Thursday, March 22, 2012

Paul Ryan is Overrated and his Budget Plan Sucks

There. I said it. I know there are a large number of people who worship him thanks to his youth, his charisma and his knowledge, but I also think people have been blowing so much smoke up his a** (myself included on occasion) that he thinks his plans are great even when they are obvious duds. Like many people who have spent too much time inside the beltway, he seems to have lost sight of reality and possibly honesty. Do you know that the much vaunted conservative savior Paul Ryan only had an ACU score of 80 in 2011? On 2 key votes he took the union side and then also "took some for the team" on votes to increase the debt ceiling and to pass huge spending bills. He seems to be about as economically conservative as Rick Santorum (i.e. not as much as you would like).

Then there are his so-called "groundbreaking" plans. Take the much heralded Ryan-Wyden plan to reform Medicare. It was scheduled to kick in in the year 2022 which even Ryan's own House Budget website admits is 2 years AFTER Medicare is scheduled to go bankrupt by the Congressional Budget Office (his new plan has it starting even later, in 2023). Imagine if you or your business was going to go bankrupt in 5 days and the bank tells you that they will be happy to lend you money in 1 year. Only in a beyond the looking glass land that is Washington could anyone think this makes any sense.

Now, on to his current budget plan. I know that the Club for Growth has issues with it, all of which are fair, but those aren't really my major issues with it. My problem is with the tax reform segment, specifically his desire to get rid of "tax subsidies" though he declines to actually let anyone know which ones he would eliminate (though the Weekly Standard said that it would "virtually eliminate" all deductions). Obviously, he knows that the deductions he is targeting are popular and just doesn't want to deal with it right now, leaving Americans in the dark about what his tax reform would actually mean for them (note he also doesn't say who would be paying what tax rate). I guess we are supposed to pass this plan in order to find out what's in it?

There are plenty of deductions that we can probably get rid of but the main ones that he is likely targeting are the ones for mortgage interest, charitable contributions and health insurance. Let's go down the list and point out how getting rid of these could be quite destructive. First, mortgage interest. I've heard some people claim that this deduction is "welfare for the middle class". Well, not exactly. Welfare is someone getting a check thanks to money taken from someone else. The mortgage interest tax deduction simply lets people keep more of the money they rightfully earned. Also, I would argue that the mortgage interest deduction doesn't actually benefit most homeowners because when they bought their home, the price was inflated due to the existence of the tax deduction. Sellers generally price items to the level that the market can bear, if there is a major tax deduction that makes a home more affordable, sellers know they can ask for more money than if there was no tax deduction. That home that you paid $550k for, might have been $450k or less if you didn't have that deduction. In other words, you can argue that when you bought your home you prepaid for your annual tax deduction. Getting rid of it will effectively be robbing the middle class of quite a bit of money. Many will now not be able to afford their homes and probably won't be able to sell them either because their values will have crashed. It would be one thing if people bought homes knowing that the deduction was temporary but didn't seem to care due to shortsightedness. But the deduction has been in place since the income tax first started a hundred years ago so it's been understood to be permanent and people have acted accordingly. Some would argue that because tax rates would decrease, there shouildn't be too much of a negative impact. But the problem nobody knows at what point the 25% tax rate is supposed to start. I can see a scenario where quite a few middle class people see their effective level of taxation double thanks to Paul Ryan's plan.

And the problems don't just start there, there are also the economic impacts. People could see tens or hundreds of thousands of dollars knocked off the value of their homes. Between that and higher taxes (due to fewer deductions), you will see them spending far less. Also, the hit to the value of real estate will also hit banks once again, banks that are still barely on their feet (remember Citibank recently failed their stress test). Simply put, the Paul Ryan budget could put us on a road to another financial crisis.

Ryan is probably also going to want to eliminate the charitable contribution deduction. Yes, those deductions often do go to the wealthy but so what? Aren't they giving their money away to people who are helping others? If you take away that incentive for people to give, you're going to see a lot less giving. This will make the poor even more dependent on centralized government programs. I would expect this from Obama, not from someone who is supposedly conservative. And finally, there is the health insurance deduction, which really isn't a deduction at all. We are getting benefits through work and have never had to pay taxes on those before as we aren't actually receiving any cash. What Ryan is probably going to do is make us pay taxes for money we don't even see, taxes that would be inflated by the fact that our health insurance is so expensive due to government handouts to other people. How the heck is that fair?

What would be fair you ask? What would be fair would be a proposal like the one that Newt put out:

I have proposed an alternative flat tax that people could fill out where you could either keep the current system — this is what they do in Hong Kong — . . . with all of its deductions and all its paperwork, or you'd have a single page: 'I earned this amount. I have this number of dependents. Here is 15 percent.' My goal is to shrink the government to fit the revenue, not to raise the revenue to catch up with the government.

The beauty of this plan is it actually gives you a choice (I know, choice, what a concept for government). You can either go to a simple system or you can keep the complex system (and all the accountants and copies of Turbotax it requires) if you think it will be a net benefit to you. It's a no lose situation for taxpayers. The only loser would be government. Now that's a plan that I could get behind!

Cross-posted from libertarian neocon's blog.


I so agree. Certo!

I would so choose the Flat 15% tax rate.

LN you are exagerating the impact of the mortgage tax deduction. The home mortgage interest rates are so low these days that you pay almost nothing in interest anymore. The system made sense 30 years ago when your interest rate was 3-5 times what it is now.

The biggest mistake made by home owners in the past decade is not getting a standard loan and putting in a down payment. These people get FHA loans and end up adding hundreds of dollars to their mortgage payment each month in PMI (that is a mortgage insurace for those who don't know). PMI isn't tax deductable either, it is just money down the drain.

The end result, the housing crisis hits and people lost value in their home. BUT, they never put any value into their home because they never had a down payment. They are effectively renters and when a renter can't afford something anymore they just give it back. How many people do you think would walk away from a home that they put a 20% down payment into, even if it lost value?

I do agree with your premise about the Ryan Plan over all. Passing legislation in the house only to have it completely ignored by the senate only plays into the hands of the democrats.

Why? Because the plans passed by the house do not have the popular support of the people! The democrats at least try to look like they are listening to the concerns of the American people. Republicans (through the lens of the media) look like they are content to lower taxes on the rich by cutting benifits from the poor and elderly.

2012 Republican theme song should be American Pie. The music has died....

It depends where you live. If you live in Detroit where the average home is 80k and you get a 4% mortgage, yeah it isn't going to matter that much (though if you are in the market for a home of that value you probably dont have much cushion). But what if you live in an expensive area? There are quite a few places around the country where you can spend $500k on a home and that just gets you a modest starter. Even with low interest rates the mortgage interest deduction saves you thousands a year.

On the real estate market, I think prices on average are down over 20% from the peak, in some places like CA, FL and NV, even more. So if you bought in the years before the bubble you could be on the verge of being underwater even if you put 20% down.

Also, right now the real estate market is continuing to be challenged. Imagine what it will do without an interest deduction? Quite a few incremental buyers will stay home.

I just think its a dishonest document because he doesn't give any details. If he takes away my mortgage interest deduction and my charitable contribution deduction and taxes my health insurance but then puts me at a 10% tax rate, no worries. Net net, Im okay. If he puts me at 25%, Im actually paying a lot more effectively, a hell of a lot more. And this is going through committee without such a detail fleshed out? For someone who is supposed to be brilliant, he is rather wanting.

LN i don't even know how to address the argument that 500k is a starter home. It is a strawman.

You don't see any money back from interest deductions until you file your taxes. I don't know about you LN, but I don't depend on my tax return to make it the rest of the year. When I purchased my home, I purchased it based on what i could responsibly pay each month. The money I get back on my taxes was never taken into account because that only happens once a year or once a quarter.
I'm in no way arguing that I want to send more money to the government, but I just want to address your point that the deduction is such a big deal.

The problem with the Ryan plan is the same problem with most government plans. They try to address todays problems by pushing them 10 years down the road. If loosing all of my deductions would balance the budget tomorrow I'd sign on the dotted line. If the Republican party wants to matter again, then they need to focus on fixing the problem today. A 10 year budget analysis predicting a future balance budget is a lie.

Maybe the republicans should try to pass a 1 year budget cutting down our deficit with the senate first. If that works, then lets move onto year 2 and so on.

If you lived around ny, la, sf or boston you wouldn't think I'm giving a strawman example. Also if he taxes my healthcare that is money that will be taken out every month. At 25% that will be several thousand dollars a year taken from me. It all adds up. And its not about being responsible, its about how much money do yyou have at the end of the year to spend or save now versus under ryans plan.

Anyway I agree with your point about 10 year plans. I think the club for growth actually pointed out that there will be fewer spending cuts under ryans plan next year than would be in the budget deal they r under now, its all just smoke and mirrors.

I don't want to beat Paul Ryan up to bad. I appreciate him making a contribution in the right direction. If ALL IT DOES is help highlight the fact that the Democrats STILL haven't passed a budget in 3 years - it is worth it.

There simply are not enough Jim DeMint's running to make a difference, much less a majority. Sometime you have pick the ugly girl for the Prom or you go alone.

I choose Newt's, LOL!

Thanks for the write-up.

Post a Comment


Twitter Delicious Facebook Digg Stumbleupon Favorites More