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Let the tax policy debate begin!

COMMENTARY | April 27, 2011

David Cay Johnston writes that, stripped of its flim-flam, the Republican tax plan steals from the poor and gives to the rich -- and makes a good starting point for a serious public conversation about how we distribute the burden of civilization.

By David Cay Johnston

Thank goodness for House Budget Committee Chair Paul Ryan, R-Wis.

Because of the budget plan put forward by the Wisconsin Republican, we are finally going to have a tax policy debate that everyday Americans can understand.

Unlike all those wonky details in most proposals that make millions of eyes glaze over, the Ryan plan can be reduced to terms that most Americans can grasp. All but four House Republicans embraced a form of Ryan's vision in a vote this month, so the plan is a reliable description of what the party's elected leaders in Washington identify as the major problem facing our economy, their solution, and how they would pay for it.

The problem: The rich do not have nearly enough.

The solution: Cut by half the taxes of the top 1 percent.

The financing: Take from the poor, the disabled, the sick, and children and raise income taxes on the two out of three Americans who make between $20,000 and $200,000.

Ryan's plan states as fact that the Congressional Budget Office has determined that the plan will cut the federal deficit, when that is not true. The CBO said the plan would cut the deficit assuming it brings in the promised 19 percent of GDP as federal tax revenue, but on further review the CBO found that the plan falls short on the revenue side by deficit-bulging sums.

Because Ryan has not corrected his plan or acknowledged that the CBO's full report disproves his claims, his proposal is neither wishful thinking nor fuzzy math, but outright deception.

Readers of this column know that I have been documenting the ways that Republicans and some Democrats are pushing the burden of government down the income ladder, using the expansion of lotteries, myriad tax favors for corporations, and a reduction of money to audit the most calculated and determined tax cheats. This is a rich vein of tax policy hardly mined.

There are subtle distributional analysis tricks in the Ryan plan to disguise and minimize this effect, which is similar in many ways to the plan by the National Commission on Fiscal Responsibility and Reform (Bowles-Simpson plan). The tricks make the plan's burdens on those down the income ladder seem less harsh than they are.

John Buckley, recently departed from the House Ways and Means minority staff to become a professor at Georgetown Law, reminds us that "the Bowles-Simpson plan looks progressive only because they include capital gains taxes that those at the top will not actually pay" because three-fourths of capital gains go unrealized or unrecognized by the tax system.

The Ryan plan moves the de facto policy of tax relief for the rich and heavier burdens for those with less to a whole new level, one driven by Ryan's deep regard for the novelist Ayn Rand.

A victim of Soviet oppression, Rand taught that human altruism is evil and that only those able to do everything on their own deserve love. Her most famous fictional hero, Howard Roark in The Fountainhead, is an architect who blows up someone else's building because it offended his ego: Ryan requires his staff to read Rand, whose views he said in a campaign video America needs to adopt. Rand's hatred of taxes infuses the Ryan plan.

Here is what Ryan would do:

  • cut the 35 percent earned income tax rate paid by the top 1 percent of earners to 25 percent, which is a 29 percent reduction from their marginal rate today, a 37 percent reduction from the Clinton era, and a 64 percent cut from 1980;
  • eliminate taxes on dividends, interest, and capital gains, which should encourage more savings but is also a huge boon to the already rich;
  • eliminate the estate tax, much of which is collected from gains that have never been taxed;
  • presumably eliminate the gift tax, put in place nearly nine decades ago by Republicans who understood how it was needed to backstop the income tax; and
  • reduce the corporate income tax rate from 35 to 25 percent in the budget resolution and eliminate it in his plan.

Ryan's plan and the recently passed budget resolution differ some, but the plan is clearly the goal Ryan wants to reach.

The full Ryan plan is a modern version of the Forest Law, a cruel tax on the rural poor who lived amid the abundance of the British woodlands but were punished for gathering fallen limbs for fuel or acorns for mash.

Ryan's plan would not resurrect King William II's practice of blinding 11th-century peasants who disturbed his deer and chopping off the hands of those who killed a deer to feed their families (a backward set of penalties that might shock even Draco).

Instead, the Ryan plan says to those under 54 that when you are old, you will get a fixed sum from Medicare to pay for your healthcare -- a voucher that you can use to buy insurance in the market.

Why would any insurance company want to sell policies to a population whose health must worsen over time and become ever more costly? No problem, Ryan said. The market will cure all. File that under TAX POLICY/thinking, magical.

And if the cost of healthcare exceeds the value of the voucher? No problem there either, Ryan says. Just pay the difference yourself.

And if you don't have any more money to pay the difference between the voucher's fixed sum and what the insurance market charges for a policy for, say, a 70-year-old who has had a heart attack or cancer or injuries from a lifetime of physical labor? Well, your grown kids can pay, assuming you had some, reducing their ability to save for their old age. Or -- and Ryan is careful not to say this -- you can just die like the 45,000 Americans a Harvard Medical School study says die each year now because they lack health insurance.

That seems harsh, but the reality is that a fixed-sum voucher is like a losing lottery ticket, a piece of paper with a contingent value one second and no value the next. If health insurance for that 70-year-old costs three times the voucher value and he does not have the rest of the money, then the voucher is worthless. The same is true if the extra cost is just a few dollars beyond the voucher and you are bedridden and unable to work.

Taxes are how we distribute the burden of civilization. They are rules that define us as a society -- if you believe we are a society, which Rand said was a false, collectivist concept. To the Randians there is no society, only the individual. And in Rand's ideal world, the weak not only are undeserving of love, they are undeserving of existence. Ryan, on his Facebook page video, says we need to learn to share her values.

The tax wisdom of the ancients that has survived, and thus in the classical sense is profoundly conservative, is that we tax the biggest winners the most and that if we redistribute, it is to those with a reduced or no ability to care for themselves. That is not what the Ryan plan would do, however. It does the opposite, taking from the many to give to the few. Now House Republicans are on record as sharing his vision.

Whatever you think about how we should distribute the burden of maintaining the civilization that makes our wealth possible, no matter what you think about whether we need more government or less, more competitive markets or more oligopolies, there is plenty to debate and study and disagree about in a civilized way.

What we should not have to debate any longer is what the Republicans in the House think is our major economic problem. They have laid it out as plainly and unambiguously as possible: The rich do not have nearly enough, and the duty of government is to ensure they get more, because somehow this upward redistribution will make all of us better off in the long run.

Put that way, Rand would have a word to describe the Ryan plan: socialism. 

This column was first published by Tax Analysts in Tax Notes on April 26. © Tax Analysts 2011. All rights reserved.

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