April 11, 2011

End of the Budget Battle, But Not the War

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The ongoing budget debacle has made unequivocally clear the difficulty of achieving consensus in today’s political climate. A government shutdown was only barely averted last Friday when negotiations at — quite literally — the eleventh hour finally reached a breakthrough. But don’t think that the debate has necessarily been resolved: Though a stopgap measure has been passed, the long-term version of the agreement is still being drafted. It’s quite possible that by the end of this week it might be déjà vu all over again.

Both parties agree that spending cuts and long-term deficit reduction are necessary. Their visions of how to do so, however, are in many regards fundamentally incompatible. In this respect, the battles over short-term continuing resolutions have become a proxy for the greater ideological warfare being waged between the two parties, with both camps becoming further entrenched in their positions.

Against this backdrop, one can only imagine how polarizing the debate over the budget resolution introduced by Rep. Paul Ryan (R – Wis.) will be. Titled “The Path to Prosperity” (and hereafter abbreviated as PTP), the proposed budget resolution would, at its core, dramatically cut spending in Medicare and Medicaid, freeze non-security discretionary spending at 2009 levels and cut top marginal tax rates to an historic low of 25 percent.

Ryan contends that his proposal will reduce the deficit by $4.4 trillion, keep government spending below 20 percent of GDP, increase GDP by $1.5 trillion and create 2.5 million new jobs within a decade. A pretty impressive resume, by any account. But as is in order whenever someone purports to have the next economic panacea, I think such claims ought to be approached with a fair dose of skepticism.

The preliminary Congressional Budget Office score of Ryan’s proposal corroborated his claimed savings, lending credibility to his plan. Two problems, however, emerge in the scoring process. The first is one that the CBO readily concedes: The plan offered to them still lacked many of the details needed to make accurate long-term projections. It is therefore likely that CBO estimations may change considerably when more information is made available. The second problem I find particularly troubling: Because the CBO lacked specifics, they were told instead to analyze the resolution within a set of parameters that basically guaranteed a flattering score.

Specifically, Ryan instructed the CBO to assume that tax revenues would hold constant at 19 percent of GDP — a lofty assumption when one considers that he plans to cut tax rates for corporations and high-income earners by 10 percent.

Cuts in tax rates can be offset by “increasing the base,” or in this case, eliminating tax credits and exemptions. PTP does precisely that, but even eliminating these tax expenditures is insufficient to compensate for the reduction in tax rates. The Tax Policy Center of the Urban Institute and Brookings Institute in fact estimated that tax revenues would fall to below 17 percent of GDP; at this level, the federal government would still be running a substantial deficit, even at the lower spending rates prescribed by PTP.

Not only would Ryan’s tax plan fail to balance the budget, but it also would shift the tax burden in a way that would tremendously benefit the top two percent of Americans at the expense of the bottom 98. PTP attempts to finance substantial tax cuts for top earners by eliminating deductions and credits; many of these credits, however, are already phased out at higher income levels. These tax deductions and credits therefore predominantly benefit low- and middle-income earners. Thus, PTP effectively raises the overall tax burden for the middle class (even if the actual rates are lower) while simultaneously decreasing the burden for the wealthy; in essence, Ryan’s proposal creates a regressive, rather than progressive, tax schedule. Slashing entitlement spending would also significantly reduce government benefits given to tens of millions of Americans, ultimately reducing the return on their tax dollars.

Moreover, PTP exempts income from interest, savings and capital gains from taxation. Such a policy would almost exclusively benefit the top echelons of earners, many of whom receive a majority of their incomes in the form of capital gains. Ryan argues that shifting the tax burden away from top earners will spur job creation and growth, but this claim relies on the same fallacious logic that underpinned the Bush tax cuts. Drastically reducing the tax burden for corporations and wealthy individuals did much less to create new jobs than it did to exacerbate growing income inequality and drive the United States into some of the deepest deficits in history.

Until the CBO is able to score the proposal in full — without being constrained by unrealistic provisos — we should hold off on taking Ryan at his word. Clearly, there are some troubling implications to his proposed tax structure, and this is to say little about his plans for Social Security, Medicare and Medcaid, which are deserving of far more attention than I could dedicate here.

The proposed tax structure is one reason to have strong misgivings about PTP. Likely, as more details emerge, there will be plenty others. Ryan nonetheless deserves credit for broaching the subject of serious long-term entitlement reform and deficit reduction — topics that, despite their importance, have not been given adequate policy consideration. Democrats thus far have failed to take leadership on this subject, so to see someone willingly grab hold of the “third rail” of politics is refreshing, to say the least.

PTP will not become law; if it takes legislators months to agree to $38 billion in cuts, agreeing on $5.8 trillion cuts will be next to impossible, especially with a Democratic Senate and White House. That’s not to say, though, that PTP will not be impactful. At minimum, it has forced Democrats to come up with a deficit-reduction plan of their own (Obama is expected to announce his this week). Will a long-term deficit reduction plan ever be agreed upon? One hopes so, despite the divisiveness in today’s legislature. This much is for sure: The current battle over funding may be nearly over, but the war wages on.David Murdter is a junior in the College of Arts and Sciences. He may be reached at [email protected]. Murphy’s Lawyer appears alternate Tuesdays this semester.

Original Author: David Murdter