Monday, August 13, 2012

Even Worse Than it Looks: The Path to Prosperity

I'm hoping the 2012 election turns into a battle of ideologies between the Obama and Ryan camps. One can quote stats until the cows come home, but what's really at stake is the American peoples collective vision of the country: Low tax, low government service, minimal wealth redistribution, high economic inequality versus moderate tax, moderate government service, moderate wealth redistribution, moderate economic inequality. Lets say Mexico (0.476) versus Switzerland (0.303), with the US (0.378) as status quo and Denmark (0.248) as a high tax, high government service, high wealth redistribution, low economic inequality reference [1].

I think I understand the ideology underpinning Mr. Ryan's proposal, that government get out of the way and allow individuals to sink or swim on their own merits. I can see how this makes intuitive sense, prima facie. It has that truthiness that warms ones heart in sound bites.

In Paul Ryan, I see a man who has benefited from a tremendous amount of accumulated privilege and entitlement, a man who was born with a low probability of descending into the ranks of America's increasingly permanent underclass [2]. A man for whom, because of his accumulated privilege, meritocracy in America may even seem like a reality. A man for whom, in his single minded pursuit of an ideological lala-land, would disregard the detrimental impact of his proposals on all but the wealthiest Americans.

Fact: 90% of his tax cuts (3) accrue to the top 20% of the US household income distribution, those with incomes above $100,000/year (4).

Fact: He continues a trend of making the US Federal income tax less progressive [5]

Fact: Total taxation rates, not just US Federal Income tax, are a fairer comparison of relative tax burden across income groups. Total Federal, State and Local government expenditures run about 40% of GDP ($6T / $15T) [6].

Fact: While the US Federal Income tax is progressive, state and local taxes are on aggregate regressive. On balance, it's a wash for the top half of the income distribution [7].

Fact: You could cut all non-defense discretionary spending and still run a small budget deficit [6].
Corollary: The Ryan plan probably won't be revenue neutral (3).

Fact: 3/5 of Federal outlays are redistributive, generally from the middle-aged, healthy and wealthy to the old, sick and poor [6]. Think pension, healthcare and welfare.

Supposition: A Ryan-esque budget would transition the US from a slightly progressive (progressive for Federal Income tax; regressive for most everything else) tax regime to a regressive regime. How you might ask? Reduction in transfer payments and increased state/local spending to counter-act Federal declines. 1/6 of Federal spending is transfer payments to state and local governments, mostly in health care, education and transportation. Less these programs be completely forfeit, the states would raise spending (and consequently taxes) to partially counter-act these cuts in direct Federal outlays and transfer payments. In essence, you're replacing progressive Federal revenue with regressive state/local revenue to pay for a reduced form of the same services/redistribution. To add a bit more regressiveness to the mix, note that this ignores the role that the Federal government plays in wealth redistribution from wealthier to poorer states.

Simply compare the US before-tax Gini (0.486) to the after-tax, after-transfer Gini (0.378) and one can see that without a progressive aggregate tax system and some wealth transfers from the more to the less fortunate, the US would be an altogether more economically unequal place, a place where the meritocratic American dream is even further out of reach than I would like to imagine.

1. After-tax, after redistribution total population late-2000s Gini as reported by the OECD.

PS. Full text of The Path to Prosperity available here.