Rep. Ryan's Common-Sense Budget

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Most people in Washington say that the federal deficit is an unsolvable problem. It's fortunate that Representative Paul Ryan, Republican chairman of the House Budget Committee, isn't from Washington. He's from Wisconsin, and the good folks in Wisconsin don't seem to know that federal deficit problems can't be solved.

Witness Chairman Ryan's new budget plan, which would reduce deficits below 3 percent of GDP by 2015. This is a revised version of one he published a year ago, one that most Republicans loved and Democrats denounced.

Ryan's committee approved the budget on Wednesday, and it will be considered on the House floor next week.

Ryan seeks to delineate profound philosophical differences between the GOP and the Democrats with a budget that seeks to reduce the size of government by shrinking federal spending in many areas, even in the politically combustible realm of health care. He would also lower top tax rates for individuals and corporations from 35 percent to 25 percent.

Where the Obama administration is talking about reducing military spending, Ryan would raise it. This, too, could be a watershed issue between the two parties.

In all, Ryan offers a fiscal roadmap, appropriately entitled "The Path to Prosperity," intended to address our ballooning spending and to underscore differences with Democrats. If embraced by many Republican candidates, it could make the November elections a genuine referendum on the direction of government.

The Ryan plan largely focuses on larger themes of reducing taxes and spending, leaving many details, especially on tax simplification, for later. It's clear that discretionary non-defense spending will have to be curtailed by large amounts to meet his stated goals. To accomplish this, he proposes:

Replacing automatic spending cuts in the 2011 Budget Control Act with a new cap that will maintain enforceable caps on spending through the next decade.

Removing automatic inflation increases from the budget baseline, so that spending does not keep up with inflation and "real" outlays fall over time.

Establishing a binding cap on total spending as a percentage of GDP. Ryan does not specify what that ratio would be, but other plans with the same goals mention 18 percent. In FY 2012, underway now, total government spending is expected to be about 24 percent of GDP.

Requiring any increase in mandatory spending, such as for health care benefits, or food stamps, which must be paid to eligible applicants, to be accompanied by a spending reduction of equal magnitude elsewhere.

Passing the Spending Control Act, introduced by California Republican Congressman John Campbell, that would place statutory caps on all categories of government spending, and also on the deficit.
In contrast to the large cuts that are proposed by President Obama in defense, Mr. Ryan would maintain military spending. His budget proposal allocates $554 billion for defense spending, $32 billion more than the President's proposal.

Total discretionary spending, military and other, under the Ryan plan is to be $38 billion lower than the President's. Simple arithmetic suggests that discretionary non-defense outlays, such as education, housing, national parks, highways, and health research, would have to be cut by $67 billion under the Ryan plan when compared to the President's.

To bolster the housing sector, Mr. Ryan proposes a bookkeeping change that could have large implications. He would bring the government-sponsored enterprises such as Fannie Mae and Freddie Mac "on budget." He would also change the Credit Reform Act to discourage the government from taking excessive risk when the Federal Housing Administration insures private mortgage loans.

Ryan also proposes transforming federal Medicaid and Food Stamps spending into block grants to states. That would enable states to craft programs more suited to their individual needs, and reduce the increase in costs to the federal government.

Ryan wants to shrink projected federal payments to the states for Medicaid by $810 million over 10 years. Though the details are not given, it seems plausible that some of these savings result from repeal of the 2010 Health Care Act, which greatly increased the scope of Medicaid.

This is the second year that Mr. Ryan has proposed his Medicare plan. His proposal, that Medicare be converted into payments to seniors to buy private health insurance, proposed a storm of opposition from Democrats and even some Republicans. Newt Gingrich famously called it right wing social engineering. But now it has been adopted by Republican presidential candidates Mitt Romney and Rick Santorum.

Ryan contemplates letting those who are 55 and younger in 2013 have an option to keep traditional Medicare or choose another government-approved plan when they retire. Traditional Medicare would have to compete with private insurers. Ryan would increase the support that is now offered to lowest income seniors.

As for eliminating deficits in Social Security old-age benefits, Ryan expresses support for the idea, endorsed by some Democrats and Republicans, for shrinking monthly benefits for people who had high incomes from work. Benefits could be shrunk outright or more of those benefits could be made subject to income tax than at present.

Income taxes: Rep. Ryan proposes a two-bracket tax table, 10 and 25 percent. To pay for this he proposes curtailing deductions and tax credits, but offers no specifics. Nor does he offer details about how he would broaden the corporate tax base as he drops the rate to 25 percent.

Ryan also proposes ending the much-reviled alternative minimum tax, which Congress has to modify each year lest it slam millions of taxpayers who would be unintended victims.

He does not directly address the present preferential 15 percent tax rates on capital gains and most corporate dividends, except to mention that a sudden rise in these taxes could "precipitate a flight of capital."

One of the possible "loopholes" that he seems intent to close is the deduction of employee provided healthcare plans. He also suggests medical liability reform to go in hand with this proposal. Ryan suggests that by enacting this reform healthcare costs will be shifted to consumers and that through these change consumers can more efficiently allocate their healthcare dollars, as the beneficiary of service is the payee.

Ryan would repeal the Dodd-Frank financial regulation act and the Patient Protection and Affordable Care Act of 2010, Obama's signature legislative achievements. He would also repeal the Medicare tax surcharges that were included in the 2010 Health Care Act, specifically 3.8 percent for investment income and 0.9 percent on earned incomes for joint filers over $250,000.

On Wednesday, Ryan said, "Ryan said, "Elected representatives have a solemn obligation to help ensure that our children have more opportunity and inherit a stronger America than our parents gave us."

A year from now, with a new set of elected representatives and a new president, this plan might be the centerpiece of a new, Republican administration.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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