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Blue Sky series: Paul Ryan's plan

ryanbluesky.JPG

Late last week, I spoke with former SEIU president and current Georgetown fellow/fiscal commission member Andy Stern about hosting a series of pieces laying out different ideas to kick-start job creation. The idea here is not to see how many compromises can dance on the head of the congressional pin; it's to see what exactly different experts think needs to be done. In Ben Bernanke's memorable term: "blue sky thinking."

The first piece came, naturally enough, from Andy Stern; the second was from Dean Baker, the third from Mark Zandi, the fourth from Heather Boushey, the fifth from Michael Lind, and the sixth from an anonymous (ex-)hedge fund manager. Today's, however, comes from Rep. Paul Ryan.

Getting the Fundamentals Right

Rep. Paul Ryan
Ranking Member; House Budget Committee

What sweeping new initiative can the Federal government enact to create X number of jobs? This question – frequently asked by policymakers in Washington – helps illustrate why the quest for jobs remains painfully elusive.

The Federal government must get the macroeconomic fundamentals right, fostering a more conducive climate for the private sector to grow and create jobs. The Federal government can – but should not – try to endlessly micromanage the economy under the misguided belief that we ought to take money from the private sector (with higher taxes or more borrowing), strain it through Congress and the bureaucracy, and deploy it among government programs and government jobs. Centralizing power in Washington, expanding government’s reach into all sectors of our economy and more and more aspects of our lives, creates a more hostile environment for private sector job creation.

Deep skepticism should accompany government initiatives that come with a promised number of jobs. As part of the sales pitch, Speaker Nancy Pelosi argued that the health care overhaul was “about jobs”, and promised the law would create “4 million jobs – 400,000 jobs almost immediately.” In celebrating the passage of cap-and-trade in the House, the legislation’s author, Rep. Edward Markey noted, “This legislation will create jobs by the millions.” More famously, the stimulus legislation promised, according the White House, to save or create 3.5 million jobs by the end of this year and keep unemployment below 8%. Counterfactual arguments aside (i.e., ultimately, it's hard to know exactly how the economy would have performed without fiscal stimulus), it is disappointingly clear that the stimulus failed to deliver on its promised results.

As I argued this past week, Americans rightfully demand “for government to play some positive role in their lives.” The question is not whether Congress should take action to address the economy, but what form such action should take. We remain in need of true patient-centered health-care reform, all-of-the-above energy solutions, transparent and effective financial regulations, and serious entitlement reform to strengthen our safety net. Legislative action is needed to restrain the explosive growth of government spending. Legislative action is needed to prevent massive tax hikes from hitting job creators at the end of the year. Last week, House Minority Leader John Boehner put forward a common-sense plan that does both: cuts spending and stops tax hikes. My hope and belief are that Leader Boehner’s proposal, which I strongly support, would pass Congress with bipartisan support if put to a vote.

The tax code should not be a tool for income redistribution or social engineering; taxes should aim to raise needed revenue efficiently to fund our national priorities while maximizing economic growth. To that end, I’ve proposed several specific tax reforms to realign incentives for growth and foster the right conditions for job creation:

Simplify the tax code. Individual income tax payers can choose to pay their taxes through existing law, or through a highly simplified return that fits on a postcard with just two rates and virtually no special tax deductions, credits, or exclusions. Joint filers would pay a 10% tax on the first $100,000 of income ($50,000 for single filers), and 25% above that. With a generous standard deduction and personal exemption, a family of four would have zero tax liability on their first $39,000. By clearing out the array of loopholes and credits (disproportionately enjoyed by high-income earners), we can broaden the base and lower tax rates. Additionally, capital would no longer be buried in the complexities of the tax code to hide from tax collectors. Simplification would reverse this misallocation of resources, as economic decisions would be exclusively geared to grow, expand, hire and prosper.

Promote growth. The tax code punishes the very things we ought to promote. Individuals pay taxes on their earnings, and then pay another tax on the return from investing those earnings. We should eliminate the double-taxation on savings and investment. The economy desperately needs more investment to create jobs, but the Democratic Congressional Majority remains intent on increasing rates on interest, capital gains, and dividends. By taxing income once at its source and never again, we better align incentives to promote growth.

Boost exports. The corporate income tax puts American manufacturers and job creators at a competitive disadvantage relative to our foreign competitors. We have the second-highest corporate tax rate in the industrialized world, coupled with a backwards double-taxation on our exports relative to imports. Our own tax code is driving businesses and jobs overseas, so I propose to replace the entire corporate income tax with an 8.5% business consumption tax, a rate half the average of the industrialized world. To level the playing field for American-made products, the tax would be lifted on exports and imposed on imports, which is how the rest of world taxes their imports and exports. With 97% of the world’s consumers living outside the United States, and fierce global competition, we must do everything we can to keep America’s edge in the 21st century.

Trillion-dollar deficits and the ominous debt cloud hanging over the economy allow some to argue for higher tax rates and even new revenue machines, such as the value-added tax. We simply cannot chase ever-higher spending with ever-higher revenue; the taxes cannot keep pace, and if we try, we’d kill the economy. Spending is driving our long-term budget crisis, and a move toward more efficient consumption-based tax reform must be predicated on both the full replacement of the anti-competitive components of the tax code and a plan to address uncontrolled spending.

Sound money. In addition, the certainty needed to restore job and capital expansion requires that entrepreneurs and workers trust that the value of the dollars they earn and invest will not be eroded by inflation. So the Federal Reserve’s commitment to keeping the value of our money stable is a crucial condition for restoring job growth.

A plan for prosperity is urgently needed, but many of the reforms outlined above would no doubt require time and effort, as economic hardships continue to mount. What Congress can do today is take action on Leader Boehner’s proposal to 1) pass a continuing resolution at FY2008 spending levels to take the needed first steps to get a grip on spending; 2) pass a freeze of all tax rates to avert a painful across-the-board tax increase at year’s end.

Going forward, policymakers need to think critically about government’s proper role in the job creation process. Above all else, we must get the fundamentals right.

Photo credit: By Katie Derksen

By Ezra Klein  | September 17, 2010; 2:31 PM ET
Categories:  Blue sky series  
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Comments

- Cut the defense budget

- Abolish the Fed

- Get rid of the filibuster

- Amend the Constitution to allow and require public financing of all federal elections.

(all other talk is just fluff)

Posted by: lauren2010 | September 17, 2010 2:40 PM | Report abuse

"The tax code should not be a tool for income redistribution or social engineering..."

WHY?

When majority Americans have lost income for over a decade with no hope / opportunities to recoup those losses; what non-sense are we talking here?

When Wall Street was 'minting' money with 'poker chips' while Washington slept on the steering wheel; most Americans saw their income 'went south' helplessly. What did Paul Ryan's Congress do then?

You want call us Socialists? Go ahead. If the question is 'jungle of Capitalism' and 'income distribution of Socialism'; why is it wrong for us to opt for the second one?

Ryan forgets that he and his Party 'failed' in guarding American People then. Point is he and his Party have lost any moral right to tell us that 'income distribution is wrong....'.

Posted by: umesh409 | September 17, 2010 2:48 PM | Report abuse

I've read Ryan's plan. After much thought as well as reading analyses from other economists, Ryan's plan would probably increase the size of the deficit and do little to increase jobs. While biz tax rates are to high and need to become more globally competitive, lower taxes on the truly wealthy has done nothing and will do nothing to increase employment. I agree with him that the tax code needs to be rewritten, but having read his plan, I'm not confident that his ideas will attain any of the desired goals other than to continue to current "supply side" economics which has caused the majority of US wealth to be in the hands of very few (1% of Americans control/own 90% of the nation's wealth, I've read).

Posted by: valkayec | September 17, 2010 2:50 PM | Report abuse

So, in the end, his blue sky proposal for jobs creation today is: spending levels of 2008 and tax rate of 2008? Was 2008 really so wonderful for job creation?

Posted by: sullivanmatthewr | September 17, 2010 2:52 PM | Report abuse

Sadly, this one is clearly the worst of the series, at least so far. And if that is one of the leading lights of Republicanism, this Country is in deep trouble.

Just a note, his (and Republicans in general) position regarding cap gains is so much nonsense one doesn’t even know where to begin. Just brutally stupid.

Posted by: thelemonboy | September 17, 2010 3:03 PM | Report abuse

His tax plan is a huge giveaway to the rich. I'm not sure how he possibly cuts spending enough to counteract the reduction of revenue from all these tax cuts.

Posted by: mschol17 | September 17, 2010 3:07 PM | Report abuse

Paul Ryan's plan:
Cut taxes for the rich.

#1 Make the tax system more regressive.
#1.a Taxpayers that would pay lower taxes under the old system can opt to choose this system, guaranteeing that we don't raise any additional revenue due to the simplication.

#2 Cut capital gains taxes so that wealthy people who live off Daddy's inheritance don't have to pay any taxes.

#3 Cut the corporate income taxes from one of the lowest rates on the planet to zero.

#4 Deflation! Spending Freeze!

This guy is dumber than a stump.

Posted by: zosima | September 17, 2010 3:21 PM | Report abuse

If the whole "Boost exports and Maintain a strong dollar" doesn't show what a charlatan this guy is nothing will.

Posted by: endaround | September 17, 2010 3:35 PM | Report abuse

Summary: cut business taxes and the top marginal tax bracket rates and we'll see lots of job growth. Uh huh. Been there, done that. Next, please. (This guy and his roadmap really don't deserve the serious attention they've gotten.)

Posted by: pjro | September 17, 2010 3:40 PM | Report abuse

To echo umesh409, the assertion that "[t]he tax code should not be a tool for income redistribution or social engineering..." is merely an opinion, offered without basis.

But let's accept it for the sake of argument. What, then, is Rep. Ryan preferred tool for rectifying the great maldistribution of wealth that we are currently experiencing?

Posted by: eb53 | September 17, 2010 3:45 PM | Report abuse

How is a 6 parameter system (3 thresholds + 3 rates) simpler than, say, a 2 parameter linear progressive (1 threshold + 1 slope), or many other systems? What makes it simple - that you simply like it better?
Promote growth of what? "The economy" does not mean "the money that my rich friends might give me sometime".
Export what to whom?
2008 is the definition of unsound money.

Posted by: JF11 | September 17, 2010 4:03 PM | Report abuse

Such creative thinking: Cut taxes! The deficit is a nightmare! Except when we make it a lot bigger with tax cuts!

We'll get a more "vibrant" economy, just like we got with the Bush tax cuts!

Posted by: edwardlahoa | September 17, 2010 4:21 PM | Report abuse

I like this plan the best of all. Ryan is a no-nonsense economical conservative. We cannot continue to spend other people's money and not expect them to go on strike. The rich will never invest in America if we don't make it profitable for them to do so.

Posted by: jpaul2 | September 17, 2010 4:38 PM | Report abuse

Ryan's plan has so many faults.

1. Do you really think Congress can stick to a 75 year plan?
2. If low tax rates are a panacea, then why are we in a recession despite the lowest tax rates in recent US History?
3.The biggest problem with his plan is that revenue projections are missing(Krugman). It like Ryan is accounting for spending cuts, but not changes in revenue. This plant is useless.
4.Its a historical fact, that tax cuts cause fiscal deficits(Ezra agrees), so how are we going to pay for them?
5.Ryan's plan is a windfall for the upper class, what programs will help the poor?

Posted by: photek00 | September 17, 2010 5:03 PM | Report abuse

@jpaul2:

We've been waiting for the strike ever since Atlas Shrugged. When was that published? 1957? Still waiting....

If people didn't Go Galt when the top marginal tax rate was 90% as it was in 1957, I'm seriously skeptical of the claim that they're going to strike now that its been reduced to 35%.

Please come join us in consensus reality.

Posted by: zosima | September 17, 2010 5:25 PM | Report abuse

did you perchance ask Paul Ryan why he voted in favor of Medicare Part D?

Posted by: ioancuza | September 17, 2010 5:27 PM | Report abuse

The proposal is right on! Simple, understandable and eliminates so much of the "special interest" manipulation that distorts the tax code and therefore the markets.

In effect, he's arguing against what Hayek referred to as "fatal conceit".

That would be a great contract FOR America!

Posted by: sanuzis | September 17, 2010 5:27 PM | Report abuse

The hedge fund manager remains in 1st place, though Ryan remains well ahead of any of the silly liberals and their wishful thinking (creating 12 million jobs for free, too bad Stern wasn't able to send Congress that plan before it blew $800 billion, having nothing to show for except 9.6% unemployment).

"To echo umesh409, the assertion that "[t]he tax code should not be a tool for income redistribution or social engineering..." is merely an opinion, offered without basis.

But let's accept it for the sake of argument. What, then, is Rep. Ryan preferred tool for rectifying the great maldistribution of wealth that we are currently experiencing?"

The assertion that there is a great maldistribution of wealth which needs rectifying is a also an opinion (two actually - that there is a maldistribution of wealth, and if it does exist that it needs rectifying).

"His tax plan is a huge giveaway to the rich."

Are you kidding me? It is NOT the government's money! It was money earned by the citizen, confiscated by the government. That the government might allow the citizen to keep a little bit more of what he earns hardly constitutes a "giveaway".

"Ryan forgets that he and his Party 'failed' in guarding American People then. Point is he and his Party have lost any moral right to tell us that 'income [re]distribution is wrong....'."

Ryan forgets that he and his Party 'failed' in guarding American People then. Point is he and his Party have lost any moral right to tell us that robbing your richer neighbor at gunpoint is wrong....'.

Hmmm... that doesn't follow.

Maybe moral rights are independent of any individual or group's particular failings (real or perceived)?

Posted by: justin84 | September 17, 2010 5:38 PM | Report abuse

So far that anonymous hedge fund guy has the best answer. Remove or reduce government created impediments to job creation. Simple, efficient, cheap.

Looking forward to hearing from someone who has ever created a job on how to create jobs......

Posted by: bgmma50 | September 17, 2010 5:49 PM | Report abuse

I see quite a few comments on this article slamming what ideas Paul Ryan has put forward. Not one of those that I read explained how the alternative (bigger government, higher taxes)is better. Everyone seems to forget that massive tax cuts in the early 1980's spurred nearly 30 years of economic expansion. Choking the economy with higher taxes, including on the rich, means less net gain in wealth for the country, so there is less total wealth to go around. Congressman Ryan is very sharp and distinguishes between good policy and good politics. I would appreciate any insight on historical examples where a free market system wasn't the superior choice for creating general wealth, as well as the means to making "the individual" more productive. The more we leave things to be managed at the lowest competant level, the better off we are going to be.

Posted by: bcartyaz | September 17, 2010 6:20 PM | Report abuse

"His tax plan is a huge giveaway to the rich."

as hall and rabushka famously wrote long ago, fetishistic "obsession" on questions of fairness should not automatically eliminate efficiency based calculations. indeed, a preponderance of tax policy scholars agree that 1. double taxation and 2. high taxes on capital are inefficient b/c of excess burden concerns.

while it's not a surprise that klein's readers obsess over "fairness," i might point out that getting rid of deductions that favor the rich (noted by klein today) while at the same time lowering taxes on capital might actually have a more neutral effect on progressivity, and is by most accounts an efficient direction.

while ryan's plan isn't IMO perfect, it makes a lot of sense for those that care about tax efficiency (although i do see the distribution issues)

Posted by: stantheman21 | September 17, 2010 6:35 PM | Report abuse

Setting aside the fact that none of this has anything to do with near-term recovery, I'd be on board in a general sense with just about every proposal for simplifying the tax code, with one exception...

The rates are way too low - the top one at least. There's no way this brings in enough cash to be revenue neutral, even if it kills every big tax expenditure like the mortgage interest and health insurance deductions and the 401(k) tax deferment.

So...all you have to do is inch the rate up a few percent more to get back to neutral. Then a few more to cover the gaping general fund hole left over from the Bush years. Then a few more to save Social Security. And finally a few more to save Medicare. Maybe break the top bracket into two in order to make it more progressive (e.g. 10%@0-100k,25%@100-200k,40%@200k+).

Done. No Social Security privatization needed. No dismantling of Medicare necessary. No ham handed spending freezes required. Just pay the bills.

Oh...and phase it in slowly: we still need some stimulus for the time being.

Posted by: csmith932 | September 17, 2010 6:49 PM | Report abuse

" Individual income tax payers can choose to pay their taxes through existing law, or through a highly simplified return"

wouldn't individuals then just pick the plan where they'd pay less total taxes, and ultimately the federal government's revenue would shrink as a result?

Posted by: SnowleopardNZ | September 17, 2010 10:02 PM | Report abuse

"We should eliminate the double-taxation on savings and investment."

wouldn't this just mean that people like warren buffet would pay no taxes? Is that really fair? And do we really want to be encouraging more people to moving away from normal jobs into speculation? Won't think just increase income inequality? And do we really want to grow the financial sector to a larger share of the economy (which would be the case if it offered an even higher reward)?

Posted by: SnowleopardNZ | September 17, 2010 10:05 PM | Report abuse

And since the economy is only growing at 1%, wouldn't slashing government right now just send the economy back into a recession?

Posted by: SnowleopardNZ | September 17, 2010 10:12 PM | Report abuse


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Posted by: quincyhow18 | September 18, 2010 6:56 AM | Report abuse

An excellent plan for a country plagued by high interest rates, inflation where companies can't borrow money to invest.

Alas for Ryan, his plan hits small snag called "reality." America has rock bottom interest rates, vanishing inflation and companies have vast amounts of cash on hand that they don't invest because there's no demand for their products.

His plan would achieve one thing, and one thing only: the rich would pay less tax.


Posted by: hughdcollins | September 18, 2010 1:30 PM | Report abuse

THERE IS NO FREE LUNCH

It is immoral to believe that somebody else is responsible for the care of others when in fact it is the individual man or woman in the mirror who is responsible for their neighbor no matter what their means.

If your neighbor has fallen in the street, do we ask everyone who can “most afford” to help the person before helping them? Do we walk away saying we paid the Federal Government to take care of them so we can play tennis?

The founders rightfully did not guarantee equality (that's for Stalin, Lenin, Chavez, Mao, etc...) they in fact designed a platform for each of us to claim Life, Liberty and the Pursuit of Happiness.

This is what makes you and me unique and defines the USA as the "Land of Opportunity" not the overly-idealized debt-ridden and socially challenged European Union.

The righteous belief that redistribution in the name of equality, at the expense of others none-the-less, untangles personal responsibility from action is utterly perverse.

Congressman Ryan is correct to acknowledge that we're all in this together and those that can pay more will in fact pay more but that everyone should have a stake in the game.

Anyone who says 10% is unfair either wants a free ride or has bought into that failed notion articulated by Marx/Engels.

Posted by: GorditoMojito | September 19, 2010 1:57 PM | Report abuse

Rep. Ryan has a great understanding of economics and tax policy. The folks that don't support what he is saying are just comfortable with the redistributive plans being cooked up by the Obummer Administration. Let's get tax policy back to basics - structure it to fund what government needs and nothing more!

Posted by: AuditDir | September 19, 2010 4:13 PM | Report abuse

What possible rationale is there to say there is a tax on WORK income, but not a tax on INVERTMENT income? Why not the other way? Why does Ryan want to discourage WORK? Let's make the taxes be ONLY on investments!!

Posted by: ejcrotty | September 20, 2010 11:07 AM | Report abuse

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