Tax Fantasy
April 02, 2012, 7:00am

New York Times -Editorial.

Congressman Paul Ryan, the author of the House Republican budget, is not the first politician to go long on promises and short on details. But his budget, which passed the House last week with no Democratic votes, takes untruth in taxes to a new level.

Mr. Ryan claims that he can drastically cut income tax rates without adding to the deficit, but he hasn’t specified how he would make up the lost revenue, an estimated $4.6 trillion over 10 years. Instead, he has said he would end or reduce unnamed deductions, exemptions and loopholes and defended this dodge by saying that he first wants to build consensus for the concept of pairing lower rates with fewer write-offs. That’s already a mainstay of many tax reform plans.

The problem is that politicians’ most cherished constituencies are big recipients of the most cherished tax breaks — including the exclusion for employer-provided health insurance; deductions for mortgage interest, state and local taxes and charitable donations; tax deferral for retirement savings; and special low taxes on investment income. With some 70 percent of an annual $1.1 trillion in tax breaks flowing to the top 20 percent of taxpayers, and 20 percent going to the middle rung, politicians are loath to champion the end of specific tax breaks.

Another problem is that ending tax breaks would not end the need for government to help with many of the activities subsidized by the tax code, like employee health insurance and retirement savings. Tax subsidies may not be the most efficient or fairest way to support social and economic goals, but there is a need for public efforts to help achieve many of their aims.

The question is how much can reasonably be saved by ending or reducing tax breaks. A new analysis by the Congressional Research Service puts the savings at $100 billion to $150 billion a year. The aggressive deficit reduction plan by the Bipartisan Policy Center, a Washington-based think tank, would generate $3.5 trillion in savings to 2020. A proposal by President Obama, scorned by Republicans, would raise $584 billion in 10 years by capping deductions for high-income taxpayers.

The upshot is that Mr. Ryan will never come up with a workable way to pay for his $4.6 trillion tax cut. And even if he found substantial offsets, it would be obscene to use the money to lower tax rates for rich taxpayers when the nation is starved for investment in jobs, education and infrastructure. What’s needed is a realistic approach, starting with letting the high-end Bush era tax cuts expire at the end of this year and closing blatant loopholes, including the unconscionably low tax rate for private equity partners. Raising taxes on the rich is not a cure-all, but there will never be consensus for broad reform without first ending the lavish tax breaks at the top. Realism also requires new tax sources, including a financial transactions tax. But being realistic is not Mr. Ryan’s style.