paul Ryan’s “Roadmap for America’s Future” which suggests that contrary to the Congressional Budget Office estimates, it won’t balance the budget. The CBO doesn’t estimate tax revenues — which is done by the Joint Committee on Taxation — and so its estimates assumed that taxes would remain at their historical levels of 19 percent in its analysis. But according to the Tax Policy Center analysis, the tax reforms he proposes (including an optional simplified tax code with two rates and no deductions aside from one for health insurance) would bring rates down to 16.8 percent, and thus “Ryan would likely fall far short of meeting his goal of balancing the budget and paying off the national debt by 2080, even if government spending were slashed to 1951 levels as he proposes.”
In response, Ryan has written the following:
I appreciate the Tax Policy Center’s effort to advance the debate on our need to get a grip on the explosion of spending and put the government on a sustainable path. Our nation’s fiscal crisis is the result of Washington’s unsustainable spending trajectory, not from a lack of sufficient revenue.
The tax reforms proposed and the rates specified were designed to maintain approximately our historic levels of revenue as a share of GDP, based on consultation with the Treasury Department and tax experts. If needed, adjustments can be easily made to the specified rates to hit the revenue targets and maximize economic growth. While minor tweaks can be made, it is clear that we simply cannot chase our unsustainable growth in spending with ever-higher levels of taxes. The purpose of the Roadmap is to get spending in line with revenue — not the other way around.
Ryan also specifies that the “Roadmap” based its revenue projections on data from last year, when economic projections were rosier, and notes that the Tax Policy Center only evaluated his plan over the next 10 years, even though it’s designed over a 75-year period. Looking at the CBO analysis myself, I find that, for instance, by 2060 primary spending (excluding debt interest payments) falls to 16.1 percent of GDP under the “Roadmap” and by 2080, it drops to 13.8 percent. So if you combine the Tax Policy Center’s lower revenue assumptions with the CBO’s spending assumptions, it still suggests that at some point, the “Roadmap” begins producing surpluses (the exact year is hard to predict given that if we assume lower revenues in the initial decades, it would mean more debt and higher interest payments in future decades).
I’d also add that “TPC did not assume that taxpayers would change their behavior in response to this new tax structure.” Yet in reality, if we had a new simplified tax code that didn’t tax savings or investment, and that eliminated the corporate income tax (while replacing it with a business consumption tax), as the Ryan plan does, it would generate more economic growth. While this economic growth may not make up for all of the revenue that TPC estimates would be lost, there’s good reason to believe, based on economic theory and empirical experience, that at least some portion of that “lost” revenue would be recouped by higher GDP. But the overaching point is that the Ryan plan, as scored by the CBO, shows that there’s a way to balance the long-term budget by keeping taxes at historical levels rather than raising them to levels that would cripple the economy. If critics acknowledge that Ryan’s reforms to Social Security, Medicare, Medicaid, and the health care system can make our nation solvent as long as we maintain historical levels of tax revenue, and the only argument left is over how to maintain historical levels of taxation, then I’d say that’s a major victory for Ryan.
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