• Taxes and the Ryan Budget

    Andrew Sullivan has provided qualified support for the Ryan budget, but doesn’t like the tax side, of which he says:

    …the biggest flaw is the refusal to add new taxation to the proposal. Worse, it actually wants to reduce tax revenues.

    I don’t think Andrew has this correct. In fact, the very large deficit reduction claims that Rep. Ryan makes in his proposal hinge on both spending cuts and a substantial increase in the total taxes collected as a percentage of GDP as compared to current levels.  The portion of Table 1 from the CBO letter to Rep. Ryan makes this clear (the full table is at the bottom of the post).

    In 2010, total taxes collected (income tax, payroll, corporate, everything) equaled 15% of GDP. Ryan’s deficit reduction figures are dependent upon this increasing to 18.5% of GDP by 2022, and rising to 19% of GDP by 2030 and remaining at that level until 2050.  In fact, if taxes as a percent of GDP remained flat for the next 3 decades, we would have a deficit of around 3.75% of GDP in 2040 even with the Ryan budget cuts fully enacted!  Thus, Ryan’s budget assumes very large increases in the aggregate federal taxes collected as compared to the status quo, putting us back in line with historical averages over the past 40 years.

    Ryan proposes decreasing the top marginal tax rate and reducing the number of rate bands, while claiming to substantially increase revenue collected.  There are several possibilities:

    • The tax side of the plan will not stand up to scrutiny when CBO scores it
    • Reductions of tax expenditures (home mortgage deduction, tax preference of employer paid health insurance, etc.) make it possible to raise this revenue
    • Income taxes will rise substantially for lower wage persons (it should be noted that ending tax expenditures is generally a progressive policy since the benefit of most such expenditures disproportionately helps higher income persons, so could balance higher income taxes paid by middle/lower income earners)
    • Other taxes could be raised

    I take this plan as an acknowledgment that our current tax code cannot produce a balanced budget given any plausible level of spending.  Increasing tax receipts to 19% of GDP would put us near the historical average in terms of tax receipts over the past 40 years as the figure from the 2011 CBO budget outlook shows.

    Of course, this is still well below average expenditures as percent of GDP from 1971 to 2010, but then that is why we have only had 4 balanced budgets since I was born. To have another balanced budget before I die, I suspect it will take something on the order of at least 20-21% of GDP collected in taxes (and spending reductions from current levels) given the movement of the baby boomers into Social Security and Medicare. I am somewhat agnostic about the overall structure of the tax code, and would like to hear a vigorous tax reform discussion focused around how to best raise a target percentage of GDP.  Moving from 15% of GDP to 19% of GDP collected in taxes is a step in the right direction, and it is notable to me that it has been embraced by the Republican Budget Committee chair. Democrats in the House are apparently going to release an alternate budget, and hopefully a useful debate will ensue, both about the level of taxation needed over the long run, as well as the makeup of the tax code.

    Update 2: The House Progressive caucus with the outline of a budget that provides quite a contrast to Ryan’s, aiming for balance at tax receipts at 22.3% of GDP in 2021 (Ryan’s would get balance at 19% of GDP). This would include increases in top marginal income tax rates, raising the wage limit to which the Social Security payroll tax would apply to the 90th percentile of wages, and eliminate the taxable max on the employer side.  More on this later, but the Deficit Commission with balance point at 21% of GDP for balance around 2035, is where you would expect it to be; in the middle.  It will likely look better and better on the policy merits over time. Not sure about the politics.

    Update: Austin sent me a longer time series of taxes collected as percent of GDP.

    • Please not that the CBO did NOT perform an independent scorign here: “as specified by Chairman Paul Ryan and his staff.” That means Rep. Ryan gave the set of assumptions and chicanery he used to make his numbers ‘work’ and tolkd the CBO to use those same assumptions and tricks and they, lo and behold, came up with similar numbers as he and his staff claimed. These were big assumptions that destroy the quality of the CBO’s numbers.

    • @DCT
      Yes, I said that. It hasn’t been scored. Nor was the Roadmap last February. In both cases it is a set of fairly detailed cuts posed against the assumption of a certain percentage of GDP raised in taxes. In that sense, it is even a stronger affirmation that as a policy we have to move from 15% to 19% of GDP in taxes (per Ryan). I think it will take 21%GDP or so given likely levels of palatable spending cuts.

      This doesn’t destroy CBOs numbers. They say it is not a score, but that they assumed %GDP in taxes and compared to cuts. Eventually, CBO will have to score the proposal (along with joint committee on taxation) as it moves into the different committees. The biggest question is what will CBO say about the tax code side of the plan.

    • I don’t think 18-19% revenue/GDP ratio necessarily means that taxes have to rise. The figure is 15% today because of the recession we’re in. According to the graph you posted, the historical average is 18%. So the real increase in taxes, if there is one, is merely 1% not 3-4.

      • Jeremy,
        In a recession, GDP falls and so does tax revenue. Are you saying that tax revenue falls more than tax revenue so that the percentage changes? This doesn’t make sense to me.

        • Yes, I am contending that revenues fall more quickly during a recession than GDP. Admittedly, I don’t have any hard facts to back this up, but the trend provided generally shows that revenues/GDP drops during recessions. If there’s any evidence to the contrary, I’d be happy to adjust my opinions.

          That being said, I’ve also read that the Ryan budget lowers the highest bracket from 35 to 25%, so taxes would have to rise somewhere to get total revenues back up to 19%.

          • I did a quick Google search and came up usgovernmentrevenue.com which has graphs since 1900. They note that recession years tend to show peaks in % of GDP tax revenue. Since their data goes back to 1900, they mention peaks in the depression/recession years of 1937, 1982 and 2001 as well as our current recession. They track both state and federal tax and they both seemed to move up (as a %) during recessions.
            This would seem to show that their is a non-linearity in tax revenue but the bias is towards an increased % of GDP as the economy slows.

            • Okay, I checked this out, and, yes, it peaks in recession years. That’s because DURING the recession it drops. It peaks right before the recession starts which supports the idea that revenues/GDP fall during recessions.

              My guess is that it’s because the rich pay a large percentage of the taxes and (possibly) their incomes react more strongly to recessions. The graphs on the website you cited suggest this.

    • @Jeremy N
      agree about recession, but at least Ryan saying long range goal on tax receipts above historical avg even though still not high enough for balance given likley levels of spending.

      • I don’t understand; the chart predicts, under Ryan’s spending plan, that spending is 14.5% of GDP in 2050. If revenues were at their historic average (or even 15%), we’d have a balanced budget.

        Are you saying “likely levels of spending” would be higher than his plan predicts?

    • “Thus, Ryan’s budget assumes very large increases in the aggregate federal taxes collected as compared to the status quo, putting us back in line with historical averages over the past 40 years.”

      This is an odd definition of “status quo.” According to the full version of the CBO table at the end of your post, Ryan’s plan cuts revenue or keeps it the same at all time points under either current law or the Bush-tax-cuts-extended scenario.

      I think “current law” or “law as expected to be modified” is a more reasonable definition of “status quo” than “revenue following the worst recession in modern history.”

    • @Zach
      probably would have been clearer to say rise from very low point currently ~15% of GDP to 19% of GDP, which is about 1pct point above the avg. taxes collected from 1970 to today. However,taxes were lower than 19% of GDP for all of Bush II admin I believe after year 1. I think it will take 20-21% of GDP collected in taxes to have hope of balanced due to what I think is acceptable on spending. Ryan acknowledges we have to move above where we have been in past decade, and certainly above where we are now in terms of taxes. We will see if CBO says his stated tax polcy (rates, tax exclusions) can get there (to 19%GDP).

      • “We will see if CBO says his stated tax polcy (rates, tax exclusions) can get there (to 19%GDP).”

        There’s no way his stated policies gets to 19% GDP on the timescale that he promises. He says he wants to dramatically lower the corporate and top individual rates, lower capital gains rates, and eliminate all the revenue-generating functions in Obamacare. He mentions eliminating expenditures, but I don’t think he’ll touch pension contributions, health insurance exclusion, or charitable contributions. That leaves, what, a few hundred billion per year remaining in possible additional revenue? The only item in his budget description that I can find that can get us to 19% GDP any time soon is “widen the tax base” aka raising tax on the poor and middle class.

        Regarding 19% being above status quo, I think that the status quo changed with tax reforms throughout the past 25 years that put us on a trajectory to raise more than 20% GDP in revenue in the expectation of growing outlays this century.

    • @Zach
      need CBO and other independent sources to verify his policies. I think the 21% of GDP suggested by deficit commission will be about right.