Matthew Continetti, in the course of defending Rep. Paul Ryan’s “roadmap,” links to a report by the liberal group Citizens for Tax Justice. CTJ says that the roadmap would raise taxes on 90 percent of Americans. Continetti writes:
That’s a swipe at Ryan’s zeroing out the stimulus and replacing the corporate income tax with a business consumption tax. You see, Ryan says the expansion of the Earned Income Tax Credit and Child Tax Credit in Obama’s stimulus bill is spending, not tax cutting. He’d eliminate it. And CTJ counts a reduction in that spending as a tax hike. The business consumption tax would be passed on to the consumer, making it regressive. But Ryan notes that Americans indirectly feel the consequences of the above-average U.S. corporate tax rate today, through lost wages and higher prices. And these effects are regressive, too. Unlike the current situation, Ryan goes on, the business consumption tax “is cleaner, simpler, and it’s on paper.” It would also make American exports more competitive than they are today.
Reining in the EITC and child credit raises two issues. First, is it right to consider those credits “spending” rather than “tax cuts”? Republicans have generally said that “refundable” tax credits — credits that you get even when your income tax liability is already zero — should count as spending. But payroll taxes are taxes too, and there’s a reasonable case that people should be able to use either the EITC or the child credit to offset payroll taxes as well as income taxes. (It’s not as though Representative Ryan is a purist on this issue, either: His plan creates a refundable tax credit for health care.) Second: Even if it is right to consider the scaling back of the credits as a spending cut, will it fly politically? Conservatives probably don’t want to be in the position of telling people who are surrendering more of their paychecks to the federal government that it only looks like their taxes are going up.
I think that Representative Ryan is right that moving from a corporate income tax to a business VAT might not do much to change the distribution of taxes. The argument that a business VAT would make exports more competitive, though, is deeply flawed. First of all, there is considerable reason to think that any gain in the trade balance would be wiped out by changes to the exchange rate. Second, there’s no good reason for the government to favor exports over imports. Adam Smith taught us that a while ago; you’d think Representative Ryan, of all people, would know better than to lapse into mercantilism.