On March 9 the Tax Policy Center (TPC) released a preliminary analysis of the tax reform proposal contained in Rep. Paul Ryan’s (R-WI) Roadmap for America’s Future fiscal plan. The TPC analysis helps Ryan advance the tax reform ball considerably, but it also raises issues some of which need to be addressed by Congressman Ryan (R-WI), the author of the plan, and some by the TPC.
Perhaps most important of all is that the TPC analysis, along with a slew of commentary both favorable and unfavorable from other sources, confirms that the Ryan plan is a very serious, substantive foray into tax reform. The Ryan plan provides an intellectually sound, coherent and fundamental path to tax reform, and is part of a broader plan to resolve our long-term fiscal crisis. If it were otherwise, the tax reform component would be ignored.
The Ryan tax reform plan, which reforms both individual and business taxes to move toward lower tax rate systems, is intended to be revenue neutral over ten years when compared to a current policy revenue baseline; the TPC analysis suggests the plan is close to its target. It may even be closer than the TPC analysis suggests because of a pair of foibles in the TPC approach as well as simple differences in estimating methodologies.
What About the Economy?
The TPC analysis is a good first step, but critically leaves out some important information on economic effects. By way of analogy, imagine the Congressional Budget Office providing an analysis of health care reform and ignoring any references to the consequences for health care costs or whether the ranks of the uninsured would rise or fall. Policymakers want to know if the legislation would “bend the curve” and that it substantially reduces the ranks of the uninsured. Analysis lacking this information would obviously be woefully incomplete.
The TPC has done much the same by ignoring the stronger economy that would follow from enactment of the Ryan plan. As with health care reform and the uninsured, a fundamental motivation for tax reform is to improve economic performance, yet the TPC acknowledges its analysis is essentially static. Revenue forecasts aside, this is a substantial shortcoming of the TPC analysis that will hopefully be remedied in their follow-on work.
Foibles to Resolve
One foible in the TPC analysis is that it combines a rigorous methodology for assessing the revenue effects from the tax on individuals with a back of the envelope approach to estimating tax revenues from the new Business Consumption Tax (BCT) tax contained in the Ryan plan. If TPC does not have the tools for a rigorous assessment of the BCT, then so be it, but TPC should clearly indicate the difference in approaches and admit that its revenue forecast of the BCT carries an unusually high degree of uncertainty.
Another foible in the TPC analysis deals with the treatment of pass-through entities such as sole proprietorships. This is a difficult area and the TPC analysis usefully highlights an issue in the plan its designers may want to revisit. However, TPC arbitrarily assumes small business owners will take all their income in tax-exempt dividends rather than taxable wages. To be sure, this is a troubled area in the existing tax code, but the TPC assumption is most unreasonable, and creates an obvious downward bias in the total revenue estimate.
Finally, the TPC is known for its distributional analysis and it refers to distributional effects in its analysis. But where are the tables?