I want to do away with the myth that the Ryan budget plan balances the budget on the backs of the poor and middle class. It does nothing of the sort. To be sure, it does make draconian cuts in the social safety net, cuts that will result in more hunger and untreated illness in the US. It does change Medicare into a voucher plan from a comprehensive insurance program. But it does not make a serious attempt to use these savings to balance the budget. By the plan’s own questionable accounting, the federal budget under the plan will not be balanced until 2063. By using more objective assessments of the effects of the tax cuts contained in the plan, it expands the deficit to even more unsustainable levels, even with the savings we gain by turning our backs on the needy.
What the plan does is redistribute wealth from the middle class and needy to the wealthy.
I’m a CPA, so I was particularly interested in the estate and income tax provisions of the plan. Most of what has been written about the Ryan plan has focused on the Medicare changes proposed, or the ridiculous assumptions used to cook the numbers (2.8% unemployment by 2021, tax cuts with no negative revenue effect). As a result, the press has not highlighted the changes in income tax laws. Since I did not find that summary, with examples, I have prepared it below. Warning – some of this is pretty dry. I have not tried to make many witty comments or jokes (assuming you have found some of my previous posts to be witty or funny). I think the examples will entertain (shock, scare…) you though. If you have any questions or would like more details or examples, please email me with your requests.
Estate taxes
The plan eliminates the estate tax. Thanks Dad (no, not really – I am not a member of the lucky sperm club).
Corporate income taxes
Corporations would see their income tax eliminated entirely; to be replaced by an 8½% business consumption tax (essentially a Value Added Tax – VAT) . The tax is calculated by subtracting purchases (non-wage expenses) from income. For tax purposes, investments made by businesses would be immediately expensed.
The VAT tax would apply to businesses that are now pass-through entities (partnerships, S corporations, sole proprietorships).
Individual income taxes
Individuals would get to select from two tax codes, the current code or an alternative simplified code (a reduced IRS would have to administer this two-code mess). Under the new code, wages would be fully taxable as they are now. Interest, dividends and capital gains would be completely exempt from taxation. Deductions from income would be eliminated.
Since wages are taxed under the Ryan plan as ordinary income business owners have a tax planning strategy available to them under the Ryan plan.
A business owner makes $500,000 from her business. The business owner, a single taxpayer, takes a salary from that total that results in taxable income of $50,000. The wage income is subject to an income tax rate of 10%. She pays herself the remaining profits as a dividend, which are not subject to income tax (yes - a rate of 0%). Pretty slick, eh? Fair? Not so much.
As the plan advertises, your income tax return would fit on a postcard. Taxable income is gross income less a standard deduction and personal exemption. The value of the health insurance provided to employees by employers will now be a part of that employee’s taxable income. If your salary is $50,000 and your health insurance cost your employer $10,000, your gross income on which income tax and social security is computed is $60,000. You would receive a tax credit for your health insurance cost to partially offset the effect of taxing the value of your health insurance.
To demonstrate, assume that a single taxpayer has $60,000 in taxable income (after standard deduction and personal exemption). His taxes, before health care credit, would be $7,500 (10% of the first $50,000; 25% on the rest). Compare that to someone who inherited wealth and does not work. He earns $1,000,000 per year from interest and dividends. His tax is $0 because all of his income is exempt from taxation. The winners and losers under the plan are clear.
Does anyone want to argue that this is fair or even makes sense?
My congressman, Mo Brooks, voted for this bill. Did he read it before he voted, or did he expect us to not read it?
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