James Pethokoukis

Politics and policy from inside Washington

The Ryan Path vs. Bowles-Simpson

Apr 5, 2011 19:15 UTC

Americans for Tax Reform has created a handy chart comparing the features of both:

atr

Paul Ryan’s revolution would finish Reagan’s

Apr 5, 2011 17:58 UTC

Is Rep. Paul Ryan’s “Path to Prosperity” potentially the most important and necessary piece of economic legislation since President Ronald Reagan’s tax cuts in 1981? Quite likely. The blueprint embraces free markets and individual choice to radically reshape America’s social welfare state for the 21st century and shrink government. Instead of looking for ways to finance an ever-expanding public sector, it would prevent Washington from growing to a projected 45 percent of GDP by 2050 (vs. 24 percent today) and instead reduce it to just under 15 percent by that year. Ryan would downsize government to its smallest size since 1950 and prevent the Europeanization of the American economy. The Ryan Path embraces dynamic growth, not managed decline and stagnation.

But what’s really important is that it affirmatively answers three questions: First, does the Ryan Path put the federal government on a sustainable fiscal path? Second, does it promote more economic growth and higher incomes? Third, is it politically realistic? Let’s take those one at a time:

1) Does the Ryan Path put the federal government on a sustainable fiscal path? Yes. It’s easily superior to President Obama’s 10-year budget plan which would generate average annual deficits of $947 billion and let debt as a share of the economy rise to a dangerous 87.4 percent from 62.1 percent in 2010. And Obama does nothing to alter the long-term fiscal glide path into insolvency.

By contrast, the Ryan Path would see debt-to-GDP peak in 2013 at 74.5 percent and fall to 67.5 percent by 2021, then continue to steadily decline until the entire federal debt is eliminated in the 2050s. Medicaid spending for the poor would be sent to the states in a fixed lump sum indexed for inflation and population growth. Medicare spending for seniors would be transformed into a system where recipients would choose among private plans, aided by a government subsidy that would grow more slowly than healthcare price increases. Indeed, the market-based plan would help lower healthcare inflation.

2) Does the Ryan Path promote more economic growth and higher incomes? Yes. Ryan uses extremely cautious economic growth figures, the same ones employed by the Congressional Budget Office, to arrive at his budget totals. But his plan would almost certainly result in higher growth and more jobs — generating more tax revenue and reducing debt even faster than Ryan estimates. It shifts vast resources from the public sector to the far more productive private sector. It also sharply reduces top federal individual and corporate income tax rates to 25 percent from 35 percent. (The U.S. currently has the highest corporate tax rate among advanced economies.) According to the Heritage Center for Data Analysis, the plan would create nearly a million new private-sector jobs next year and bring unemployment down to 4 percent in 2015. A flat tax on income and consumption would be even better, but Ryan significantly moves the ball forward.

3) Is it politically realistic? The risk is that Paul Ryan has created a plan only Paul Ryan can sell with his passion and deep expertise. He does make political concessions. The plan doesn’t, for instance, cut Medicare spending on current retirees or older workers. But austerity of that sort probably isn’t needed yet. Current trends, though, are leading toward a fiscal crisis that would result in both extreme and immediate benefit cuts and higher taxes.

And that, ultimately, is how the political case is made. The alternative to the Ryan Path isn’t the fiscally unsustainable status quo, but a future of harsh austerity beset by financial crisis, stifled by higher interest rates and marred by a lower standard of living. In short, the death of the American Dream and  the collapse of any social safety net.

But there is a way forward to another American Century and away from that nightmare. And Ryan has found it.

COMMENT

Purely partisan foolishness. To suggest that Ryan’s plan somehow restores “free markets” is a spectacular insult to the intelligence of anyone with enough education to be barely literate and enough sense to look one level deeper than the TMZ headline of the day.

Ryan’s plan cements the corporate cronyism that has driven our economy into the turf. What’s needed is a REAL return to free markets, and this plan doesn’t even scratch that surface.

Pethokoukis, you’re nothing more than a partisan shill. My dog could eat an inkjet cartridge and defecate a better-reasoned column than this.

Posted by JackMack | Report as abusive

No April Fools’ joke, U.S. now world’s highest corporate taxer

Apr 1, 2011 01:41 UTC

If only it were an April Fools’ Day prank. With Japan officially cutting its corporate tax rate as of today, America now has the highest rate among advanced economies. Even its effective tax rate is way above average despite the likes of General Electric spending billions to game the labyrinthine code. A smarter approach would be to substitute a business consumption tax.

Now the United States might cling to second place if Japan cancels the rate reduction to help pay for the tsunami and earthquake devastation. After factoring in state taxes, America’s top rate of 40 percent would still exceed the average of 26 percent for the rest of the OECD.

Headline rates, of course, are like sticker prices on new cars. The real numbers are lower, thanks in part to the $40 billion companies spend annually to comply with, and often sidestep, the maximum levy. GE, for example, has taken heat for consistently paying less than what the U.S. tax code would imply it should.

But even taking into account the efforts of attorneys and lobbyists, the average effective U.S. rate in 2010 was 29 percent against 21 percent for international counterparts, according to the  American Enterprise Institute. And before the recession, corporate tax revenue as a share of U.S. GDP was at its highest since the 1970s.

Politicians of all stripes have been talking about lowering corporate taxes and eliminating loopholes to pay for a sharp rate reduction.  A sharply lower rate —  Canada’s will be just 15 percent in January 2012 — would boost worker wages, investment, productivity, jobs and growth. Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure.

A better alternative might be a consumption tax where business would simply determine its liability by subtracting total purchases from total sales. The tax would then be imposed on what’s left, essentially a firm’s value added. Unlike the corporate income tax, a consumption tax would allow the cost of investments to be fully deducted immedi ately, providing incentives for more. Such a tax also could be imposed on imports and deducted from exports, as other nations currently do with their VATs.

The Tax Policy Center estimates an 8.5 percent consumption tax — by broadening the tax base and boosting output – would boost corporate tax collections as a percentage of GDP to 4.5 percent from the 2.4 percent the White House forecasts for the next few years. (This is the corporate tax plan, by the way, found in Rep. Paul Ryan’s “Roadmap for America’s Future.”) That’s no laughing matter.

White House confusion on corporate tax holiday

Mar 23, 2011 19:18 UTC

The White House perhaps rightly worries, via a Treasury blog posting, that a tax amnesty for U.S. companies repatriating profit might distract from broader reform. (House GOP Majority Leader Eric Cantor recently came out for the idea.)  But its economic objection to the idea is confused.

As things stand, there’s an incentive for companies to stash cash overseas, because bringing it back triggers a U.S. tax rate of up to 35 percent, depending on the level of local taxes already paid. A big but temporary reduction could see a lot of cash returning to the domestic economy — especially in the technology and drugs sectors.

Treasury notes, though, that this might result in very little direct new investment or job creation. When such a holiday was last tried in 2004, tax data show that 843 companies brought back nearly $400 billion. But for every dollar returned, about 91 cents went toward share buybacks with another eight cents toward boosting dividends, according to research from economists at the University of Connecticut and the National Bureau of Economic Research.

Meanwhile, President Barack Obama and others want to reform corporate taxes more broadly. A reduction in America’s fairly high headline tax rate would most likely come with the elimination of some tax breaks beloved of companies. With limited political capital available — his own congressional Democrats don’t want to cut rates or provide a tax holiday — Obama may need to focus on this more lasting change. Moreover, if company bosses are given reason to believe they’ll get an amnesty every few years, they might lobby harder to keep their favorite tax breaks, thereby derailing reform.

If the political calculation is slightly negative, though, the economic one tips the other way. Treasury is stretching a point in assuming the government would somehow lose revenue by taxing repatriated income at a sharply lower rate. In reality, without the reduction most of the money will remain offshore.

And even if all the cash returning to the United States went to companies’ shareholders, that could still generate more consumption, growth and jobs, a knock-on effect Treasury ignores. Yet this so-called wealth effect is explicitly part of the rationale behind the Fed’s second round of quantitative easing. Some economists dispute the linkages, but not the ones that work for Obama. So despite some political risks, it might be time go on holiday — as long Washington also continues the work of reform.

Obama’s hidden budget strategy

Mar 7, 2011 17:09 UTC

The great Jim Capretta reveals all at NRO. Here is a bit, but read the whole thing:

The Congressional Budget Office (CBO) says the total tax hike over the next ten years will exceed $800 billion — a significant sum. But that’s really just the beginning of it. The authors of Obamacare were looking for a “game-changer” that went beyond a near-term tax hike. …  Their solution: Go back to 1970s-style bracket creep. … The Obamacare tax hikes associated with Medicare — 0.9 percent on wages and 3.8 percent on non-wage income — were sold as hitting only individuals with incomes exceeding $200,000 and couples with incomes above $250,000 annually. But those income thresholds are fixed. … . Consequently, as the years go by, more and more Americans will find themselves paying much higher federal taxes for Medicare — even though they are decidedly not the “rich” people the president said he was targeting.

Similarly, the so-called “Cadillac” tax on insurance plans — sold as a way to hold down costs in the most expensive arrangements — will quickly become a tax that nearly everyone in America pays. In 2018, when the tax goes into effect (conveniently after President Obama has exited the scene), insurers and employers offering plans with premiums exceeding $27,500 for family coverage will pay the tax. But in 2019 and beyond, that threshold will not grow with medical inflation. Instead, it will increase only with economy-wide consumer prices, generally a few percentage points below the inflation trend in the health sector. As the years go by, therefore, virtually all health-insurance plans will start bumping up against the “high-cost” tax t

By 2020, the total tax hike associated with Obamacare will already be bad enough — about 0.5 percent of GDP. But by 2035, because of bracket creep, it will have more than doubled — to 1.2 percent of GDP, according to CBO. And it won’t stop there. It will keep going up every year, in perpetuity.

The piece is a good reminder how the center-left consensus is that Americans are wildly undertaxed, and that dramatic tax increases must be part of the fiscal fix.  So transparency is to be avoided at all costs.  Another reason why tax simplification is not just about making it easier for folks to fill out their taxes.

The final nail in the coffin for tax increases

Mar 2, 2011 17:32 UTC

AFGHANISTAN/

OK, so the U.S. government’s auditor has found duplication and overlap that may be wasting $100 billion or more a year, according to the Republican senator who commissioned the study. How can anyone argue for higher taxes as long as Washington is so inefficient? A few points:

1) I mean, no one should expect the feds to be as Six Sigma efficient as FedEx or Wal-Mart. Government doesn’t have the financial discipline from the profit motive. Its priorities are to “insure domestic tranquility” and “secure the blessings of liberty,” as the introduction to America’s 1787 prospectus puts it.

2) But the audit from the GAO gives a feel for the yawning chasm between Washington and those models of corporate efficiency. For instance, the auditor found 82 separate federal programs to improve teacher quality ($4 billion a year), and 20 distinct programs to deal with homelessness ($2.9 billion a year). The GAO also found plenty of waste in the $700 billion military budget, which should open the eyes of Republicans shielding it from the ax. Realistically, the Army and Marine Corp don’t really need to develop separate versions of “mine rollers” to counter roadside explosives.

3) Streamlining redundant programs would be a solid start toward fiscal soundness. A next step might be to downsize the federal civilian workforce, which has so far been spared the cuts seen in the private sector. Trimming the federal headcount by 15 percent — some of which might potentially be done by not replacing retirees — would save nearly $300 billion over the next decade, according to the Congressional Budget Office.

Bottom line: Promised federal pension and healthcare benefits will eventually need to be scaled back. And, in exchange, some taxes might need to rise to spare some Democrat-supported spending. But these big-ticket items are tough to sell with polls showing public trust in the government at its weakest in a half century. Reports like the GAO’s latest won’t help.

Thriftier and more competent government might only save relatively few bucks today, but it would help create the public confidence needed for more radical action tomorrow.

Photo: U.S. Marine Corps prepares a mine roller system for a mission in southern Afghanistan. REUTERS/Shamil Zhumatov

COMMENT

srt

Posted by Anonymous | Report as abusive

Any way you slice it, U.S. corporate tax rates are too high

Feb 2, 2011 20:35 UTC

David Leonhardt (NYT) makes the point that U.S. companies often pay far less than the top statutory corporate tax rate of 35 percent:

Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.

Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades. …

The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company — and that are indeed inefficient for the larger economy — can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”

Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.

Inefficiencies like these slow economic growth, and they are the reason that both conservatives and liberals criticize the corporate tax code so harshly. Mitch McConnell, the Republican Senate leader, says it hurts job creation. Mr. Obama, in his State of the Union address, said that the system “makes no sense, and it has to change.”

It should also be noted that whether you are talking about the statutory rate or the effective rate, the U.S. is still at uncompetitive levels (via Tax Foundation):

corprate

corprate2

COMMENT

Rubbish. Any taxes at all are too high for James Pethokoukis. Corporate tax rates in the United States are among the lowest in the world. Combine that with the loopholes that corporate lobbyists have bought for their clients, and most US corporations pay no tax at all.

Posted by GetpIaning | Report as abusive

The right response to America’s Sputnik Moment?

Jan 27, 2011 19:56 UTC

I am a little late on this, but AmSpec’s John Guardiano is dead on:

Kennedy didn’t think America was “as strong as [it] should be.” And the reason, he surmised, was that the heavy hand of big government was too onerous. The feds, he realized, were stifling initiative and entrepreneurship. He knew the solution was to cut marginal tax rates. And so he did just that.

Kennedy cut the top marginal rate from 91 percent to 70 percent. He also cut tax withholding rates, instituted a new and more generous standard deduction, and increased deductions for child care and other familial expenses. The result: the economic boom of the 1960s.

It would be nice if Obama’s SOTU included some of this stuff

Jan 25, 2011 22:13 UTC

The folks at Americans for Tax reform have assembled a pretty solid list of ideas.  Since Obama is apparently going for growth in an attempt to get reelected, he might want to take a gander at a few of these:

1.  Cut the corporate income tax rate.  The United States has the highest corporate income tax rate in the developed world.  This puts American employers at a disadvantage to our international competitors, and costs U.S. jobs.

2.  Move from “worldwide” to “territorial” taxation.  The U.S. is one of the few developed nations that not only seeks to tax all profits earned within her borders, but also the profits of her taxpayers earned all around the world.  Most other countries are closer to a “territorial” system.  The U.S. should move toward this type of system, which would make the complex maze of international deferrals and credits unnecessary.

3.  Make full business expensing permanent.  As part of the tax increase avoidance deal in December, Congress and the President agreed to one year of full business expensing (as opposed to multi-year deductions called “depreciation”) for new business machinery and equipment.  This should be expanded to real property and made permanent to further equalize the tax treatment of investment versus consumption.

4.  Call on Congress to repeal Obamacare taxes on families making less than $250,000 per year.  Obamacare contained nearly two-dozen new or higher taxes, at least seven of which are directly-levied on families making less than $250,000 per year.  At the very least, those taxes which violate President Obama’s “firm pledge” not to raise “any form of taxes” on any family making less than $250,000 should be repealed first.

5.  Remove uncertainty from small employers and investors by making current tax rates permanent.  The top personal rate of 35 percent is also the rate at which a majority of small business profits face taxation.  The capital gains and dividends rate of 15 percent has been priced into the value of every American’s IRA and 401(k) balance.  To restore certainty to the economy, businesses and families need to plan with steady and permanent tax rates.

6.  Call for a moratorium on new federal regulations.  According to the annual “Cost of Government Day” report issued by Americans for Tax Reform Foundation and the Center for Fiscal Accountability, regulations impose a cost of $1.5 trillion annually on our economy.  There were over 60,000 pages added to the Federal Register in 2009.  Americans had to work nearly 75 days just to pay for the regulatory burden of government.  At the very least, no more damage should be allowed to occur, starting with harmful Obamacare regulations.

7.  Admit “stimulus” failures and rescind the unspent funds. This could save taxpayers almost $200 billion. Famously threatening that absent an influx of cash in the form of government “stimulus” unemployment would crest 8 percent, two years of economic stagnation and unemployment holding steady above 9 percent shows the plan to be a failure by the White House’s own standard. Admit defeat and move on to proven pro-growth policy.

8.  Promise to veto any further state government bailouts.  Refuse to reward the fiscal recklessness of the states by pledging to end state bailouts. Due in part to the snake oil of “stimulus” funds, states expanded rather than restrained their bottom lines during the economic recession, and are facing a cumulative $72 billion overspending problem, on top of a $3 trillion hole dug by unsustainable pension promises. If the President is serious about fiscal restraint, he should make clear states are responsible for their own spending habits.

9.  Keep your promise on earmarks. According to Citizens Against Government Waste, earmark spending has topped $36 billion over the past two years of the Obama Administration, to say nothing of the trillions of dollars of spending that have been enabled by greasing the palms of elected officials.

10.  Support lasting reform to permanently shift the bias away from spending. Prudent measures such as allowing taxpayers to read bills online for five full days before they receive a vote would ensure lawmakers are diligent stewards of taxpayer dollars.

Illinois, a kleptocracy in action

Jan 14, 2011 18:58 UTC

What should America do about its troubled economy? Sometimes the real world provides the best laboratory for political and economic experiments. Democratic capitalism vs. totalitarian communism? One quick look at East Germany and West Germany in the 1980s or North Korea and South Korea today provides easy analysis of which is the preferable way to create and organize a peaceful and prosperous society.

Now we have Illinois vs. Indiana. The Prairie State has the worst debt rating of any state in the union and heading into 2011 faced a funding shortfall equal to 40 percent of its total budget. Only Nevada, hit particularly hard by the housing depression, is as nearly bad off, according to the Center on Budget and Policy Priorities

Yet directly east of Illinois is the Hoosier State with a AAA credit rating. Indiana faces a 2011 shortfall of just 9 percent and expects to balance its budget even though the economic downturn has struck just as hard as in Illinois. Under Governor Mitch Daniels, a noted budget hawk who may run for the Republican 2012 presidential nomination, Indiana has continually pared back spending. It now has the fewest public employees per capita of any state. And it spends half as much per citizen as Illinois.

But faced with a fiscal crisis, Illinois decided this week to raise taxes by $7 billion a year, jacking up the individual rate to 5 percent from 3 percent and the corporate rate to 7 percent from 4.8 percent. That the state didn’t instead cut spending dramatically is not really surprising. One-party kleptocracies — and that pretty much is what Illinois is — always want more taxpayer money, not less.

Yet it is unlikely the state will raise anywhere near that $7 billion now that it chose to undermine its competitiveness. This, from the nonpartisan Tax Foundation:

Our 2011 State Business Tax Climate Index ranked Illinois 23rd in the country, middle-of-the-pack compared with its immediate neighbors. Illinois’s low, one-rate individual income tax offers the advantages of simplicity, stability, and a competitive rate relative to other states, outweighing more negative elements of the state’s tax system.

If this legislation enacted on January 12, 2011 had been in place on July 1, 2010 (the snapshot date for the 2011 State Business Tax Climate Index), Illinois would have ranked 36th instead of 23rd. This is a fall of thirteen places, past South Carolina, Georgia, Pennsylvania, Tennessee, Alabama, Nebraska, Oklahoma, Maine, Massachusetts, New Mexico, Arizona, and Kansas.

On the individual income tax sub-index, Illinois would have ranked 14th instead of 9th, a drop of five places. On the corporate income tax sub-index, Illinois would have ranked 45th instead of 27th, a drop of 18 places.

Three  lessons here:

1. Neither states nor countries exist in isolation. Just as it’s foolish for Illinois to act as if what Indiana and Wisconsin are doing fiscally is irrelevant, so to must the U.S. take into account that is has, for instance,  a marginal and effective corporate tax rate far above that of the average advanced economy. The Obama White House may call for a cut. If he doesn’t, the congressional GOP should.

2. As the Indiana experience shows, the earlier you get started on budget cutting the better. Even though Uncle Sam has been running trillion-dollar deficits in recent years, the bond market hasn’t seemed too worried about the accumulation of all that debt. This has given President Barack Obama and Congress a window to make fiscal fixes that are reasonable rather than radical.

But the window could easily, and even quickly, close someday. If it does, the Federal Reserve chairman and the Treasury Secretary may be forced to trudge up to Capitol Hill and beg for action to reassure markets, such as a big tax hike (like a VAT). This is exactly the scenario some GOP spending hawks fear.

3. States should realize that Washington is not coming to their rescue, unless making it possible for them to declare bankruptcy counts as a “rescue.”

COMMENT

We hear so much about the evil corporations. Who has caused the financial crises in these states: Corporations?
Unions?
Union-Politician collaboration?

Posted by Leon1 | Report as abusive
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