On Wednesday, Paul Ryan (R-WI), the ranking Republican on the House Budget Committee, presented a comprehensive tax and entitlement plan that would cut Social Security benefits, end Medicare as it's currently structured and attempt to simplify taxes by creating an optional income tax that one could choose in lieu of the current system. The plan follows a string of losses of formerly Republican-held House seats in special elections and a general sense that Republican members of Congress want to improve their message.
One part of the plan would replace Medicare benefits with a "payment of up to $9,500 - adjusted for inflation and based on income, with low-income individuals receiving greater support." Another part of the plan copies a Bush proposal to offer tax credits - $2,500 for individuals and $5,000 for families - to purchases health insurance. Perhaps most surprising is the part of the plan that essentially revives the prospect of diverting money out of Social Security to fund private accounts.
The tax reform part of the plan would go much further -- and cost much more -- than the Bush tax cuts. The estate tax would be abolished (at a cost of a trillion dollars over a decade) and the AMT would be eliminated (which would cost $1.5 trillion over a decade), and taxpayers would get to choose to file under either the current income tax or a "simplified" income tax with rates of 10% on income up to $100,000 for joint filers, and $50,000 for single filers; and 25% on taxable income above these amounts. The standard deduction and personal exemptions would be larger, totaling $39,000 for a family of four.
While many anti-tax lawmakers have suggested an optional simplified tax, it's not obvious how having two income taxes can be simpler than having just one. The most likely result is that people would calculate their taxes twice to see which system offers them less tax liability. And of course, the reason why the simplified version must be "optional" is that all lawmakers claim to support simplification but can't bring themselves to really close down the various loopholes that benefit certain pockets of voters (and campaign contributors) and which actually cause the complexity in the tax code.
Interest, capital gains and dividends would no longer be taxed. (Most of the benefits of the current capital gains and dividends tax breaks go to the richest one percent.) The corporate tax would be replaced by business consumption tax of 8.5 percent.
The plan would allegedly eliminate the federal budget deficit, in part with a provision that would require the OMB to make across-the-board reductions in discretionary and mandatory programs if spending rises above a certain percentage of GDP "but applies the reduction only to fast-growing programs, and is limited to no more than 1 percent of a program's spending." But given the magnitude of the tax cuts included in this plan, it's difficult to imagine Congress ever paying for them by reducing spending, which did not occur even when Rep. Ryan's party controlled the House, Senate and White House.