# Romney’s Selection of Rep. Ryan Draws Battle Line in Fiscal Policy | On Point

Romney’s Selection of Rep. Ryan Draws Battle Line in Fiscal Policy

2012 August 22

Mitt Romney’s selection of U.S. Representative Paul Ryan of Wisconsin as his running mate has apparently helped to not only generate renewed interest in  the Ryan-authored budget resolution passed by the U.S. House of Representatives, but also  to draw the battle line with regard to America’s fiscal policy in this presidential campaign. The battle line is based on the President’s budget submitted to Congress in February 2012 and the above-mentioned budget resolution. Despite their different fiscal paths, reviews of both budgets reveal each of them has inherent weaknesses but, from policy perspective, either plan will have significant impact on the deficit. The key difference is  Rep. Ryan’s budget plan being achieved through more dramatic deficit reduction in the near term.

While the President’s budget is very detailed and includes the recommendations on deficit reduction made to the “Super Committee” last year, it relies on internal White House economic assumptions which may not be as robust as those of the Congressional Budget Office (CBO).  Rep. Ryan’ budget plan reflects CBO’s economic assumptions, but the plan is in the form of annual congressional budget resolution, which typically includes few specifics and projects top-line revenue levels and spending by functional category. This lack of detail enables Rep. Ryan to escape scrutiny as to the specific impact of his budget plan on many Americans. Additionally, both plans only achieve modest savings in Medicare and Social Security within the next decade, even though these are two of the three programs that contribute significantly to the federal deficit. These weaknesses notwithstanding, law makers can work together to bridge the differences in both plans to help cure America’s fiscal ailment. The following are how the two plans compare based on information from diverse sources, including the Bipartisan Policy Center.

On the budget deficit, Rep. Ryan’s plan calls for reduction from the current 7.8% of Gross Domestic Product (GDP) to 4% in 2014, and 0.9% by 2017, while the President’s plan calls for a reduction to 3.9% and 3% respectively. Both plans call for increase in revenue by 2013, due mainly to the scheduled expiration of the payroll tax cut, but the President’s proposal aims at allowing the tax cuts on household income over $250,000 to expire and would impose new limitations on tax deductions and exclusions for upper-income taxpayers.

Rep. Ryan’s plan will replace the current individual income tax rates with two rates: 10% and 25%; lower the corporate income tax from 35% to 25%; and make it easier for multinational corporations to reduce their tax liability on foreign profits.  The President’s plan calls for an increase in the top-tier individual tax rate from 36% to 39.6%; and a reduction of the corporate income tax rate to 28%.

In the area of spending, Rep. Ryan’s plan aims at reversing the President’s planned defense cuts and appropriating $554 billion for defense in fiscal 2013. The plan will  reduce overall government spending by 1.2% and 1.3% of GDP in fiscal 2013 and 2014 respectively, in spite of the fact that it will reverse most of the cuts planned under “sequestration” in 2013 and spread other cuts over 10 years. The President’s budget assumes that the sequester is not implemented, and his spending cuts are modest compare to Ryan’s.

On Medicare, Rep. Ryan’s plan calls for the gradual raising of the eligibility age to 67 and giving those younger than 55 years the chance to opt out and participate in a federally supervised private voucher system. It also calls for significant changes in the structure of Medicare but this will not take effect until after the 10 year window Congress uses to evaluate fiscal policy. The President’s plan will leave the current system largely unchanged but will raise premiums or copays for the top income earners.  While the Ryan plan calls for turning Medicaid into a Block grant for the states, allowing them the flexibility in how much coverage they offer their residents and whom they cover, the President’s plan would keep it as is because his planned expansion of Medicaid was struck down in the Supreme Court ruling on the Patient Protection and Affordable Care Act. Given these differences, the question is which of the two budget plans is better for America?

In an independent study that compares the fiscal paths under Rep. Ryan’s budget plan and the President’s proposal, relative to an extension of current fiscal policy, the Goldman Sachs Global Economics Research team concluded that both budget plans would reduce the deficit significantly relative to current policy. A review of the study findings shows the President’s budget would nearly eliminate the primary deficit (spending excluding interest expense would be nearly equal to
revenues),  by 2018 while Rep. Ryan’s plan will would achieve a primary balance by 2015 and a primary surplus by 2018. It also reveals that compared with current policy, both proposals would impose greater fiscal restraint in 2013 and 2014, that revenues would rise under both proposals in 2013, but would keep rising under the President’s budget, and that spending would come down more quickly under the Ryan budget.

Although both plans could have significant impact on the deficit, it is clear that Rep.  Ryan’s plan is the boldest attempt at deficit reduction currently on the table. Despite the limitations in his plan, Rep. Ryan should be given credit for his courageous effort at addressing the deficit. Our nation’s fiscal problems are serious ones that call for bold leadership on both sides of the political divide. However, as indicated above, the issue with the Ryan plan is that it is short on specifics. The nonpartisan Tax Policy Center projects the revenue loss from the Ryan plan to be $4.3 trillion over the next decade, although this is partially offset by about $1.7 trillion in spending cuts. Given Rep. Ryan’s  goal to reverse the President’s planned defense cuts, most reasonable minds would agree that most of his savings would come out of basic federal services such as transportation, assistance to the poor, education and social services. For example, his proposed Medicaid changes are projected to save around $800 billion, and the cuts in food stamps could save roughly $130 billion.

Rep. Ryan’s plan aims at eliminating tax shelters and other upper-class tax benefits to help make up for the revenue shortfall. However,  the Bipartisan Policy Center has indicated that to fill the revenue gap, the entire tax code will need to eliminate nearly every exemption, including dependent exemptions, child tax credit, education credits and mortgage deduction credits. These exemptions, together with the reductions in Medicaid and food stamps, form key aspects of the battle line in fiscal policy when it comes to this year’s presidential campaign. The President will obviously argue getting rid of these credits and the safety net for the vulnerable will cause undue hardships on many Americans and further weaken an already fragile recovery. One clear issue though is our political system is such that compromises will be necessary for a more balanced approach especially if the Democrats retain the White House or even the U.S. Senate. No matter who takes control of Congress and the White House in the November elections, policy makers have the obligation to  work together to restore sanity in our nation’s fiscal policy by taking the best from both budget plans. A key to fiscal sanity is for both sides to be bolder and take serious steps to dramatically slow the growth of entitlements in order to restore the fiscal competitiveness of our country.


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