Issue 27 Paul Ryan plan part 2 march,6,2013

Shorter than the previous part 1, this one deals with taxation.

The Ryan Budget Part 2: Taxes and the Budget

            One of the key parts of the Paul Ryan budget plan is his total overhaul of the Federal tax code and how those tax dollars are spent. Ryan’s goal with the tax system is to simplify the system to make it less of a burden on Americans and American business while expanding the tax base for a larger amount of money to be collected.  While it sounds contradictory, Ryan’s plan achieves simplification, expansion of funding and lower taxes all in one.  With the addition of Ryan’s budget control measures Ryan’s goal is to reduce the burden of government on the people while paying for all of governments functions.

            For the individual, Ryan offers a choice.  You can keep using the current tax code or use his, depending on which is better for your financial situation.  Ryan’s version is a 10% rate on adjusted gross income (AGI) up to $50,000 for single filers and $100,000 for couples, with anything exceeding those amounts taxed at 25%.  Taxable income (which is your AGI) is your gross earnings minus a standard deduction of $12,500 for single filers ($25,000 for couples) and a personal exemption of $3,500 which would apply in either case.  This tax system is much simpler than the 6 tax brackets, hundreds of deductions, credits and loopholes in our unintelligible tax code we have now.  The tax rates in Ryan’s plan are adjusted each year by a cost of living adjustment which is measured by increases in the consumer price index.  Also, the only deduction will be the health care refundable tax credit which is $2,300 for individuals and $5,700 for couples.  With such a simple tax code, your tax form is the size of a post card.  You’ll never need turbo tax again.

            Additionally, the Alternative Minimum tax (AMT), which was originally designed to tax the rich but now hurts the middle class, is eliminated.  All forms of double taxation are also eliminated such as taxes on capitol gains, dividends and other investment taxes.  It has already been shown that taxes on investments slow economic growth and that when scaled back like under the Kennedy administration and the Reagan administration job growth expands rapidly.  Imagine America without such economically debilitating taxes.  The estate tax (death tax) is also repealed.  This tax is a tax on your inheritance from your now dead family members which has caused some people to go bankrupt and mainly hurts small business owners who want to pass on their work to their next of kin.  Not only is its elimination great economically but it ends an immoral tax which leaves grieving families footing the tax bill. 

            If by your calculations, you’ll be paying more taxes under the Ryan tax code, don’t worry for the older clunky system will still be there if you choose to stay with the existing code.  Within the first ten years of the enactment of Ryan’s tax plan you may choose the new system or the old system with one additional change over permitted within your lifetime.  Also, you may change over to either tax code when a major life event occurs changing your tax status such as death, marriage, or divorce.  This ensures no one can game the system while allowing you to choose the tax code that best fits your financial situation.   

                   To ensure competitiveness in the world market, taxes on businesses are completely overhauled.  The current code taxes businesses at 39% which is one of the highest corporate income tax rates in the world.  Ryan replaces this tax with a business consumption tax (BCT) with a rate of 8.5%.  Under the BCT a businesses taxable income is total sales minus total purchases the business makes.  For example, a furniture store buys a couch for $100 from the manufacturer, when sold for 125 the cost of the business to buy the couch is subtracted from the purchase price at sale.  So the $125 minus the $100 is $25, and thus that $25 is taxed at 8.5%.  The tax is collected quarterly and is easier to pay as it does not require any special forms, or records, just the existing buying and selling records.  Also, business investments are expensed immediately rather than the current system allowing a portion to be expensed each year.  In addition, there will be no taxes on exporting good, something other countries have already stopped doing and will allowing for business to finally compete on a more level playing field globally. Ryan even accounts for issues with transitioning to the new system and thus includes some form of relief measure. With business investments not taxed, no export taxes and a new low tax rate America will become a source for future investment.

            You may be worried that the personal income taxes and the business tax rate will rise due to the usual governmental ineptitude.  Well fear not as Congressman Ryan’s budgetary reforms account for that.  For one, the total amount of taxes (personal income and business taxes) the government may take in is limited to 19% of the Gross Domestic Product (GDP).  This cap on spending limits how much the government may collect in proportion to economic progress.  In addition, Ryan’s reform accounts for issues in the budget process itself by finally allowing entitlement programs (like Social Security) and other forms of automatic spending to be reviewed so as to be rid of bad portions of the programs, allow essential functions to be reformed and even make trade offs between mandatory and discretionary expenditures.  This also means changing how government sending’s impact is measured. Currently the base line measure that is used projects entitlement growth beyond what is capable of being funded, and if the growth is slowed then the base line measuring system labels it a spending cut.  Then Congress gets creative by using revenue and/or spending “gimmicks” to off set the real costs, hiding the long term impact of the spending itself. 

            To ensure the spending cap is maintained the plan calls for the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) to make annual projections in comparison to the spending limit.  Also in the plan, a comprehensive review on the long-term budget outlook will be held every 5 years.  If spending exceeds the mandated limit and Congress fails to act during the review an automatic cut of 1% to all of the fastest growing programs as determined by the OMB will occur.  This is all in an effort to bring spending under control, but if the reduction fails then the reduction will occur again the following year.  Therefore Congress has a one year window to get its finances strait.  In order to make sure Congress does not just raise the 19% GDP cap and increase taxes, a 3/5ths super majority vote will be required in both the House and the Senate.  To sum up, Ryan wants transparency in the budget process and to make Congress do their job rather than find ways to dodge the issues.

            Overall, the business tax reform and the budget reform are probably the most essential reforms here.  The business tax makes the United States competitive globally and is much simpler than the current code.  As to budget reform, Ryan wants to ensure that entitlements and the obligations that our government has are taken care of properly.  In other words, if you’re on Social Security, you should have nothing to worry about.  I do criticize the personal income tax however, as a single flat tax rate is much more effective and hurts the poor less than the two tier system of Ryan’s plan or even the 6 tier system of the current code.  But I do like its simplicity, and is thus tolerable in that respect.  Also, it try’s to mitigate the impact on people with lower incomes transitioning to a higher tax bracket through the deductions.  The elimination of all forms of double taxation also helps as it makes the U.S. competitive as all other countries tax investment.  In addition, the 19% GDP cap on taxes/spending will force Congress to pass all essential spending first, before trying to sneak in their pet projects.  With the 3/5ths majority vote in place we will not have to worry about higher tax rates for a long time coming, while the auto 1% reduction in fast growing programs if Congress fails to maintain the cap ensures that the budget will be much more carefully looked at.  Overall, as an American I approve.

Update: With the sequester kicking in, Paul Ryan has proposed giving the President power to decide which cuts will go through.  Also, Ryan has proposed the elimination of several government departments (not disclosed as of yet) and going for a 17% flat tax as opposed to his 2 tier flat tax I described in my essay. Tax wise, the middle class and the rich will see a major drop in taxation while the poor will see a minor increase.  In addition, giving the President the responsibility and flexibility to cut what is necessary ensures only what is unnecessary and unneeded in the budget is cut (and it's the Presidents fault if something goes wrong).

Tomorrow is the final part and it is as long as part 1....but it is an important read.