Media Briefing: The Ryan Budget’s Radical Priorities
Robert Greenstein:
Good afternoon everyone. In late January, Congressman Paul Ryan, the ranking Republican on the House Budget Committee, issued a sweeping proposal known as the “Roadmap For America’s Future” that would overhaul both the tax code and the nation’s biggest social programs. And it has been touted as one that restores fiscal responsibility. Today we’re releasing a major analysis of The Roadmap. This analysis is based on work by the Congressional Budget Office, an extensive new analysis of the Ryan plan’s tax provisions by the Urban Institute Brookings Tax Policy Center, and analyses of the social security provisions of an earlier version of the plan, by the Social Security Actuary. The Center’s team that conducted the analysis was led by Paul Van de Water and Jim Horney, both former Senior CBO officials who are now here at the Center on Budget and are among the city’s leading policy experts.
I’m going to note some of the highlights of their findings and then turn this over to Paul Van de Water for a further discussion of the findings, and then of course we’ll go to your questions.
Let me start by saying that the findings on the Ryan plan are amazing. The plan is promoted as restoring fiscal responsibility but it turns out that it would actually provide the biggest tax cuts for the wealthy in our nation’s history. And since, as the Tax Policy Center analysis shows, the plan raises taxes for the middle class, and since it contains cuts of stunning depth in Medicaid, Medicare, and Social Security, the net result of the plan as a whole would be the largest transfer of income from ordinary Americans to the wealthy that has been legislated ever in U.S. history. Now, let me assure you – I am not being overly dramatic or hyperbolic here. As Paul will shortly explain, the plan slashes tax rates at the top and cuts or eliminates virtually every major tax that affects high-income Americans, while imposing a new consumption tax that would be regressive. The plan would also privatize a substantial portion of Social Security, reduce Social Security benefits, end traditional Medicare and most of Medicaid, terminate the children’s health insurance program, and replace these health programs with a system of vouchers whose value would erode over time and that thus would purchase health insurance that would cover fewer and fewer health services as the years went by.
Regarding the plans tax changes. Here’s some of what the Tax Policy Center found would do – as compared to continuing current tax policies. The Tax Policy Center reports that the plan would cut the taxes that the richest 1% of Americans pay in half. And the higher up the income scale one goes, the more massive the tax cuts would be. Households with incomes of more than a million dollars a year would receive an average annual tax cut of $500,000. And the richest 1/10th of 1% of Americans, those with incomes above about 3 million dollars a year would receive an average annual tax cut of $1.7 million, and all of these tax cuts would be on top of those, that high income households would get for making the Bush tax cuts permanent. Meanwhile, the Tax Policy Center analysis also finds that Americans with incomes between $20,000 a year and $200,000, that’s about three quarters of the country, would face tax increases. The plan would shift tax burdens so massively from the wealthy to the middle class, that and I think this is really, truly remarkable, the Tax Policy Center reports that people with incomes over $1 million a year would pay much smaller percentages of their income in federal taxes than ordinary Americans would.
The plans tax cuts for the affluent are so big, that even with the large benefit cuts, the plan would make (Medicare, Medicaid, Social Security, and the middle class tax increases) the plan would fail to put the economy on a stable course for decades. We estimate the federal debt would soar under this plan to about 175% of the GDP, by mid-century.
Now, this brings us to an area where there’s been some confusion. Some have said that the Congressional Budget Office has found that the Ryan plan would be fiscally responsible. Those assertions are not accurate. They reflect misunderstanding of what CBO actually said. CBO did not prepare a cost estimate of the Ryan plan and it analyzed only part of the plan. In particular, CBO hasn’t estimated the cost of the plan’s tax cuts – that’s not something CBO does. The Joint Tax Committee – not CBO – does estimates of tax legislation and the Joint Tax Committee has not analyzed the Ryan Plan. As CBO clearly noted in the reported issue of the Ryan plan, instead of estimating the cost of the tax cuts, CBO simply plugged in an assumption that Ryan’s staff gave it and specified it should use, which assumed that revenue levels through 2030 would be the same as under a continuation of current policies. Now, with the release of the Tax Policy Center analysis, we finally do have a cost estimate of the Ryan tax changes and it shows that the assumption that the Ryan staff specified CBO to use, was far off-base. The plan indeed cuts revenues far below current policies, and historical levels. The reason here is clear: the tax cuts for the wealthy dwarf the tax increases for the middle class, and as a result of the large revenue of losses the Ryan plan would allow the federal debt to continue growing for decades to come, despite its deep cuts in Medicare, Medicaid, and Social Security.
Finally, a few points related to Social Security that further relate to this question of how the plan rates in the area of fiscal responsibility. The plan has large cuts in Social Security benefits. But, it diverts all of the savings from the benefit cuts to fund private accounts, rather than to restore Social Security solvency. As a result, the plan leaves Social Security with a deep financial hole which it fills by transferring $4.9 trillion over 60 years from the rest of the budget to Social Security. Now, let me be clear this transfer exceeds what it would take to make Social Security solvent for the next 75 years if policy makers were irresponsible, refused to make any changes in Social Security, and simply transferred enough money for the rest of the budget to fill the hole. The transfer under the Ryan plan is even bigger than that because it diverts so much money to private accounts that it actually makes Social Security’s hole larger.
Lastly, in order to entice people, especially affluent people, to go for the private accounts, the Ryan plan would require the federal government to guarantee the performance of the private accounts. It would require the treasury to fill in any losses that occurred when the stock market fell, triggering what could be massive bail out costs. Those bail out costs, like the costs of the plan’s large tax cuts, are not reflected in the CBO estimates that Representative Ryan and others have incorrectly cited as touting the plan’s fiscal responsibility.
Paul Van de Water:
Bob Greenstein has provided an overview of our analysis of Ryan’s budget proposal. I will provide more detail in four key areas: First, how the plan would alter the distribution of the tax burden; second, how it would affect the federal budget picture in coming decades; third, what it would do to health coverage; and, fourth, what it would do to Social Security.
Turning first to the distribution of the tax burden. Most of the major components of Ryan’s tax proposals tend to shift the tax burden from those with high incomes to the middle class.
1. Ryan would cut the top marginal income tax rate to 25 percent from its current level of 35 percent.
2. Ryan’s plan would entirely exempt capital gains, dividends, and interest from taxation. Since these types of income accrue primarily to high-income people, this change will also provide the greatest benefit to those at the top.
3. Ryan would eliminate the corporate income tax. Much of its burden also falls on capital income, so this change, too, would primarily help the wealthy.
4. Ryan’s plan would repeal the estate tax.
5. To make up some of the lost revenue, Ryan would impose an 8.5 percent value-added tax, a form of sales tax on most goods and services. Since low-income people consume virtually all of their income but wealthy people do not, this tax change, too, imposes the highest burden on those with the lowest incomes.
Each of these tax changes is, by itself, regressive, and Ryan’s tax package as a whole is highly regressive. But the actual numbers from the Tax Policy Center are mind-boggling. Here are just a few. And, all these estimates compare the Ryan plan to current tax policy, which assumes a continuation of the 2001 and 2003 Bush tax cuts.
- As Bob has said, the vast bulk of taxpayers—the nearly three-quarters of the population with incomes between $20,000 and $200,000—would see their total federal taxes go up.
- For example, people with incomes between $40,000 and $50,000 would see their taxes rise by an average of almost $800, or 10 percent.
- In sharp contrast, those with the highest incomes would get huge tax cuts. People with income over $1,000,000 would get a tax cut of $500,000.
- Those in the top one-tenth of 1 percent—those with incomes of about $3 million or more—would get a tax cut of $1.7 million.
Now to my second question: What happens to total federal revenues? Answer: They go down sharply. The Tax Policy Center has produced estimates. And they show that the Ryan tax plan would reduce revenues sharply compared to current policy. Over the next 10 years alone, the Ryan plan would produce almost $4 trillion less in revenues than CBO assumed, following the specifications of Rep. Ryan’s staff.
We at the Center on Budget have prepared deficit projections for the Ryan plan using the actual TPC revenue estimates. The TPC estimates extend only through 2020, and we have projected them for later decades. Using real revenue projections, the Center estimates that the debt under Ryan’s policies would soar to over 175 percent of GDP by 2050.
This is not a path to fiscal responsibility. Most fiscal policy analysts recommend that the debt-to-GDP ratio be stabilized within the next ten years, and at a far lower level. The Ryan plan doesn’t even come close to that goal.
Now to my third topic: The effect of the Ryan plan on health coverage. In short, Ryan would eliminate or undercut all the major existing arrangements for providing health coverage in this country. It would eliminate the tax exclusion for employer-sponsored health insurance coverage. It would end traditional Medicare. And it would abolish most of Medicaid and all of the Children’s Health Insurance Program. Each of these arrangements would be replaced, under the Ryan plan, with a tax credit or voucher to help people buy health insurance in the private market.
Now, there’s nothing inherently wrong with using tax credits or vouchers to help people buy health insurance. In fact, tax credits form part of the health reform bills passed by the House and Senate. But any arrangement involving tax credits or vouchers for health insurance has to reform the insurance market in ways that will assure that health insurance will actually be available and affordable.
That’s where the Ryan plan falls down. The Ryan plan would sharply reduce or eliminate all of the current insurance arrangements that spread health risk by pooling healthy and less-health people together on a large scale. And it would do so without creating viable new pooling arrangements. Most Americans—including the poor and the elderly—would be left to purchase insurance on their own with a voucher or tax credit in an insurance market that would be largely unreformed. In particular, insurance companies could continue to charge people much higher premiums based on their age, gender, or health status. Thus, older and sicker people could be priced out of the market under the Ryan plan.
Low-income seniors and families with children would be particularly hard hit. Many of these people, who today are eligible for Medicaid, are in poor health or have special health care needs. They could end up uninsured if they were unable to obtain coverage in the private market, while those who found coverage would face more limited benefits and higher out-of-pocket costs than under Medicaid.
Another problem with Ryan’s health proposals is that the value of the health insurance vouchers would, by design, fall further behind the cost of health care with each passing year, so they would purchase less and less health coverage as time goes by. For example, by 2040, projected spending for Medicare vouchers under the Ryan proposal would be more than one-third less than projected spending for today’s Medicare. In other words, by 2040, the vouchers that would replace Medicare would receive less than two-thirds of the resources that Medicare otherwise would use. In later years, the reductions would be much deeper.
Like vouchers, cuts in the growth of Medicare spending and in tax subsidies for health insurance are not necessarily a bad thing. In fact, slowing their growth will be essential putting our fiscal house in order. Still another problem with the Ryan plan, however, is that it largely lacks the kinds of provisions in the Senate- and House-passed health reform bills that are designed to slow health care cost growth by pushing health care providers to become more efficient and economical. Under the Ryan plan, the burden of reducing health care spending would fall primarily on consumers, who would face steadily rising health care costs with a steadily diminishing amount of health insurance.
Fourth, and in conclusion, let me talk about Social Security. The Ryan plan proposes two major changes to Social Security that would cut future benefits compared to those under current law. Some reductions in Social Security benefits are likely to be necessary in any plan to make Social Security solvent, but there are two big problems with the Ryan plan.
1. The Ryan plan isn’t balanced. The Greenspan Commission in 1983 proposed a mix of benefit reductions and tax increases. The Ryan plan, in contrast, only cuts benefits. It neither raises the payroll tax rate nor increases the limit on the amount of earnings subject to the tax.
2. The Ryan plan diverts all of the savings from cutting Social Security benefits into new private accounts. As a result, it requires massive transfers of general revenues to keep Social Security solvent. These transfers are so large that they exceed the transfers that would be needed to restore Social Security solvency over the next 75 years without any changes in the program.
As became clear in the debate over President Bush’s proposal to privatize Social Security in 2005, privatization has nothing to do with improving Social Security solvency. In fact, by diverting funds that would otherwise go into the traditional system, privatizing makes Social Security solvency worse. That lesson is just as true today as it was in 2005.
Since 2005, however, we’ve learned some additional things. We’ve seen the importance of having some portion of retirement income that isn’t linked to the performance of the stock market. Stock prices have slipped, putting a huge dent in IRAs and 401(k)s. Interest rates are at record lows, so that even the most conservative investors have seen big drops in their incomes. And businesses and governments have continued to cut back on the availability of traditional, guaranteed pension plans. Against this background, Social Security provides the only source of retirement income that not only doesn’t fall but is guaranteed to keep pace with inflation.
In response to these concerns, the Ryan plan would require the federal government to guarantee the performance of the proposed private accounts. Individuals who diverted a portion of their payroll taxes to private accounts would be promised that they would receive back in retirement at least as much as they contributed, plus an allowance for inflation. In essence, the federal government would provide them a guarantee against losses in the stock market. This guarantee could require a massive federal bailout of private accounts when the stock market performs poorly. This proposed guarantee is just one more reason why claims for the Ryan plan’s fiscal soundness are largely undeserved.
Now, let me turn things back to Bob.
Robert Greenstein:
Let me just note one other interesting fact. When CBO looked at the expenditure side of Ryan, as distinguished from the tax side, it estimated that the Ryan plan would shrink total federal expenditures other than interest payments, from roughly 19% of GDP in recent years to 13.8% of GDP by 2080. Federal spending hasn’t been at that low a level of GDP since 1950, when Medicare and Medicaid did not exist, Social Security failed to cover many workers, and close to half of the American people in the U.S. lived in poverty.