Paul Ryan's Fiscal Policies under the Microscope

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By Ken Berry 

The newly minted Republican candidate for vice president, Wisconsin Representative Paul Ryan, is a staunch conservative known for his controversial fiscal policies. Would Ryan's proposals to reform the federal income tax and Medicare systems either "destroy" or "save" the country, as some have claimed? The reality probably lies somewhere in between.

Under the latest version of Ryan's proposed plan for Medicare, senior citizens would have the option of spending a fixed amount of money in a health insurance exchange instead of paying premiums to Medicare to cover their expenses. Beginning in 2023, senior citizens would receive vouchers to purchase either private insurance or enroll in the traditional Medicare program. Therefore, the changes to Medicare wouldn't affect anyone who is already fifty-five or older. In effect, private insurers would be competing with Uncle Sam in the health insurance market for new retirees. 

The vouchers would be pegged to the lower cost of the exchange-run plans. If a retiree wants to opt for the traditional Medicare program, that individual would have to pay higher premiums. Once a senior citizen chooses a plan, he or she would be responsible for paying any out-of- pocket costs the voucher doesn't cover. Also, federal spending increases on Medicare would be capped at one-half percentage point greater than the growth rate of the economy. 

Proponents of the plan say that retirees will be able to benefit from lower premium costs and keep the rest for themselves. But detractors point out that seniors would have to shoulder more out-of-pocket expenses if the cost of health care grows faster than the economy.

Ryan's tax plan is even more radical. He proposes to give individuals a choice of paying taxes under existing law or scrapping the cumbersome tax code with a simplified process that can literally fit on a postcard. The current setup would be replaced with a system using just two tax rates and virtually no special tax deductions, credits, or exclusions (other than the health care tax credit). 

The two tax rates would be 10 percent on income up to $100,000 for joint filers and $50,000 for single filers, and 25 percent on taxable income above those amounts. The calculation would also include a generous standard deduction and personal exemption (totaling $39,000 for a family of four). This setup completely eliminates the onerous alternative minimum tax (AMT).

Significantly, there would be zero tax on capital gains, dividends, and interest income. What's more, no federal estate tax would be imposed. Thus, retirees could live tax free on their earnings and then pass their wealth tax free to their heirs. Finally, the proposed plan replaces the corporate income tax with an adjustable business consumption tax of 8.5 percent.

Supporters of this tax plan claim that it encourages saving and avoids complexity, but the naysayers say it rewards the rich while imposing higher taxes on middle-class workers. Both sides can trot out estimates and calculations that favor their point of view.

In the end, Romney's proposals matter more than anything Ryan has proposed before he joined the ticket. Although the presidential candidate agrees in theory with much of the rhetoric from the Ryan camp, he will continue to shape his own policies as the campaigning heats up. 

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