Paul Ryan's $5.7 Trillion Magic Trick

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The latest Ryan plan doesn't add up without huge, unnamed savings

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(Reuters)

I'm not really a fan of magic, but I'm even less of one when it's politicians doing the tricks.

That's why I've had some less-than-nice things to say about Paul Ryan's latest budget. Like its previous iterations, it explicitly says how he wants to cut taxes, but says nothing about how he wants to pay for it. Instead, Ryan uses a magic asterisk. He merely waves his hand, and says he'll cut enough tax expenditures to pay for all of his tax cuts. He just can't tell us what any of these tax expenditures are. Not a single one.

This is some pretty expensive hand-waving. Now, I have a bit of a mea culpa here. A few days ago, I said that Ryan's magic asterisk was worth about $6.7 trillion over a decade. That was my back-of-the-envelope calculation of how much his tax plan -- which, among other things, shrinks our current seven tax brackets down to two of 10 and 25 percent -- would cost. This was in line with other estimates, but it turns out it was wrong. Paul Ryan's magic asterisk is really only worth $5.7 trillion, according to new numbers from the Tax Policy Center.

But I was right about the big story: this magic asterisk is worth about $1 trillion more than before. Ryan keeps the same tax cuts he had last year, but he assumes these same cuts will raise an extra 0.5 percent of GDP in revenue. In other words, it's the same magical budgeting we've come to know from Ryan -- but now with even more magic!

It's particularly magical for the top 1 percent of households. The chart below from the Tax Policy Center shows the percent change in after-tax incomes for each income group from Ryan's tax cuts. That's what comforting the comfortable looks like.

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As the Tax Policy Center's Howard Gleckman points out, the top 0.1 percent of households -- a group who make $3.3 million or more a year -- get an average tax cut of $1.2 million under this plan. And they get 30.5 percent of Ryan's total tax cuts. As you can see below, households that make $1 million or more would get almost half of the tax cuts under Ryan's plan. Households making less than $100,000 would get 16.5 percent of the total.

RyanTaxCuts3.png

But wait. Ryan's tax plan is incomplete. It's all rate cuts and no expenditure cuts. Wouldn't this lopsided picture be a bit less so if we tried to account for the loopholes he says he would cut? Yes. The rich are more likely to itemize deductions, and have bigger deductions to take. But there's a problem. (It's one that Mitt Romney knows well). Ryan's top-end cuts are likely too deep to pay for by cutting top-end expenditures. In other words, his plan would probably cut taxes for the super-rich -- which means it would have to raise taxes for the non-rich if it was going to be revenue neutral.

Who would pay more under the Ryan plan? Probably the upper-middle class. The Tax Policy Center hasn't finished updating its distributional analyses of all the different tax expenditures, but the trend is generally the same: households in the $75,000 to $200,000 range take a good amount of deductions. Their tax cuts under the Ryan plan are small enough that they easily could end up paying more if he zeroed out big deductions, like home mortgage-interest.

Of course, Ryan might find that he prefers magic to math -- that if it's a choice between not paying for his tax cuts, and not getting them, he'll choose to not pay for them. In other words, his $5.7 trillion magic asterisk might just turn out to be $5.7 trillion of red ink. 

Hmmm. Budget-busting tax cuts heavily tilted towards the rich? That's not even a new trick.
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Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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