Paul Ryan and House Republicans are in a familiar quandary: They know that it is necessary, both economically and politically, for them to introduce a budget with reforms sufficient to place the national debt on a path toward stabilization. They also know that such a budget has only the most theoretical chance of passing Harry Reid’s Democrat-controlled Senate or being signed into law by President Barack Obama. The question before them is how many steps toward fiscal rectitude they can take before the budget debate ceases to be an exercise in balancing politics with policy and becomes instead an exercise in politics exclusively.
Ryan’s proposal shows its best face when paired with the Democratic alternative, to be formally released by Democratic senator Patty Murray’s Budget Committee on Wednesday. The Democratic proposal contains: 1.) a tax increase of nearly $1 trillion, 2.) a new $100 billion stimulus bill, 3.) $275 billion in health-care cuts that are unlikely to be enacted, and 4.) $240 billion in military cuts that will be enacted. In exchange for all this, the Democrats’ proposal achieves less than half of the deficit reduction of the Ryan plan.
The Ryan plan begins with an enormous concession: While the budget calls for some important tax-code reform, the revenue line stays where it is under current law. That is, Ryan’s budget grants President Obama and the Democrats their recent tax increases, including those associated with Obamacare. (Obamacare itself would be repealed, but the tax level it established would be maintained.) On this point, we think the Republicans made the wrong choice.
Otherwise, the new Republican proposal will be in its broad strokes familiar to those who know Ryan’s early proposals. It contains tax reform that will trade the elimination of certain exemptions and deductions for reduced tax rates. This alone will neither reduce the deficit nor add to it, but the simplification of our overcomplicated tax code will encourage investment and growth, and will bring some measure of relief to those taxpayers who do not at present benefit from the panoply of federal special-interest tax benefits. But if it seriously reduces the mortgage-interest deduction and similar benefits enjoyed by middle-class taxpayers — in exchange for reducing the tax rate for the highest earners to 25 percent — it will be very difficult to defend politically. It would be better to begin by jettisoning those deductions that are least defensible and then adjust rates down proportionally, rather than assuming a top rate of 25 percent and then eliminating deductions until the point of revenue neutrality is reached.
Ryan’s budget is designed to eliminate the federal deficit within ten years. That would be a remarkable achievement made more remarkable still by the fact that the budget includes no net tax increases and achieves its savings largely through Medicare reforms that are desirable in and of themselves, regardless of their effect on the deficit.
What Ryan’s budget does not contain, it should be emphasized, is spending cuts. The difference between Ryan’s balanced budget and Obama’s crippling deficits is this: Ryan proposes that federal spending be allowed to grow at 3.4 percent a year rather than the 5 percent rate it is expected to hit otherwise. That is the most important context for this debate: For a difference of 1.6 percentage points in the growth of federal spending, we get a balanced budget in ten years instead of a headlong rush into a debt crisis on the Greco-Spanish model.