Barack Obama, Nancy Pelosi and most of the left are screaming about Paul Ryan‘s plan to literally pull the food out of the mouths of poor children to give tax breaks to millionaires and billionaires, to paraphrase the rhetoric. This is because Ryan’s plan would lower the top rate to 25 percent from its current rate of 35 percent.
Lost in all of this is that Ryan wants to get rid of most deductions and credits. Many of the deductions in the tax code are skewed towards those in the top bracket, such as charitable deductions and deductions on capital losses. This would force the actual rates of taxation much closer to the marginal rates, especially for the higher income earners. In 2007 the average marginal tax rate for the top bracket was 17 percent. Under Ryan’s plan, there most assuredly would be much less room for a large amount of write offs and deductions and the top bracket would pay closer to their 25 percent marginal tax rate.
That sounds like a tax hike to me. Also, it’s fine by me. I know this is almost heresy, but a lower marginal rate in exchange for a higher tax burden is not only unavoidable when simplifying the tax code, it is also necessary to put our house in order. Almost half of Americans pay no taxes. Under any tax simplification, they would have to start paying taxes. Sounds like a tax hike to me. The argument for them is, that’s unfair, they have to have some skin in the game. So if a tax hike for them is ok under the banner of tax reform, it should be ok for everybody.
Lower, simpler tax rates and a path to a smaller government will not be without its costs. We can’t have our cake and eat it too.