House republicans recently revealed their budget for fiscal year 2013. It is a budget that Republicans are billing as a plan that highlights the differences between the President’s vision for the country and their own. The plan sets its sights on some of the largest fiscal issues facing our economy today. And seeks to offer viable solutions for these problems. Let’s go over some of the details now.
Now, this plan is commonly referred to as the Ryan plan, because it was spearheaded by Representative Paul Ryan, who is a Republican from Wisconsin, and who is also the Chairman of the House Budget Committee. The plan looks to take on some of the most controversial budget issues facing us today, and tries to do so in both the short term as well as the long term. So issues such as tax reform, entitlement reform for Medicare, Medicaid and Social Security, and budgeting for defense, are all addressed. Let’s take a few of these one by one now.
The plan makes a major push for tax reform by seeking an overhaul of the entire tax code. The plan proposes consolidating the 6 existing personal income tax brackets into just two: a 10% bracket and a 25% bracket. The plan would repeal the Alternative Minimum Tax which has had an unintended negative impact on middle income taxpayers.
The plan would reduce the corporate tax rate to 25% percent. It is currently at about 39%, which is the highest in the world. The plan would shift to what it calls a “territorial” tax system for corporations. Which means corporations would only be required to pay taxes in the countries or territories where the money was earned. They would be able to repatriate those profits, or bring them back home, without having to pay additional taxes on them. Under the current system of taxation, corporations are taxed twice: by foreign governments when the money is earned overseas, and then again by the US government when those profits are brought back home. The plan contends that this current system puts American companies at a disadvantage competitively with their foreign counterparts. A change to a territorial system, the plan contends, would level the playing field and make US corporations more competitive.
Now, on taxes, the plan seeks to offer a stark contrast with the President’s plans for taxes. The Ryan plan refuses to increase taxes on any segment of the population. The President’s plan as you may have heard proposes the “Buffet Rule,” which states that the tax rates on the wealthiest households in America should be raised to be more in line with the tax rates of middle income households.
Instead of that approach, the Ryan plan looks to eliminate all tax loopholes and special credits in the tax code altogether. The plan contends that by doing this, the country’s tax base will be broadened because fewer people will be able to claim deductions and take advantage of loopholes. This will allow for lower rates for everyone while still keeping the plan revenue neutral. Which means, the government won’t be taking in any less tax revenue than they are now.
The plan also seeks to strike a contrast with the President on plans for Defense. The Ryan plan provides $554 billion for defense spending in the coming fiscal year. And looks to reverse the President’s call for nearly $500 billion in cuts to defense spending over the next 10 years. The Ryan plan contends that the President’s proposals for defense spending are driven by budgetary calculations, when they should be driven by strategic calculations. The Ryan plan aims to do just that.
Now, the plan also takes considerable aim at government spending as well. The plan would take several programs aimed at assisting lower income households, such as the Food Stamp program, and devolve them to the States. In other words, the budget would transfer the funding of these programs from the Federal level to the State level. The budget contends that States can better tailor these programs to their specific constituents making them more robust and effective.
The budget would place two important reforms on social programs such as these. First, it would turn these programs into block-grant programs. A block grant program is a program in which a lump sum of funds is granted to State and local governments by the Federal government, which those local governments can then use as they see fit. The budget contends this allows the States to better come up with creative solutions to reduce the number of people on their assistance rolls.
The second reform is time limits and work requirements for enrollment in programs such as these. The plan contends that requirements like these lead to a drop in dependency and overall poverty nationwide. These changes would be phased in over time to give recipients time to adjust, as well as the economy time to recover.
Where the plan makes its most controversial proposals however are the major entitlement programs. Specifically, Medicare and Medicaid. The House plan would change Medicare from a program subsidized by the government, to one where the government would give seniors stipends to go out into the marketplace and purchase their own insurance. So each year, a certain benchmark level of support would be determined. And the government would pay that amount out to seniors. Seniors would then go out into the marketplace and choose a health care plan that they feel is right for them.
A marketplace would be created, called the “Medicare Exchange” where health care providers would compete, by bidding, for the right to serve Medicare beneficiaries. Seniors would have the option of choosing from among these providers. If they choose a plan from a provider that is more expensive than the benchmark cost that is determined, seniors would be responsible for paying the difference. Conversely, if they choose a plan that is less expensive, they would receive a rebate for the difference. Critics of this plan often deride it as a plan to turn Medicare into a voucher program. Because seniors, in essence, would be given vouchers to go out and purchase their own insurance.
Now this plan would go into effect in the year 2023. So it would affect only those workers who are currently under 55. For workers currently above that age, and who are close to retirement, their Medicare benefits would be completely unchanged. The program would exist for them as it does now.
Now, it’s the skyrocketing cost of Medicare that is putting the program at risk. Healthcare costs are increasing at such a dramatic rate, that they are making the program unsustainable. The government subsidy, the Ryan plan contends, is precisely the reason for these skyrocketing costs. The plan contends that if some competition and some free market forces were allowed to play a role, they would help keep the costs of the program in line.
The plan contends that it’s the nature of the open-ended Medicare subsidy that incentivizes volume of services rather than quality of care, and also lends itself to rampant waste and abuse, which is prevalent in Medicare. Conversely, switching to a market system with more choice and competition, incentivizes reducing costs and improving quality of care for recipients.
Now similarly, with Medicaid, the plan also proposes major changes. As with the other safety net programs mentioned earlier, the plan seeks to turn Medicaid into a block grant program administered by individual States rather than the Federal government at large. The plan contends that offering States more flexibility and control in the way they administer Medicaid benefits, will lead to better quality care and more control over costs. Under the Ryan plan, funding for Medicaid would be cut by about $800 billion over the next 10 years.
So those are the major facets of the plan. It should come as no surprise that Democrats have found a lot to criticize about these proposals. Firstly, they point out that the plan offers no specific numbers by which the plan can be analyzed, or scored. For example, the budget plan says that the 6 existing tax brackets would be eliminated in favor of just 2. But the plan does not specify the limits for those 2 brackets. That makes it impossible to evaluate the plan’s actual effect on the economy.
Secondly, Democrats criticize the plan for breaking the agreement reached by Congress over the debt limit last summer. You will recall that last summer when the US was rapidly approaching its debt limit, Congress reached an agreement at the last minute, whereby Republicans agreed to vote for a debt limit increase in exchange for Democrats agreeing to a level of spending cuts. That agreement cut discretionary spending down to $1 trillion 47 billion. This budget cuts that level down further to $1 trillion 28 billion, a difference of about $20 billion. Democrats charge that by changing the terms both parties previously agreed to, Republicans are violating a good-faith agreement.
Perhaps the biggest cause for criticism the Democrats see is Medicare. Democrats charge that the Ryan plan basically ends Medicare as we know it. They say the changes the plan proposes completely guts Medicare and makes it a voucher program. They argue that this points to the fact that the Ryan plan seeks to cut the deficit on the backs of the weakest and most vulnerable members of society.
There are many issues one can take with the Ryan plan. Firstly the Democrat’s claim, that the budget serves more as a political statement than it does as a financial plan, is legitimate. The plan does not include specific budget numbers, and that makes it impossible to evaluate the real effect it would have on the economy. It is also true that the deal does look to break the agreement reached last summer over the debt limit. That agreement was made in good faith. To try and change the terms now would only breed more distrust and adverse feelings. And the plan does propose drastic changes to Medicare and Medicaid. Whether or not these changes are the best way to proceed, many people are still unconvinced of.
But the fact is this: the main drivers of our deficit and debt are not programs like foreign aid, or departments like the EPA, or even defense spending. They are our major entitlement programs. Social Security, Medicare and Medicaid. These are the issues that need to be addressed and addressed quickly if we are to get America back on solid ground financially. This budget, for all of its shortcomings, at least focuses on the right topics. Entitlement reform is probably the toughest conversation we need to have right now. And this budget, at the very least seeks to begin that conversation.
For too long our elected officials have chosen not to tell the truth about these programs. They have operated, basically on political fear. But as Paul Ryan said when presenting this budget, “If we simply operate based on political fear, nothing is ever going to get done.” That is correct. Paul Ryan has chosen to brave this political fear. And for that he is to be applauded and commended. We can have a long and difficult debate about whether or not these ideas are the best way forward. And judging by the proposals in this budget, long and difficult the debate should be. But let’s put aside the political fear, and begin at least asking and answering the right questions.