Representative Paul Ryan’s proposal to lower the top individual and corporate tax rates to 25 percent would require Congress to eliminate more than $2.9 trillion worth of tax breaks over the next decade, according to a new analysis.
The study released yesterday by the Tax Policy Center in Washington provides the first independent estimate of the challenges that Ryan and congressional Republicans would face in trying to drive tax rates down while holding total revenue collection between 18 percent and 19 percent of the gross domestic product.
“It’s a lot of money,” said Roberton Williams, senior fellow at the center, which is funded by the nonpartisan Urban Institute and the Brookings Institution. “Three trillion dollars over 10 years doesn’t make a job any easier.”
In his proposal, Ryan said he wanted to eliminate or sharply curtail so-called tax expenditures to broaden the tax base. Getting to $2.9 trillion would likely require him to eliminate some of the largest items, such as the mortgage interest deduction, the deduction for charitable contributions and the exclusion for employer-provided health insurance.
For example, in 2014, the mortgage-interest deduction is projected to cost the government $106.8 billion in forgone revenue, about one-third of the $295.6 billion target that Ryan would have to hit for that year. The task is likely to prove even more difficult than that, because that calculation is based on the assumption that tax rates will be higher; the lower rates reduce the value of deductions.
Ryan, a Wisconsin Republican, released his budget outline on April 5 and set two parameters for the revenue side of the budget: The top individual and corporate tax rates should drop to 25 percent from 35 percent, and the government should collect about the same amount of money over the next decade as it would if Congress extended all of the income tax cuts expiring at the end of 2012. That’s $4.2 trillion less than the government would collect if Congress didn’t extend expiring tax breaks.
House passage of Ryan’s budget wouldn’t, by itself, lower the tax rates or eliminate tax breaks. Those details would need to be included in a separate bill that would start at the House Ways and Means Committee.
Ways and Means Committee Chairman Dave Camp, a Michigan Republican, has also set 25 percent as his preferred top rate.
“The pro-growth tax reform proposal included in Chairman Ryan’s budget proposal is both revenue neutral and holds revenue at historical norms,” Camp spokeswoman Michelle Dimarob said in an e-mailed statement.
A spokesman for Ryan didn’t respond to a request for comment.
The center’s analysis assumed that the 28 percent, 33 percent and 35 percent brackets would all be collapsed into the 25 percent bracket. If that framework were applied to 2011, the top tax rate would take effect for individuals once taxable income exceeded $34,500 and for married couples once taxable income surpassed $69,000.
Moving any of those taxpayers into tax brackets with lower marginal rates would require Ryan to find additional money to make up any forgone revenue, Williams said.
The analysis also assumes that the alternative minimum tax would be repealed, which accounts for $545 billion of the cost. Otherwise, Williams said, the AMT would grow dramatically in ways that lawmakers have never allowed. The AMT is a parallel tax system originally designed to prevent wealthy individuals from legally avoiding taxes.
The estimates also follow Ryan’s direction to repeal last year’s health-care law, which included tax increases on investment income and wages of individuals making more than $200,000 and married couples making more than $250,000.
As a comparison, a tax plan that the bipartisan fiscal commission wrote last year set top individual and corporate rates of 28 percent. It would eliminate itemized deductions, turn the major ones into credits, and tax capital gains and dividends as ordinary income.
Unlike Ryan’s proposal, the commission’s plan also was designed to raise more revenue than would an extension of current tax policy. It set a revenue target of 21 percent of GDP.
Ryan, a member of the commission, voted against that plan.