Which Paul is Correct? Is Krugman or Ryan the ‘Unserious Man’?
Paul Krugman attacks Paul Ryan as an “unserious man” because, as Krugman does the math, the Ryan budget plan doesn’t add up. Using Tax Policy Center data, Krugman says Ryan’s tax reform would lose $4.3 trillion over the next decade while his budget cuts would only save $1.7 trillion. “Over all, the effect would be to increase the deficit by around two and a half trillion dollars,” Krugman writes in his New York Times column today.
Now, let’s recall that referring to this budget, the bipartisan Committee for a Responsible Federal Budget said the following:
As with last year’s budget, Chairman Ryan deserves a lot of credit for his proposals to get spending under control over the long-term. Even taking out any claimed savings from no doc fixes and leaving in the sequester, the House Republican budget still looks better than most other prominent plans out there by putting debt on a clear downward path — a very encouraging element of the plan.
But that’s an appeal to authority. Let’s appeal to math and economics instead. The crux of Krugman’s argument concerns Ryan’s tax plan, which Ryan describes thusly in his Path to Prosperity:
• Reject the President’s call to raise taxes.
• Consolidate the current six individual income tax brackets into just two brackets of 10 and 25 percent.
• Reduce the corporate rate to 25 percent.
• Repeal the Alternative Minimum Tax.
• Broaden the tax base to maintain revenue growth at a level consistent with current tax policy and at a share of the economy consistent with historical norms of 18 to 19 percent in the following decades.
• Shift from a “worldwide” system of taxation to a “territorial” tax system that puts American companies and their workers on a level playing field with foreign competitors and ends the “lock‐out effect” that discourages companies from bringing back foreign earnings to invest in the United States.
Ryan says the plan would generate revenue equal to 18.3% of GDP over a decade, while Krugman-TPC say it would generate just 15.5% of GDP. If Ryan is right, deficits would average 1.7% of GDP from 2013 to 2022. If Krugman-TPC are correct, deficits would average 4.5% of GDP over that span.
So here are the two big problems with the Krugman thesis: a) it assumes no budgetary offsets from reducing tax breaks, b) it assumes only modest affects to growth.
And both assumptions are wrong. Ryan has said he would dramatically scale back tax loopholes. And Ryan’s tax reform would boost growth. For instance, Krugman-TPC assumes the corporate tax cut would lose $1.1 trillion. Would it really? Note this 2007 study from AEI’s Kevin Hassett and Alex Brill:
Corporate tax rates among industrialized nations have been declining steadily since the mid 1980s. Theories of globalization, capital mobility and tax competition have been proposed to explain these changes. Less attention has been paid to the changes in corporate tax receipts during this period and their relationship to tax rates. This note explores these changes and finds, similar to Clausing (2007), strong statistical evidence of a Laffer curve in the international corporate tax data. This conclusion remains even when significant potential outlier countries, such as Ireland, Switzerland and Norway, are excluded from the sample. We extend her work by exploring the time variation in the revenue maximizing corporate income tax rate from 1980 to 2005. We find robust evidence that a Laffer curve has existed in the corporate tax sphere throughout most of our sample period. It is not merely a recent phenomenon. We also find that the revenue maximizing corporate tax rate was about 34 percent in the late 1980s, and that this rate has declined steadily to about 26 percent for the most recent period.
Brill and Hassett, shorter: The U.S. corporate tax rate of 35% is way, way above the revenue maximizing rate.
And does Ryan’s Medicare reform plan — whose premium support concept is one centrist Democrats used to support (some still do) — point to him as being unserious or, rather, a thoughtful politician who has moved to the center to get things done and reach out to Democrats such Senator Ron Wyden of Oregon?
Ryan? Unserious? That’s a joke.