Tuesday, April 12, 2011

Republicans Propose Massive Tax Increases on All Non-Millionaires, Hope Nobody Notices

In a rare post about the politics of the day (regular readers will note that I usually stick to broader economic and political themes rather than discussing the political story du jour), I want to take a few moments to talk about the current federal budget-making process, since I think it might have long-lasting implications.

Before I get into the heart of the matter, I just want to say that as a D.C. resident AND a federal employee, I am seriously pissed that the Democrats traded away my rights as a D.C. resident just to get a deal with the Republicans to prevent the government from shutting down last week and pass a FY 2011 budget. The Dems should have shut the government down, and I would have been happy to go without a paycheck for a few days / a couple of weeks, rather than see a further erosion of the rights of the already second-class U.S. citizens who live in D.C.

That issue is largely separate from the FY 2012 budget, however, which (together with the debt ceiling) will probably be the center of attention for the next few months in Washington.

Obama laid out his FY 2012 proposal back in January - the entire document is available online, though for a quick analysis, I don't think you can beat the NYTimes' interactive infographic that shows the percent changes for all the various departments from FY 2010 levels, allows you to isolate discretionary and mandatory spending, and highlights areas that Obama proposes to increase or decrease dramatically:

Click for large, interactive version at NYTimes.com.

Up until now, the entire fight has been about discretionary spending. Here's the same infographic, with only the discretionary areas highlighted:

Obviously, the largest chunk of discretionary spending is defense-related - if take away the gigantic square that is defense spending, you're only left with about 15% of the federal budget. Seeing as how the U.S. government borrows about 40% of what it currently spends, you obviously can't balance the budget by only cutting non-defense discretionary spending, particularly since I don't think there's much left in non-defense discretionary spending to cut, unless you want to stop investing in transportation, education, and basic research completely.

So, to start decreasing the deficit in any meaningful way, you have to increase revenue (i.e. taxes) and/or decrease defense spending, Social Security, and/or Medicare/Medicaid. Obama's FY 2012 budget proposes modest tax increases (i.e. letting the Bush tax cuts expire) for households making over $200,000/year, as well as increased revenue from coal, oil, and gas producers.

A week ago or so, Paul Ryan (R-WI), chairman of the House Budget Committee, released the Republican's FY 2012 budget proposal, and it's since been impossible to read a single newspaper, news website, or blog without seeing at least a dozen posts about Ryan's proposal. I'll link to what I think is some of the best analysis of Ryan's plan at the end of this post, but I want to focus on what I put in my headline:

The Ryan plan (i.e. the Republicans' budget proposal for FY 2012) would raise taxes on all non-millionaires (lower class, middle class, and non-rich elderly), in order to give a big tax break to corporations and the rich.

"Wow," you say, "that's a strange agenda to pursue - how can they hope to sell that to the U.S. public?"

Well, the Republicans are simply hoping that nobody notices. So what's going on here?

First off, the Republicans are making blatantly phony economic assumptions about how America is going to grow in the next decade - every serious economist, conservative and liberal, who has looked at the numbers in the proposal thinks that the numbers are laughably, ridiculously optimistic. For example, they estimate that the U.S. unemployment rate will be 2.8% in 2020 under this budget. The unemployment rate in the U.S. hasn't been that low since the early 1950s, and most economists put the absolute floor for the U.S. unemployment rate at somewhere between 4.5 and 6.5 percent, so unless the Republicans are planning on another World War and post-World War boom (which I suppose they might be), there's nothing to suggest that the U.S. will achieve this level of growth.

It's perhaps useful to remember that the Republicans had similarly optimistic (and just as made-up) numbers to justify the Bush tax cuts, which were supposed to pay for themselves by setting off an unprecedented economic boom in the U.S. Let's check out their predictions v. reality as it happened, shall we?

Can we please stop pretending that supply-side economics has any basis in reality?

But, Ryan's made-up numbers in this plan allows him to say that the government is going to get more money in taxes, since everyone's going to be richer and employed.

Second, the Ryan plan proposes to:
  • keep the Bush tax cuts, and further decrease the top marginal tax rate on the wealthiest Americans from 35% to 25% (read: tax cut for the rich);
  • consolidate the number of tax brackets (read: tax increase for the poor and middle class);
  • keep overall revenue levels the same (read: have to get more money from poor and middle class to pay for tax cuts for the rich);
  • pay for the tax cut at the top by eliminating some unspecified tax expenditures (read: weasel-phrase so they can pretend to do something other than raise taxes on the poor and middle class).
It doesn't take a rocket scientist to see that, if you massively cut taxes for the richest Americans by another 30% and keep revenues the same, then you're going to replace that lost revenue by massively increasing taxes on the poor and middle class.

So, yes, the Republican budget plan calls for a massive tax increase on the poor and middle class in order to pay for additional tax cuts for the richest.

Ryan's avoids utter fiscal catastrophe by gutting Medicare and Medicaid (and shifting much of the cost from the government to seniors), which produces all of the savings in the plan's outer years - another way of raising taxes on the poor and elderly. In fact, fully two-thirds of Ryan's proposed budget cuts fall on the poor and elderly. Furthermore, it's hard to believe that a future Congress wouldn't undo the proposed Medicare austerity when voters start complaining in 10 years or so, reversing the only part of Ryan's plan that would save any real money.

That's it for me on the Ryan plan / the Republicans' FY 2012 budget, and I hope not to have to blog about it again, since I hope that people will soon come to realize what it actually contains - huge tax increases for the poor, middle class, and elderly to pay for huge tax cuts for corporations and the rich. I hope we can stop talking about this unfair, unrealistic plan and talk about balancing the budget in a way that doesn't cause irreparable harm to the most vulnerable Americans among us.

Below is the best of the rest when it comes to commentary on Ryan's plan over the past week or so:

James Fallows points out a number of reasons why Ryan's plan is neither brave nor serious, as many pundits and Republicans are claiming. Most importantly, the plan says nothing about military spending, and while it (correctly) identifies health care costs as the main problem in increasing public spending, it entirely avoids the question of how to contain rising health care costs.

Lawrence Lewis dissects what Ryan's plan shows about Republican values: namely, that they don't really care about deficits, just that they care about class warfare in favor of the rich over the poor and middle class. ThinkProgress also thinks that the Republicans don't really care about deficits. ThinkProgress also points out that while services for Main Street are being slashed and the median family is paying more in taxes than they have in 50 years, the richest 400 taxpayers are paying the lowest level of taxes they've paid since the Great Depression:

Even NYTimes conservative columnist Ross Douthat think that the poor bear too much of the economic pain doled out by the Ryan plan.

Karl Smith muses that the Ryan plan is implicitly proposing a repeal of all U.S. immigration restrictions, as that is the only way to make Ryan's projected numbers fit a possible future.

Paul Krugman finds the plan both ludicrous (for the made-up numbers referenced above) and cruel, since 2/3's of Ryan's proposed spending cuts fall on the backs of the poorest Americans.

Andrew Sullivan think that Ryan's plan's biggest problem is that it is deeply, profoundly unfair:

Ezra Klein has lots of thoughts on Ryan's plan. I'll highlight Klein's comments that 1) seniors would pay much, much more for their healthcare under Ryan's plan even as healthcare becomes more expensive overall - it both increases overall healthcare costs and shifts more of those costs to seniors, making healthcare unaffordable for many; and 2) the plan is extremely regressive, doling the most harm out to the most vulnerable Americans.

In separate blog posts, Krugman also points out that, as pointed out above, the Republicans' unemployment projections are ridiculous, and that the Republicans assume two impossible things: 1) that U.S. government spending on healthcare will decrease as a percentage of GDP while the population both grows and ages, and 2) that U.S. discretionary spending (which includes all defense spending) will fall from 12% of GDP today to 6% of GDP by 2022, even as we maintain the ability to wage multiple wars at once.

Kevin Drum points out that the biggest winners under the current system are current retirees, who receive far more in Medicare benefits than they paid into Medicare, and he wonders why Ryan isn't asking current retirees to share some of the pain.

Ezra Klein points out the budget is already balanced, if we do nothing - but we're not going to do nothing, since that would involve allowing all the Bush tax cuts to expire, and even Obama wants to extend them for American households earning less than $200,000/year.

Michael Linden also sees a hidden middle class tax hike.

TPM reports that even Ronald Reagan's old OMB director thinks the Ryan plan is a joke: "It is simply unrealistic to say that raising revenue isn't part of the solution. It's a measure of how far off the deep end Republicans have gone with this religious catechism about taxes." He approves of Ryan's entitlement proposals but breaks faith over taxes and the GOP's unwillingness to slash defense spending. And he laughs off the notion that the plan will do anything about unemployment, let alone dramatically reduce it, which Ryan and his plan claim it will.

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