March 2011

What's the Tax Debate All About?
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To make some sense out of the tax debate in the U.S., we talked to Andrew Fieldhouse, a federal budget policy analyst at the Economic Policy Institute.

Fieldhouse has been studying the tax proposals of Rep. Paul Ryan (R-Wis.), the new chairman of the House Budget Committee. Ryan is considered one of the GOP's leading specialists on economic policy. Some of Fieldhouse's answers to questions are drawn from his EPI Briefing Paper, "Paul Ryan's Plan for Millionaires' Gain and Middle-Class Pain."

EW: Rep. Ryan has talked a lot about a "value-added" tax, which he says would be fairer than today's income taxes and would encourage businesses to invest in creating jobs. What is a value-added tax?

Fieldhouse: A value-added tax is a broad consumption tax that is levied on goods and services at every stage of production but ultimately lands on consumers. I'll give you an example using a 10 percent tax. You buy a bicycle at a store for $150. The retailer bought the bike for $100 from a producer, which paid $10 of "value-added" tax. The retail mark-up is $50, so the retailer owes $5 to the IRS and keeps $45. While the producer and retailer physically make the payments to the IRS, the full $150 cost, including all $15 of the tax, ultimately lands on the consumer. Under Ryan's plan, a new 8.5 percent value-added tax would be baked into the price of goods and services.

EW: Ryan says a value-added tax is "fair" because everyone pays the same taxes.

Fieldhouse: Everyone does not pay the same taxes. That's the problem. And Ryan isn't just proposing a value-added tax. He's proposing to eliminate taxes on corporate income and to reduce taxes on money made from investments.

Workers who have yearly incomes of $25,000 or even $100,000 yearly, spend a much higher fraction of their income on food, clothes, gasoline and other needs than the very wealthy do. They also collect less investment income. So instead of being fairer, Ryan's tax is more regressive, forcing workers to subsidize the reduced taxes on the very wealthy. This leads to more economic inequality. It is not going to help our economic recovery because it will decrease consumption.

Ryan's "Roadmap to America's Future," published in 2010, would slash Medicare, Medicaid and Social Security benefits while depleting tax revenues by letting wealthy taxpayers off the hook. The only Americans who would have their taxes raised are those who make between $20,000 and $200,000. The middle class would pay higher average tax rates than millionaires. This is an unprecedented reversal of progressive U.S. tax policy.

EW: If Ryan's plan isn't fair and doesn't work to improve our economy, what would?

Fieldhouse: We have two problems running together—a cyclical downturn in the economy and a longer-term structural problem caused by the export of U.S. manufacturing, global competition and chronic underinvestment in public goods such as education, research and infrastructure. So deficit spending on stimulus measures to put jobless Americans back to work is absolutely necessary, and those investments can boost long-term productivity.

EW: But some politicians say that we should handle our nation's finances just like Americans handle our household finances. Aren't deficits dangerous?

Fieldhouse: A so-called "double-dip recession," which could result from premature deficit reduction, would be a worse alternative than expanding our deficit. As we work to strengthen the recovery and put America back to work, however, we can take steps to reduce our long-term deficit. Again, it's about what choices we make. The Ryan Roadmap is riddled with policies that ignore the lessons learned from the Great Depression and underscored by the Great Recession. Ryan's plan still swears by the failed Bush-era economic policies of cutting taxes for the wealthy while neglecting the middle class and national investments.

Instead of cutting Medicare or shifting costs to states, many of which are already in financial trouble, the federal government should exert price competition, perhaps through a public insurance option, to bring down the costs of health care, which is the biggest long-term budget challenge. Instead of moving to an unfair tax system, we should raise the tax on millionaires and tax capital income from investments at the same rate as ordinary income, which, unlike the Ryan plan, would increase tax revenue and narrow income inequality.

Unemployment won't come down immediately, but, using tax revenues, we could expand investment in our decaying infrastructure, putting construction workers back on the job, and put jobless younger workers to work in programs that help create a stronger, more cohesive U.S. society like AmeriCorps, the Peace Corps and Teach for America.