The Republican Path to Prosperity

Republicans in general, and presumptive Republican presidential nominee Mitt Romney in particular, have endorsed an economic program generally attributed to Wisconsin Congressman Paul Ryan and entitled, “The Path to Prosperity,” hereinafter referred to as “the Path.”  In the next few weeks, I will be doing a logical analysis of various parts of this document.  I write here only to make one observation about a key element about which the document remains mysteriously silent.  In the meantime, I strongly recommend that you read the whole document.  You may skip the first ten pages, which are primarily a political statement about the Republicans’ opposition to President Obama.

The fundamental premise of The Path is the indisputable assertion that the United States is heavily in debt and needs to reduce that debt.  The general structure of the solution offered by The Path is to reduce spending, increase revenue and stimulate the growth of businesses and, therefore, jobs.  In these general outlines, The Path follows an inescapable logic.  To balance one’s budget, one has only two options:  reduce spending and increase income.  Stimulating the growth of business is presumably a means of increasing income, since more business and more jobs would mean more income and therefore more tax revenue, not to mention less reliance on public funding and therefore a reduction in spending.

There is, however, an apparent anomoly in The Path regarding the increase of income.  The Path actually proposes to reduce taxes, suggesting that the maximum tax margin be reduced from its present 33 percent to 25 percent.  This would presumably be in addition to other tax reductions presently being proposed by Republicans, such as the pending bill to further reduce taxes on hedge fund and private equity managers by an additional twenty percent.  The Path argues that this further tax reduction on the income of what turns out to be the highest incomes, primarily people making in excess of one million dollars a year, is justified as a part of the program to stimulate the growth of business, and that the resultant reduction in tax revenue would be more than made up for by eliminating what The Path refers to as “income tax loopholes.”

Herein lies the mystery.  The Path, and apparently all of its supporters, refuses to reveal what “tax loopholes” it proposes to close.  There are some obvious candidates for the title of “tax loophole”, the elimination of which would create a great deal of new income for the government.  There is, for instance, the Foreign Investment Tax Credit.  This little-mentioned provision of the tax law allows multinational corporations to hide gigantic profits offshore without being taxed.  So, for instance, Exxon Mobil used it to shelter 56 billion dollars in profits, and GE was able to shelter a whopping 62 billion dollars.  (See Richard Blake, “Repear the Foreign Investment Tax Credit,” Denver City Buzz Examiner, June 19, 2009.)  Then there are the hedge fund tax deductions, the corporate restructureing tax deductions (used by venture capital and private investment funds) and, of course, the historically low capital gains tax, 97% of the benefits of which went last year to people earning more than one million dollars a year.  (See Leo Burman, “Mitt Romney’s Teachable Moment in Capital Gains,” Forbes Magazine, January 18, 2012.)

Are these the “tax loopholes” that the Republicans would close to increase tax income and reduce the debt?  On that subject, the document and its proponents remain silent.  The fact that Republicans are proposing to increase tax deductions to hedge fund managers suggests that these are not the “tax loopholes” they are thinking of.  However, a recent editorial in The Milwaukee Journal Sentinel may give some insights into what “tax loopholes” would be on the chopping block.  The editorial, entitled “The Buffett Rule is a Gimmick,” suggested that the Republican program, presumably The Path, is a far more reasonable approach.  The article goes on to say that the “tax loopholes” that would be closed would be such things as the deduction for dependents and the deduction for medical insurance and expense.  What is remarkable about the ones mentioned by the Journa/Sentinel is that they are all deductions used primarily by people with incomes under $250,000 per year.  If this is true, if The Path is proposing to close these loopholes, then the result will be that effective tax rates will go down for the wealthy and will go significantly up for those that are not wealthy.

This proposal has a logic to it.  After all, there are far more people making less than a million dollars a year than there are making more.  Increasing taxes on the less than wealthy will result in a greater increase in tax revenue.  Taking a thousand dollars from each middle income taxpayer will generate more income for the governent than taking a million dollars from each millionaire taxpayer.  But is it fair?  And, fair or not, why don’t the proponents of The Path come out and tell the people whether this is, in fact, their intention?  The answer to that last question is easy.  This is an election year, and there are far more middle income voters than there are millionaire voters.  Telliing the average voter that they intend to solve the country’s financial woes off the backs of the middle and lower income classes would very likely lose the election for the candidates who endorse The Path.  So, from a purely political viewpoint, their silence is perfectly understandable.

It is the first question that is the more difficult one.  Is it really fair, is it really within the scope of the American ideal, to increase the retained wealth of the already wealthy and to levy the lion’s share of the present American debt burden on the backs of the middle and lower income people who have already been brutalized by this severe, and ultimately avoidable, economic recession?  Each must answer this on his or her own.  For me, it not only seems unfair.  It seems, in the end, doomed to failure.  The American way of life depends on the average person in America feeling that he or she has at least a decent chance at financial security.  Increasing that average person’s burden could shake that feeling, and that way lies, if not madness, then at least danger.

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