Paul Krugman on the Ryan Roadmap

by Reihan Salam

Paul Krugman has written a column centered on Rep. Paul Ryan’s “Roadmap for America’s Future.” It is a peculiar column, and I’m sorry to say that it is somewhat misleading. Josh Barro and I wrote an article on the Roadmap for National Review, and we were careful to highlight its deficiencies as well as its strengths in order to give a balanced portrait. Krugman, for whatever reason, has chosen to take a different approach. 

Krugman highlights one important flaw in the original version of the Roadmap, namely its optimistic revenue projections. And he highlights an analysis from the Tax Policy Center, which Josh and I also referenced in our article.

 

The nonpartisan Tax Policy Center has, however, stepped into the breach. Its numbers indicate that the Ryan plan would reduce revenue by almost $4 trillion over the next decade. If you add these revenue losses to the numbers The Post cites, you get a much larger deficit in 2020, roughly $1.3 trillion.

And that’s about the same as the budget office’s estimate of the 2020 deficit under the Obama administration’s plans. That is, Mr. Ryan may speak about the deficit in apocalyptic terms, but even if you believe that his proposed spending cuts are feasible — which you shouldn’t — the Roadmap wouldn’t reduce the deficit. All it would do is cut benefits for the middle class while slashing taxes on the rich.

And I do mean slash. The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half, giving them 117 percent of the plan’s total tax cuts. That’s not a misprint. Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population. [Emphasis added.]

Disappointingly, the column does not link to the source material from the TPC. Fortunately, Howard Gleckman wrote a helpful post on the subject in March:

CBO’s most realistic projection of revenues (assuming  most Bush tax cuts are extended and many middle-class families continue to be exempted from the Alternative Minimum Tax)  figures the existing tax system would raise about $4.2 trillion in 2020. By contrast, Ryan’s plan would generate about $3.7 trillion, or $500 billion less in that year alone.

Rep. Ryan has acknowledged that this is a problem, and he has explicitly stated that he is “open to adjustments in specified rates under his tax reforms”:

Congressman Ryan stands by his numbers, and of course would be open to adjustments in the specified rates under his tax reforms if in fact TPC’s estimates are closer to reality than Ryan’s estimates.  We clearly cannot chase our unsustainable growth in spending with ever-higher levels of taxes – and the purpose of the Roadmap is to get spending in line with revenue – not the other way around.

And Gleckman offers more insight into the distributional consequences of the tax reforms:

 

Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts. By 2014 people making in excess of $1 million-a-year would enjoy an average tax cut of more than $600,000. To put it another way, their after-tax income would rise by nearly 30 percent.

By contrast, the average taxpayer making $75,000 or less would pay higher taxes if they chose Ryan’s two-rate alternative. If they chose the tax plan more favorable to them, they’d do a bit better. For instance, people making between $50,000 and $75,000 would typically get a tax cut of $157 in 2014, while those making between $40,000 and $50,000 would pay $128 more on average.

These estimates are subject to lots of uncertainty. For instance, we assumed Ryan’s 8.5 percent VAT—the new business tax—would generate about 4.3 percent of GDP in revenues. TPC’s Joe Rosenberg, who modeled the Ryan plan, believes that estimate is generous. But since no such tax currently exists, it is hard to know for sure. [Emphasis added.]

Moreover, the Ryan tax reforms would reduce the overall tax burden on earners in the bottom quintile. The following sentence from Krugman’s column

Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population.

and this sentence

Even as it slashed taxes at the top and for the bottom quintile, the plan would raise taxes for middle-income households.

are both true. Krugman is relying on the power of aggregation, and one can’t help but admire his polemical skill. (Note that at least some of the rhetorical power of Krugman’s statement rests on the false impression that the poor would face a heavier tax burden.) It is also true, however, that almost any shift towards consumption taxes would have the same impact. Households at the top tend to save and invest more than households in the middle. A VAT or progressive consumed-income tax would both place a heavier burden on less-affluent households than on more-affluent households for that reason. Yet consumption taxes have other virtues.

So it seems that Krugman’s basic problem is with consumption taxes. And that’s perfectly respectable. This, however, places him at odds with many tax policy experts, who believe that we need to shift to consumption taxes that are less damaging to U.S. growth prospects than income taxes at the same level. 

Krugman’s claims regarding Medicare care reform are more misleading still. James Capretta has explained the logic behind the Ryan model:

 

As I argued in a Galen Institute white paper released last month, the Ryan Roadmap is the answer. What’s desperately needed in health care today is a new dynamic in which efficiency and productivity are rewarded rather than punished. The Ryan program would do just that by converting millions of passive insurance enrollees (both in Medicare and in employer plans) into active, cost-conscious consumers. As more and more of these consumers received their federal support in the form of a defined-contribution payment, they would have strong incentives to get the best value possible from both the insurance they select and the “delivery system” they use to access services.

Orszag contends that the Ryan plan is based on a flawed premise — the notion that consumers facing more cost-sharing for services can do something about the high cost of care. He points out that most Medicare spending is concentrated in a relatively small number of high-cost cases with expenses that far exceed the up-front costs of even a high deductible plan. But the benefits of the Ryan plan would extend well beyond moving people into high-deductible insurance products. In a vibrant health-care marketplace, consumers would be able to pick from among competing delivery systems too, well in advance of needing expensive care. Hospitals and physicians would have strong incentives to reorganize and offer their services in ways that are less costly and more patient-focused in order to maximize enrollment in their networks. That’s the way to bring about genuine “delivery-system reform.”

Krugman posits that the Ryan model would have baleful consequences:

The only way the Ryan plan could save money would be by making those vouchers too small to pay for adequate coverage. Wealthy older Americans would be able to supplement their vouchers, and get the care they need; everyone else would be out in the cold.

That is, in fact, a reasonable description of the likely trajectory of planned cuts to Medicare FFS, a program that’s proven highly resistant to the kind of delivery-system reform that Capretta has described. Yet Krugman has praised the planned cuts to Medicare FFS. Krugman suggests that there will be no business-model innovation in response to the Ryan reforms, which is implausible. 

Josh and I were cautious on Ryan’s proposed Medicare reforms:

Many on the left have attacked the Ryan plan for “privatizing” and “gutting” Medicare. Again, what the plan actually does is to voucherize Medicare, giving seniors money to buy insurance on the private market. The vouchers grow slightly more slowly than medical costs do, a gap the plan hopes to make up with cost-saving health reforms. We are enthusiastic about these reforms, which include efforts to introduce more-effective price signals in the health-care market, along with tort reform and modification of health-insurance mandates. But a clearer picture of the likely cost savings will be needed — along with a willingness to adjust if sufficient savings do not materialize.

My guess is that Rep. Ryan would agree that adjustments might be necessary. 

So is Rep. Ryan’s plan a “fraud,” as Paul Krugman describes? It is only a “fraud” insofar as, like any broad reform plan, it rests on contested assumptions about the future. If anything, Rep. Ryan’s openness to revision is a refreshing departure from the norm. At the heart of the plan is a serious effort to restrain growth in entitlement spending, an effort that will prove difficult and, almost by definition, surprising as the economy continues to evolve. What is clear, however, is that either spending burden has to be tackled or the tax burden — for all households — will have to increase.

I’m personally skeptical about Rep. Ryan’s particular vision for tax reform. The structure strikes me as unwieldy. I do, however, like its emphasis on simplifying deductions and shifting the burden from income to consumption. But there is room for disagreement.