Tax Gap the hardest to bridge in dueling budget proposals

March 16, 2013 — 2 Comments

What’s the difference between Paul Ryan’s “path to prosperity” and the Senate Democrats’ budget proposal?

This sums it up pretty well:

Budgeted   New Tax Revenue Over the Next Decade

Democrats $975,000,000,000
Republicans $0

Okay, so that’s a gross oversimplification, but search the web for any article about the dem’s budget proposal and you’ll almost certainly find “a trillion dollars in new taxes” in the title.

It shouldn’t surprises anyone that the focus here is on how much we should be taxed, rather than which plan is the most fiscally sound.  Taxes have been the most heated political issue since Thomas Jefferson and co. decided they were sick of paying taxes to the British monarchy.  Things really aren’t that different today, except maybe that the two major parties are starkly divided solely by their approach to tax policy- a division which has caused political stalemate since the recession.

Official portrait of Congressman .

Official portrait of Congressman . (Photo credit: Wikipedia)

Each parties’ plan accurately reflects this devide.  The House Republican plan championed by Paul Ryan includes no new tax revenue, keeping it at around 18.75% of GDP.  To make up for the revenue gap, the plan includes an ambitious $4.6 trillion in spending cuts, balancing the budget by 2023.  Note: this plan relies on revenue generated from the American Taxpayer Relief Act, which raised marginal rates on the top 2% of income earners, plus the tax increases from the health care overhaul, highlighted by the 3.8% Medicare surtax on net investment income for incomes over $200,000/$250,000.  Ryan opposed the new year’s tax increases and says he intends to repeal parts of Obamacare.

The Democratic plan, meanwhile, takes a more “balanced approached,” by cutting spending and raising taxes by equal amounts.  The target result is about $1 trillion in new revenues, averaging 19.3% of GDP over 10 years.  Spending cuts would be around the same amount: $500 billion from domestic spending, $240 billion in defense cuts and $275 billion in cuts to Medicare providers.  The plan does not attempt to balance the budget, but does reduce government borrowing by nearly $2 trillion over the next decade.

One of the major criticisms of the Democratic proposal is that it includes savings from ending the war in Afghanistan ($240 billion) and lower interest payments ($242 billion) in its  total.  Moreover, because the plan repeals the cuts imposed by the sequester, spending would actually increase slightly from current projections.  Ryan’s plan does not include these savings, however his tax plan relies on savings from tax increases which he opposed and the healthcare law he and his party intend to repeal.

The major effects of both proposals are shown on the graph below:

dem vs repub budget

From this perspective, Ryan’s plan looks like the clear winner.  It does the most to reduce the deficit, leaving the country with a surplus in just 10 years.  However, with no new tax revenue it gets there by bold and potentially damaging cuts.  Many economists argue that cutting trillions from spending in such a short period of time is unnecessary and places an unfair burden on lower income households.  The CBO says that the debt to GDP ratio is sustainable at around 73%.  Ryan’s plan would bring it way down to 55%, and the Democrats to 70%.

The spending gap between each proposal ($3.6 trillion) is much greater than the revenue gap ($1 trillion). But in this political climate, it will inevitably be the tax gap that’s harder to bridge.

JDKatz: Attorney's At Law

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

2 responses to Tax Gap the hardest to bridge in dueling budget proposals

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