Ryan’s Tax-Rate Drop Would Require Lawmakers to Consider Favored Breaks

The fiscal plan outlined by House Budget Chairman Paul Ryan calls for reducing the top individual and corporate tax rates from 35 percent to 25 percent, which would require lawmakers to consider eliminating tax breaks such as the mortgage interest deduction to meet his revenue targets.

Over the next decade, the Wisconsin Republican wants the government to collect $4.2 trillion less than it would if Congress did nothing, and $1.8 trillion less than under the budget proposed Feb. 14 by President Barack Obama. Ryan’s targets in the plan he released yesterday are similar to the amount of revenue that would be raised if Congress extends tax cuts set to expire at the end of 2012.

Lowering rates that much while reaching the revenue targets in Ryan’s budget would require lawmakers to consider eliminating so-called tax expenditures, including the mortgage interest break and the deduction for charitable contributions, said Mel Schwarz, partner at the Washington national tax office of Grant Thornton LLP. Both have long been viewed as politically difficult to challenge.

“It would require very, very significant changes if he’s going to make this a revenue-neutral proposal,” Schwarz said.

In a document outlining his budget, Ryan acknowledged that such tax expenditures must be curtailed.

‘Greater Incentives’

“When offset by lower rates, it would have a doubly positive impact on the economy,” he wrote. “It would stop diverting economic resources to less productive uses, while making possible the lower tax rates that provide greater incentives for economic growth.”

Schwarz said Ryan’s plan provides an outline of a tax proposal and that important details would need to be determined by the Ways and Means Committee, of which Ryan is a member.

Policy makers should note that Ryan’s proposal is an outline, not a specific plan that can be analyzed by congressional scorekeepers, said Michael Linden, director of tax and budget policy at the Center for American Progress in Washington, an advocacy group often aligned with Democrats.

“This is what Congressman Ryan says his plan will raise, regardless of whether or not it actually will,” he said.

Senator Kent Conrad, a North Dakota Democrat and chairman of the Senate Budget Committee, criticized the proposed rate cut as a giveaway to the country’s richest individuals, who would be the biggest beneficiaries of the 25 percent top bracket.

‘Partisan’

“Representative Ryan’s proposal is partisan and ideological,” Conrad said in a statement yesterday. “He provides dramatic tax cuts for the wealthiest, financed by draconian reductions in Medicare and Medicaid. His proposals are unreasonable and unsustainable.”

Ryan aims to keep government revenue between 18 percent and 19 percent of gross domestic product. That’s lower than the 20 percent that President Barack Obama’s budget calls for by the end of the decade. It’s higher than the level included in the balanced budget constitutional amendment that Senate Republicans released last week, which would effectively cap revenue below 17 percent of GDP.

The budget proposal also presumes the repeal of the health- care law that Obama signed last year. That would eliminate tax increases on capital gains, interest, dividends and wages in the bill that applied only to individuals earning more than $200,000 annually and married couples making more than $250,000.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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