The Poor Get Poorer: How Ryan's Budgets Would Affect Ours

His vision is to free the lower-income from an allegedly dangerous dependence on government programs. But the outcome could be a multi-hundred-billion-transfer of money from poor to rich.

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There are many different ways to talk about Paul Ryan's Roadmap, but maybe the most useful is to imagine how his budget affects your budget. How much more money would you keep under his broad tax plan? How much more would you have to save to pay for health care? And for the low-income, whom -- as we'll see -- bear the brunt of Ryan's cuts: How alone would they be in Ryan's America?

But let's start with a bit of basic arithmetic.

There are two ways that the government's budget can affect yours. Clearly, one is taxes. More than 80 percent of government revenues comes from individuals' wages and income. (The rest comes from corporate taxes and things like excise taxes on gasoline, which also affects our budgets, but less directly.) Two is spending. Although most of us might think of government as providing public goods like airports and security, $3 out of every $5 Washington spends is basically insurance -- a transfer to those who are old, sick, and poor. Social Security writes checks equal to 20% of government outlays. Medicare, Medicaid and CHIP account for another 20%. Safety net programs and benefits for veterans and federal retirees account for another 20%.

So, a full accounting of how Ryan's budget would affect your budget must consider how much he would cut our taxes and how much he would cut our transfers.

TAXES. Ryan cuts income tax rates and abolishes investment taxes to reduce government revenues by about $450 billion* per year over the next ten years. (That's after he makes permanent the Bush/Obama tax cuts.)  

We don't know exactly how Ryan's tax cuts would break down by family income level, but the Tax Policy Center has published an estimate based on the Ryan-inspired budget passed by the House of Representatives this year. The upshot is that the federal income tax code -- the one highly-progressive part of our tax system -- would become significantly less progressive. Taxes would barely change (or even rise) on the low-income Americans, and the top 1% would see a windfall from the elimination of taxes on most of their investment income.

"Those making $1 million or more would enjoy an average tax cut of $265,000 and see their after-tax income increase by 12.5 percent," TPC found. "By contrast, half of those making between $20,000 and $30,000 would get no tax cut at all."**


SPENDING. Ryan is most famous for his Medicare plan, but if his budget became law at midnight tomorrow, the most dramatic changes over the next ten years would be everything but Medicare. That's because Ryan's long-term plan to move Medicare from a defined-benefit fee-for-service system (where government is your insurance) to a defined-contribution system (where government writes you a check to help you pay somebody else for insurance) is truly a long-term plan. It wouldn't begin to take effect until the early 2020s. The typical family might prepare for a more modest Medicare by putting more money away. They might leave more of their salaries in a savings account. They might invest in the stock market, with the understanding that any gains wouldn't be taxed. They might use their modest income gains to buy a house, with the intention to sell at a tax-free gain later.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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