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

By Derek Thompson

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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Reuters

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.

Ryan slashes deeply, but he spares defense and Social Security, which, together, account for 40% of the budget. That means his $4 trillion in cuts come mostly out of health care spending, income security spending, and basic government duties. By 2023, Ryan would spend 16 percent less than Obama on income security programs like unemployment benefits and food stamps. He would spend a quarter less on transportation, and 13 percent less per veteran, according to Brad Plumer.  Medicaid spending would be shaved by about a third, and the Urban Institute calculated that a similar proposal would force the states to drop between 14 million and 27 million people from Medicaid by 2021 (note: that's an extreme prediction). It's not clear exactly what programs would be cut, or by exactly how much. What is clear is that everything within the bundle of government responsibility -- from subsidizing science research to subsidizing education to keeping up national parks and law enforcement -- would come under pressure for cuts to make room for the massive and regressive cuts to taxes.

What does that budget mean for your budget? It rather depends where you fall on the income ladder. Romney is relieving the richest Americans from some of their duties to pay for the risk-protection of the poor, and he is asking some of the poorest Americans to accept less help from the government in exchange for ... well, the virtue of independence from government. It is stark, but broadly accurate, to say that the less you benefit from Ryan's tax cuts, the more you would potentially suffer from Ryan spending cuts. It is possible -- and, in Ryan's vision, duly hope for -- that devolving responsibilities from the federal government to the states and the private sector will drive efficiencies. But, as the GOP likes to point out about the president, "hope is not a policy," and it is definitely not an inevitability.

Remember when Romney said he's "not concerned about the very poor" because there's a safety net for them? Well, there wouldn't be the same safety net after Ryan's plan took root. Romney doesn't have to embrace every detail of Ryan's plan, and he won't. But he has embraced the philosophy of Ryan's vision: That true freedom means freedom from government dependency, and that the poor are somehow richer, in spirit or in literalness, if they take less money from the government. Ryan believes that his budget could unlock spectacular growth and increase lower-income wages. And it might! But most of what we know about the impact of technology, emerging markets, and off-shoring suggests that gaping income inequality is a side-effect of global capitalism more than an outcome of progressive government. 

This budget would have a very predictable outcome: It would make poor families poorer, and more exposed to the risks of medical or financial calamity, all under the banner of "Responsibility And Freedom." Ryan is free to march under his banner. But don't ask me to call it responsible.

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* To be clear, in the latest plan passed by the House of Representatives, Ryan did not propose to zero out investment taxes, as he has proposed in earlier iterations of his Roadmap.

**Read Alan Viard's comments about Ryan's plan here.

This article available online at:

http://www.theatlantic.com/business/archive/2012/08/the-poor-get-poorer-how-ryans-budgets-would-affect-ours/261043/