PrintMay 1, 2011
House Republican Budget Plan Would Benefit the Poor
In an opinion piece in the Wall Street Journal (Paul Ryan's Reverse Robin Hood Budget), Princeton economics professor Alan S. Blinder excoriates the House Republican budget plan, put together by House Budget Committee Chairman Rep. Paul Ryan, claiming that it is far inferior to the bipartisan Bowles-Simpson and Domenici-Rivlin proposals. He claims that Rep. Ryan's plan is regressive, meaning that it would fall most heavily on the poor and least heavily on the rich. Prof. Blinder seems unaware that the same criticism could be made of the bi-partisan proposals.
Blinder approves the Bowles-Simpson proposal, put together by a bipartisan Obama commission headed by President Clinton's former chief of staff Democrat Erskine Bowles and former Republican Senator Alan Simpson. Its recommendations included the closing of one-third of America's overseas military bases, increasing the Social Security retirement age to 69, eliminating the mortgage interest deduction under the income tax, cutting the top income tax rate, a three-year freeze on federal pay, a 10 percent cut in the federal workforce, and increasing the gas tax by 15 cents to pay for road projects. Regressive? You bet.
Blinder also approves the Domenici-Rivlin recommendations from a bipartisan task force chaired by former Republican Senator Pete Dominici and President Clinton's former OMB director Alice Rivlin. It gets most of its budget savings by gradually limiting the growth in Medicare spending for each eligible senior. It also proposes sizable benefits cuts and tax increases for Social Security and a new 6.5 percent national sales tax. Regressive? You bet.
The Ryan Plan
Ryan's plan would reduce the deficit by $4.4 trillion over ten years by repealing ObamaCare, substituting private health plans, and making block grants to the states for Medicaid. It also imposes hard spending caps on domestic spending. It ends government bailouts to Fannie Mae and Freddie Mac, which have already cost the U.S. taxpayer hundreds of billions of dollars (and, with house prices continuing to fall, will likely cost hundreds of billions more). It enhances business investment by reducing the top corporate and personal income tax rates from 35% to 25% while making up the revenue loss by closing tax loopholes. Furthermore, Ryan's plan would remove the barriers to safe, responsible energy exploration in the United States.
Not only that, but Ryan's plan would actually benefit the poor tremendously, simply by ending Obama's environmental crusade which has been banning the exploration and development of our plentiful oil and natural gas resources on public lands; offshore in the Atlantic, Pacific, Bering Sea, and Gulf of Mexico and through the EPA's many restrictions on coal, oil and natural gas producers. The rising price of transportation and energy hurts the working class more than any other group. Regressive? You bet.
It would also help the poor by reducing corporate welfare. President Obama's Recovery Act gave billions in corporate welfare to wind and solar plants. Not only did these plants get direct subsidies, but they were also guaranteed higher prices for the electricity they produce -- double or triple the cost of electricity produced by coal or nuclear energy. Even though Obama gave China a free pass to emit carbon dioxide when he negotiated the Copenhagen Accord, his EPA is raising electricity prices to all American households and businesses by requiring that they separate out carbon dioxide from their smoke stacks and sequester it underground. These regulations will be paid for by American households in the form of higher utility bills and lost manufacturing jobs. Regressive? You bet.
The Obama administration and its EPA are adherents of the 20th century theory that climate change is caused by greenhouse gases. The 21st century theory, currently being explored by some of the world's top physicists, is that solar activity shields the earth from cosmic rays, which cause clouds to form. And that low lying clouds tend to cool the earth by reflecting sunlight back into space. (Watch this Cern lecture by Jasper Kirkby for a review of the current research evidence.) Kirkby's research group has just achieved a breakthrough which may establish exactly how clouds are formed. If the new theory is true, then sequestering carbon dioxide harms plant growth, but has little effect upon climate. Obama's EPA administrators were informed of the changing state of climate change theory in an internal report by some of their own employees, which they decided to ignore.
How to Improve the Ryan Plan
Congressman Ryan's plan is an excellent plan, but it could still be improved. We would suggest the following four additions:
1. Cut Discretionary Spending. The weakest aspect of the Ryan plan is that it does not actually balance the federal government budget. According to a preliminary CBO scoring of the plan, the federal government's budget deficit, which was 9% of GDP in 2010, would still be an enormous 2% of GDP in 2022. House Republicans could cut the budget much further by borrowing from Republican Senator Rand Paul's excellent budget plan. Among the largest items Senator Paul would cut are $78 billion by eliminating the Education Department and most of its functions, $53 billion by eliminating Housing and Urban Development and most of its functions, $44 billion by eliminating the Energy Department and most of its functions, and $43 billion from the Transportation Department, partly by defunding Amtrak.
2. Changing to Rollover Capital Gains Tax. The Ryan plan intends to end tax loopholes for the rich, but it misses the largest loophole of them all, the top 15% tax rate on capital gains. The problem is that income is fungible and can be converted from one form to another. For example, many corporations give their top executives stock option bonuses and then buy back their own stock (consuming their own capital) to drive up the price. Their executives sell the options at a profit, only having to pay a 15% tax on the capital gain, whereas they would have had to pay a 35% tax on a straightforward bonus.
Capital gains taxes are low for a good reason -- to prevent the government from removing income producing capital from the private sector. However, taxing capital gains at a rate lower than other income is taxed has a bad side effect -- encouraging the consumption of capital. The solution is simple: raise the capital gains tax rate to the same rate that other income is taxed, but switch to the rollover treatment, which only charges the capital gains tax when capital is consumed. When people sell one asset to buy another, the capital gains tax would be deferred until the new asset is sold (i.e., the capital gain would be rolled over into the new asset).
3. Switch Transportation to Compressed Natural Gas. New discoveries of natural gas show that the United States could become completely independent of foreign oil if we switched many of our vehicles from gasoline and diesel fuel to compressed natural gas (CNG). CNG is already much less expensive than gasoline and will become an even better buy in the future. The main problem preventing its use is the lack of CNG filling stations. This lack would be remedied quickly if all public vehicular transportation switched to CNG.
4. Add a Scaled Tariff, (our invention!) to balance trade with countries with which we are experience large chronic trade deficits. Such a tariff would apply to those countries with whom we have been experiencing chronic deficits, including China, Germany and Japan, but would not apply to countries such as Canada or Brazil, with whom our trade is balanced. Moreover, it would be perfectly legal under World Trade Organization (WTO) rules that allow countries experiencing chronic trade deficits to impose tariffs upon those countries with which they have trade deficits. When the U.S. trade deficit with a country would go up, the duty rate would go up. When the U.S. trade deficit with a country would go down, the duty rate would go down. When trade would approach balance or go into surplus, the duty would disappear.
If the U.S. enacted a scaled tariff, the Chinese government, which currently only lets its people buy 30¢ from the U.S. for every $1 we buy from them, would likely remove its barriers that prevent its people from buying more American products. Also, American and international businesses would once again find it profitable to build factories in America. An additional benefit is that the scaled tariff would collect well over $200 billion in revenue during its first year.
Conclusion
The Ryan plan is pro-growth. It cuts business tax rates, thus encouraging investment, and at the same time it encourages energy exploration. If the changes that we have suggested were added, it would completely balance the U.S. budget, greatly reduce transportation costs, and produce millions of good paying American manufacturing jobs. The resulting reduction in unemployment and increasing incomes would provide the greatest benefit possible to the poor and to all other Americans.
In contrast, President Obama's initiatives and regulations, heavily weighted toward alternative energy production, fall with greatest weight on low income families. The poor bear most of the costs through high energy prices, lost manufacturing jobs, and high unemployment.
The authors maintain a blog at www.idealtaxes.com, and co-authored the 2008 book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.
