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Obama Might Trade Parties With Paul Ryan: Laurence Kotlikoff

We all know that Democrats want to spend more on people and Republicans want to tax people less. But giving someone an extra dollar is no different than taking a dollar less from that person; raising spending is the same as cutting taxes, and cutting taxes is the same as raising spending.

Gee, maybe Democrats are closet Republicans, and Republicans are closet Democrats.

Of course some spending isn’t on people. It’s on tanks and bureaucrats. But the Democrats aren’t bigger discretionary spenders than Republicans. Bill Clinton, for example, cut discretionary spending from 8 percent to 6 percent of gross domestic product. George W. Bush raised it back to 8 percent. Since 1971, discretionary spending averaged 8 percent under Democratic administrations and 9 percent under Republican administrations.

So when it comes to discretionary spending, Republicans are Democrats and Democrats are Republicans.

This problem is on full display in the latest contretemps between “Democrat” President Barack Obama and “Republican” House Budget Chairman Paul Ryan. The president has characterized Ryan’s tax plan to cut top personal and corporate income tax rates from 35 to 25 percent as horribly regressive. But if you look closely, it may be highly progressive.

Progressive Taxation

Progessivity depends on average, not marginal taxes. Take TwoGuys, a country comprising Joe Rich and Harry Poor. Joe makes $5 million a year and pays $2 million in taxes. Harry makes $50,000 and pays $5,000 in taxes. Joe’s average tax rate is 40 percent; Harry’s is 10 percent. This outcome is progressive -- average tax rates rise with income. But, I forgot to mention, in TwoGuys, people earning more than $3.5 million face no extra tax; that is, the top rate is zero.

Conclusion: you can simultaneously lower the top rate and make the system more progressive.

Ryan is proposing dramatically broadening the tax base by curtailing or eliminating tax loopholes, such as the home mortgage-interest deduction. This and other breaks disproportionately favor the rich, saving millionaires $75,000 each on average. And Ryan’s base-broadening may include taxing capital gains and dividends at ordinary rates. In this case, the rich will pay a 25 percent, not 15 percent, tax on this income, and see both their marginal and average tax rates rise.

Next, consider cutting the corporate tax rate, which will lead to new investment, jobs, and higher wages. This isn’t a trickle-down fantasy. Just look at Ireland’s amazing growth after cutting its corporate rate.

Tax Avoidance

Unlike our personal income tax, the rich can avoid our corporate tax by investing abroad. With a higher corporate tax, capital leaves and wages (the cost of labor) fall until capital is again indifferent between staying and going. With a lower corporate tax, the opposite occurs.

Raise the corporate tax and take-home wages fall; lower it and take-home wages rise. Sounds like the corporate tax hits workers like a payroll tax.

That’s precisely what most public-finance economists believe. Hence, Ryan’s proposed cut in the corporate tax rate would, effectively, replace Obama’s temporary payroll tax cut with a permanent one -- and a roughly six times larger one at that. Haven’t the president’s economists told him this?

The president has also vilified Ryan’s Medicare voucher plan, which moves Uncle Sam from paying the fees for whatever services the health-care sector sends him to putting health care on a fixed budget. Absent such a budget, our nation will go broke, as the president himself acknowledges.

Never Worked

The president says he can limit Medicare’s fee-for-service spending through other, mainly unspecified means. But we’ve tried all types of alternatives for decades and nothing’s worked. As a result, Medicare, not Paul Ryan, is killing Medicare. As the health-care sector orders up ever-more services for the government to pay, government will be forced to cut its fees to the point that doctors will no longer cover Medicare participants.

Finally, think about Ryan’s Medicare vouchers. They are individually risk-adjusted and the poor, who are in worse shape than the rich, will get bigger vouchers. Those who will have to pay more out of pocket will be the rich.

Ryan’s voucher plan may be the most progressive reform proposed in recent memory. But the president dismissed it out of hand, saying, “I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry, with a shrinking budget to pay for rising costs.”

Vouchers for All

To read this, you’d think Obama wouldn’t countenance vouchers for anyone. But Obama’s health plan, which covers the uninsured, provides the same vouchers that Ryan is advocating. So the president is saying vouchers are OK for uninsured workers, but not the elderly? And he’s saying leaving such workers at the mercy of the insurance industry is OK? He can’t have it both ways. Either vouchers and regulated insurance companies are OK or they aren’t.

Both are OK. As I’ve said in my last two columns, we need a single voucher system covering everyone. If Obama and Ryan sat down and spoke in French, they’d likely agree to that, as well as find common ground on taxes and discretionary spending cuts. After which, they might switch parties.

(Laurence Kotlikoff is professor of economics at Boston University, president of Economic Security Planning Inc. and author of “Jimmy Stewart Is Dead.” The opinions expressed are his own.)

To contact the writers of this column: Laurence Kotlikoff at kotlikoff@bu.edu;

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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