Quick Thoughts on the Ryan Budget FY 2014

As Ross Douthat and James Pethokoukis suggest, the FY 2014 Ryan budget is a perfect illustration of Matt Continetti’s “double bind” thesis. That is, the things conservative Republican lawmakers need to do to attract swing voters in swing constituencies appear to be in tension with the things conservative Republican lawmakers need to do to shield themselves against primary challengers.

There are a few things to keep in mind.

1. The public has a limited appetite for cuts in the top marginal tax rate. Promising a substantial cut in the top marginal tax rate is not likely to pay significant political dividends, and there is at least some reason to believe that promising a modest increase in the average tax rate paid by high-earners remains at least somewhat politically attractive, particularly when contrasted against other deficit reduction strategies.

2. Though the Affordable Care Act isn’t popular as such, a number of discrete provisions of the law are popular. In particular, anxieties concerning pre-existing conditions, chronic illnesses, catastrophic expenditures, the cost of COBRA, etc., are a barrier to efforts to rollback the law. Conservative policymakers have devised plausible alternative strategies for expanding coverage and addressing the concerns of individuals with pre-existing conditions, yet these strategies, e.g., funding high-risk pools, are expensive — so expensive that they are difficult to reconcile with other conservative priorities, like containing the federal revenue as a share of GDP to the postwar historical average, a period during which the prime-age share of the population was considerably larger relative to the retired share than it is now and then it will be for decades to come. Moreover, many of these plausible strategies, e.g., curbing the tax subsidy for employer-provided medical insurance for high-earners more than the ACA, risk alienating influential and vocal constituencies. All of this is to say that repealing the ACA will be a heavy lift, even if, as seems at least possible, it has adverse economic consequences, e.g., depressing full-time employment levels.

3. The likely survival of the ACA creates an opportunity for advocates of spending restraint, as Avik Roy has explained: raising the Medicare retirement age would mean that the youngest older Americans would shift from Medicare to some combination of the ACA’s state-based exchanges, Medicaid, and employer-provided coverage. This is one way to mitigate the fact that the aging of the population means that delaying implementation of Medicare premium support becomes more expensive over time, as Pethokoukis reminds us.

4. Medicaid is fairly popular, in part because a large share of nursing-home residents are covered by Medicaid. Consider the size of the so-called “Sandwich Generation.” The Pew Research Center finds that 47 percent of Americans between the ages of 40 and 59 have a parent over the age of 65 and are either raising a minor child or are supporting a grown child. The Medicaid program is, for a variety of reasons, deeply attractive to many of these parents, as it helos ease the burden of caring for an elderly parent. What is interesting is that members of the Sandwich Generation are more likely to be relatively affluent than non-members, yet they nevertheless rely, albeit indirectly, on a safety net program. Recall that former President Bill Clinton’s address to the 2012 Democratic National Convention attacked the 2012 Ryan budget not for its Medicare reform but rather for its Medicaid reform. Also note that a number of Republican governors, many of them in swing states like Ohio, Florida, and New Jersey, have embraced the ACA’s Medicaid expansion, an indication that the politics of achieving substantial savings in federal Medicaid expenditures will be challenging going forward. 

5. As Charles Blahous has observed, current policies mean that Social Security will have to be subsidized by general revenues. This promises to change the politics of Social Security in a number of unpredictable ways, and the case for structural reform in the near-term is fairly strong. 

Given this landscape, several aspects of the Ryan budget stand out:

A. The budget calls for a two-rate income tax system as the goal of tax reform, despite the limited appetite for cuts in the top marginal tax rate described in (1) and despite the fact that the more modest goals articulated by the Romney-Ryan tax proposal proved extremely difficult to reconcile with revenue-neutrality, thus causing endless headaches for the Romney-Ryan campaign. Indeed, the budget assumes a considerably higher post-cliff revenue baseline than the Romney-Ryan campaign, which implies implausibly deep cuts in tax expenditures for low- and middle-earners as well as high-earners. 

The interesting question is whether or not the political dividends that flow from the 25 percent number, or rather sticking with the 25 percent number, merit the political heat Republicans are likely to take for advancing an implausible number. (I focus on the political heat because I am interested in the strategic merits of the decision. Substantively, I oppose a 25 percent top rate unless it is part of a much larger overhaul, e.g., something along the lines of Michael Graetz’s Competitive Tax Plan, as I think it is important to preserve room for an expansion of the child credit.) I find it extremely unlikely that going for 25 percent as opposed to 35 percent or, say, 37 or 30 percent, will be worth it. And while some conservatives would have objected to the higher top rate, any disappointment would be outweighed by insulation against the charge of cutting entitlements to finance tax cuts for high-earners — a charge that gains plausibility from the eye-catchingly-low 25 percent rate. 

One legitimate concern is that there is a reasonably good case for a 25 percent corporate income tax rate, per Robert Pozen and Lucas Goodman, and complications might arise if the gap between the corporate income tax rate and the top personal income tax rate are too far apart. But Pozen and Goodman offer a convincing account of how they achieve revenue-neutrality without unduly burdening the firms that “lose” from revenue-neutral reform.

B. The Ryan budget assumes that the ACA will be repealed. The budget offers thoughts on Medicare and Medicaid reform, yet it offers only a brief discussion of the virtues of patient-centered reform, medical-liability reform, and a free-choice option for employees receiving employer-provided health insurance. One can argue that the budget is not the right place for a detailed discussion of health reform or coverage expansion, yet the fact that a conservative health reform agenda will likely cost some non-trivial amount of money — less than the ACA, presumably, but something — this is an important lacuna. So the budget doesn’t tee up congressional Republicans to make a successful push on replacing the ACA for the reasons outlined in (2), and it doesn’t capitalize on the opportunity Avik identifies in (3).

C. The Ryan budget’s Medicaid reform offers a reasonably attractive architectural principle. Yet there is reason to believe that a decision to grow Medicaid block grants with population and inflation (not health inflation) would meet with sharp political resistance, particularly in the event of a recession. As Paul Howard of the Manhattan Institute has suggested, tying Medicaid block grants to a state’s relative population of low-income and disabled and making the program explicitly countercyclical is a more attractive and politically palatable approach. But it is almost certainly more expensive.

There is more to say, but this is a start. Crafting a budget that reconciles the interests and preferences of the Sandwich Generation and the Tea Party Caucus is a challenge, and I don’t envy the lawmakers who’ve given it a shot. 

I’m eager to see what the Senate Democrats have come up with tomorrow. All reports suggest that the Sen. Patty Murray, chair of the Senate Budget Committee, will release a proposal that is if anything less detailed than Ryan’s. I’m hoping nevertheless that the Senate Democrats’ plan will provide details on tax increases.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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