Having touched the third rail of American politics last year — proposed cuts to entitlements like Medicare — and lived to fight another day, Representative Paul Ryan was back this week with a revised Republican budget proposal and another storm of criticism. His budget “slashes the safety net to pay for tax cuts mostly for wealthy Americans“(a column in The Washington Post); is one in which “the rich pay less in taxes than the unfairly low rates they pay now” (an editorial in The New York Times); and “would shower the wealthiest few Americans with an average tax cut of at least $150,000” (the White House).
Some preferences would be eliminated under Paul Ryan's tax plan. It is unclear which ones.
As I worked on my own taxes this week and realized I may be paying even more than I did last year, when I paid 24 percent of my adjusted gross income in federal income tax and 37 percent in combined federal and state — more, as I’ve reported, than the average 18 percent paid by the top 400 taxpayers earning an average of $270 million a year — I found it hard to believe anyone would seriously propose cutting the already-low tax rates of the ultrawealthy. With multimillionaires like Mitt Romney paying just 13.9 percent of his $21.7 million of adjusted gross income in federal tax, how much lower can their rates go?
So I turned to Mr. Ryan’s “Path to Prosperity” and its proposal for tax reform: “The tax code is patently unfair: many of the deductions and preferences in the system — which serve to narrow the tax base — were lobbied for and are mainly used by a relatively small group of mostly higher-income individuals.” These tax preferences amount to $1 trillion a year, the proposal states, and “these tax preferences are disproportionately used by upper-income individuals. ...There’s nothing fair about that.”
This is a conservative Republican document intended to cut taxes on the wealthy? To me it sounds like a proposal to raise their taxes by depriving them of cherished “loopholes,” to use the proposal’s word.
Mr. Ryan wants two simple tax rates: 25 percent for higher incomes and 10 percent for lower incomes. He wants to abolish the alternative minimum tax, which has hit an ever-growing number of middle-class taxpayers, especially in high-tax states like New York and California. He wants the results to be revenue-neutral.
But there’s no getting around the fact that a 25 percent rate on the top earners would nearly double Mr. Romney’s effective rate and more than double it for the 101 of the top 400 taxpayers who pay less than 10 percent, assuming the loopholes are indeed closed. (The White House calculation that the Ryan plan would result in a tax cut for the wealthy assumes they won’t be.) A top rate of 25 percent may sound like a cut from current higher rates, but so few wealthy taxpayers pay the top rate that it would be a significant increase for many of them.
I caught up with Mr. Ryan this week as he was on his way to a vote on the House floor. “All I’m saying is, let’s have a fair, simple and competitive system. Let’s get beyond the rhetoric of class division,” Mr. Ryan told me. “The fact is that nearly all the loopholes and tax shelters benefit the top bracket taxpayers. For every dollar you park in a tax shelter, that dollar is taxed at zero. You take away the shelters, and we can have a lower rate for everybody. It’s really that simple. As for fairness, under the current system you can have two people living next door to each other with the same income paying a dramatically different tax rate. There’s something fundamentally wrong with that and we’ve got to fix it.”
Of course, one man’s loophole or shelter is another’s beneficial social policy. Just what those policies should be, and which of the current tax breaks would have to be sacrificed to pay for them, remains to be decided.
But Mr. Ryan said he believed everything should be on the table, even some of the Republicans’ most cherished tax breaks. “What we need is to get the country behind the principle first, which is to lower rates by broadening the tax base, then proceed to do it,” he said. “We need hearings in the light of day, with no back-room dealings. If we can’t afford certain policies, or if we can’t afford to retain certain tax breaks, then let’s have an open debate about it. But let’s do first things first. You can’t go out there with a detailed formula until there’s a consensus that we need to broaden the base and reduce rates.”
Despite Mr. Ryan’s reluctance to specify which tax preferences might have to be curtailed or eliminated, there’s no mystery as to what they would have to be. Looking only at the returns of the top 400 taxpayers, the biggest loophole they exploit by far is the preferential tax rate on capital gains, carried interest and dividend income. The top 400 taxpayers account for over 10 percent of all capital gains and nearly 5 percent of all dividend income reported by individual taxpayers.
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