- Days left

What Paul Ryan's Budget Plan Would Mean for an Average Family

×
Paul Ryan
In many ways, the November election is shaping up to be a fight between different visions of America's economy. To prepare for the battle, the Republican party has lined up two of its biggest economic warriors: Mitt Romney, a former Wall Street money man, and Paul Ryan, the party's most famous number-cruncher. Together, the pair hopes to offer a sustainable, prosperous vision of the future, a "Path to Prosperity," to borrow the title of Congressman Ryan's famous budget proposal.

While it is unclear how much of Ryan's proposal will ultimately be enacted if he and Romney win, there's no question that his suggestions for lower taxes and drastically scaled-back services has informed much of current Republican economic thought. What has been less discussed, however, is how his suggestion would affect the average middle class family -- and whether or not they would be better off in a Romney-Ryan America.

A Pretty Decent Tax Cut

Let's start with where we are right now. The average American household has 2.6 people and lives on just under $50,000 per year. Under the current tax code, it pays 10% of its income up to $17,400 and 15% of everything above that. After the standard deduction of $11,900, this comes to $4,845 in base taxes, not including exemptions and tax credits.

Ryan's plan streamlines the tax code, condensing the current six tax brackets into just two: 10% and 25%. The plan doesn't specify where the cutoff line between the two brackets would lie, but it seems reasonable to expect that it would stay somewhere near where the 25% bracket currently hits in, at $70,700 for a married couple filing jointly.

If that was the case, and if the standard deduction stayed the same, the average household would see an immediate drop in its base tax rate. A couple filing jointly would pay $3,810 -- a savings of $1,035 when compared to their base tax rate under the current code. While not the stunning $265,000 that the average millionaire household would save under the Ryan plan, it is nonetheless a nice chunk of change.

Ryan's tax cuts for the wealthy would leave a big hole in the budget, but he argues that the shortfall could be filled by cutting some of the tax code's credits, exemptions and loopholes. In a recent interview with Fox News' Britt Hume, Ryan claimed that this would primarily affect rich taxpayers: "What we're saying is get rid of special interest loopholes and deductions that are uniquely enjoyed by the wealthy so we can lower tax rates for everybody."

In other words, Ryan claims that his plan would reduce tax breaks for the wealthy in order to cut taxes for the poor and middle class.


The Other Shoe Drops

Unfortunately, though, eliminating tax shelters and other upper-class tax benefits would barely make a dent in the massive revenue cuts Ryan is proposing. To fill that gap, the Bipartisan Policy Center recently pointed out, the tax code would need to eliminate nearly every exemption -- including those enjoyed by poor and middle class workers. These include dependent exemptions, child tax credit, education credits, mortgage deduction credits, and other exemptions that bring down the average family's total tax burden.

These exemptions aren't minor. After getting all their deductions, the average family currently pays an effective federal income tax rate of roughly 3.3%, or $1,650. (Though of course, that's not the full tax rate: the effective total federal tax rate for an average middle-income family is 14.3%)

With all exemptions and credits removed, that turns the $3,810 tax bill that Ryan's plan proposed as a net savings for you into a $2,160 tax hike.

Admittedly, this is an extreme scenario. However, Ryan has said his tax code revision would be revenue neutral -- and based on his explanation of how to get us there, the only way the math adds up is if all our tax breaks get the ax.

Paul Ryan

Cuts in Services

But even if a Ryan plan could be devised that preserved all the exemptions, deductions and credits the middle class enjoys today, his plan would still have a major impact on middle class finances. It calls for roughly $4 trillion in budget cuts over 10 years. Because big ticket items such as spending on Social Security, defense and interest on the national debt are protected, most of these cuts would come out of the one-third or so of the budget that's labelled "discretionary" programs.

The Ryan budget talks about these cuts in very vague terms, but a veritable army of economists have devoted themselves to determining how they would actually play out. The general consensus is that most of the savings would come out of basic federal services. Washington Post reporter Brad Plumer has broken this down to a few simple numbers: Among other things, he argues that under a Ryan budget plan, transportation spending would be cut by 25%, assistance to the poor by 16%, and education and social services by 33%.

These cuts would hit middle class families hard. In vague terms, they would translate into dozens of costly problems, including driving delays as road repairs are put off, food poisoning outbreaks as more food goes uninspected, and a thinner safety net during job layoffs and other emergencies. On a broader scale, it also seems likely that many families would have to increase spending on necessities like their children's education and car repairs as the quality of essential government services would plummet.

Paul RyanAnd Then There's Medicare

Ryan's boldest plans have revolved around Medicare. His most recent proposal calls for insurance companies to make yearly bids, in which they would offer competitively-priced health care plans. The government, in return, would agree to fund the second-cheapest plan, and would allow retirees to enroll in it for free. For insurance over the level of that baseline plan, retirees would have to pay out of pocket.

Under Ryan's proposal, the cost for a person to enroll in Medicare would fluctuate every year, as the baseline insurance plan price and level of coverage would change. It's worth noting, however, that getting that privatized Medicare at the current level of coverage would have cost the average person an extra $64 per month in 2009, a significant amount of money for a middle-class retiree on a small fixed income. (And that will be a lot of people: 60% of workers have less than $25,000 saved for retirement.)

Ultimately, Ryan's economic plan might offer a slight tax break off the top for the middle class, but any savings would be wiped out by the loss of deductions and a big jump in the amount of money that taxpayers would have to spend to educate their children, fix their cars, deal with e. coli outbreaks, and handle all of the other services that the federal government would no longer provide. And, if anything was left over, they would be well-advised to set it aside for old age, when Ryan's proposal could leave them struggling to pay for health care.

In other words, Ryan's tax cut is a great deal -- if you don't actually rely on the federal government for anything.





Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

Increase your money and finance knowledge from home

Timing Your Spending

How to pay less by changing when you purchase.

View Course »

How to Buy a Car

How to get the best deal and buy a car with confidence.

View Course »

TurboTax Articles

Know The Key Dates For Health Care Reform

"Open enrollment periods for the health insurance marketplace under the Affordable Care Act are limited" says Mac Schneider, a retired certified public accountant from Albion, Michigan. ?Avoiding tax penalties requires awareness of important dates that may vary year-to-year.? As well as key dates, there are time cycles and coverage gap allowances important to health insurance coverage under provisions of health care reform.

Deducting Mortgage Interest FAQs

If you're a homeowner, you probably qualify for a deduction on your home mortgage interest. The tax deduction also applies if you pay interest on a condominium, cooperative, mobile home, boat or recreational vehicle used as a residence.

What Extra Tax Deductions Should I Make Sure To Take?

The federal government offers tax deductions and credits to reduce taxable income under certain circumstances. There are several that are often overlooked, including deductions for job hunting, caregiver expenses for dependents and children while you work, a credit to reduce taxes for moderate- to low-income earners and the premium tax credit associated with the Affordable Care Act. TurboTax can help determine if you qualify for these credits and deductions.

Add a Comment

*0 / 3000 Character Maximum

1258 Comments

Filter by:
KAiRiZ

fito . . what about when you get to 70 years old and are told, "Sorry, no treatment for you. You are too old." This is already happening with certain insurance companies. One woman was told her insurance wouldn't cover her medication (I don't remember if it was heart or blood pressure medication) because she was too old. This happened to a woman in Texas who is a friend of my co-worker. It might sound okay to some . . but I am blessed to have parents still living who are 78 and 82. It is NOT okay for them to be refused medical attention because they are too old.

Fox News and realistic reporting is not the problem on this issue. Liberal news agencies who fail to report the downside of the Healthcare Act are the problem. They lull the American people who choose to rely on the news reports rather than read the Healthcare Act contents for themselves. I did a report on it which required reading it. I did not read all of it, but I read enough of the contents to know this is NOT the positive move for Americans it is purported to be. We have got to think of the future, not just the here and now. And what about the extra costs associated in administering the Act? The added government board and committees created by the Act will NOT be working for free, I assure you. Not to mention the extra cost of government funds in other areas besides wages.

October 16 2012 at 3:00 PM Report abuse rate up rate down Reply
annrcpa

What is the point of government if not to help those in need and do things that indviduals can not do(ie funding road building, etc.)

September 11 2012 at 5:54 PM Report abuse rate up rate down Reply
harmony384

Social the dam country, at least the poor will have something to live while the rich fill there pockets.

September 02 2012 at 10:04 PM Report abuse rate up rate down Reply
fito

Health Care Act, is one of the most patriotic acts that a US president took in the history of the US. Here's the truth US spends $7,960 for every men, woman and child on health care. So a family of 4 spends $31,840 a year on Health Care. The second highest to US in the world is Louxemburg, an immensly wealthy country in europe with a universal plan covering everybody, but spending less with $6592 per capita. Family of four there would spend $26,368, so $5,500 less. The quality of care though provided there is much much better. If you want to compare health care with similar attributes such as the US, then the closes would be Canada and they spend on health care that covers everybody, rowly 40% less then in US. If health care were the same, americans would need to pay $14,500 less a year for a family of 4.
So President Obama is one who put his future in jeopardy by going against lobies (in other countries, political parties can only get paid from taxes, as to prevent conflict of interest). The poison instilled in people from two decades of indoctrinated idology through the likes of Fox news, and O'Raily that they preached, created a society unable to realise what's in their interest, and where hate governs the actions of an individual with more force then reason. I have seen some of the methods Germans used before World War II started and similarities with what's happening today in US with that in Germany in the 1930's are stuning. Everybody american's duty should be to seek answers if there's a possibility of deception.

August 31 2012 at 11:42 AM Report abuse rate up rate down Reply
fito

Government is you, me, the neighbour etc. These claims that big government is somehow to blame for the worsening of living conditions of a common citizen, please provide me proof to back those claims.

There's been less and less government, since Reagan came to power. How did that translate to the living conditions of most American today? Here are the facts.

1945-1980 (35 years) 2 recesions; 1980-2010 (30 years) 8 recessions

1980 average US per capita income 25% higher than 2010 (after adjusting for inflation).

1980 richest 10% of americans saw their average US per capita income INCREASE %300. RICHEST 1% INCOME INCREASE 4000%.

1945-1980 One employed parent could provide for the well being of his/her family. 2010 Two employed parent can't provide enough to provide for all expenses. The facts are all around for those willing to open their eyes and see.
But most people that write these negative anti-american coments, filled with hatered and anger and prejudice, have their judgement clouded by the relentless push to feed prejudices such as anti-immigrant sentimet, blatant racism, religous intolerance. And interspersed in between these ideologies was a concept of big government=evil. When if fact Big Government = Bigger voice for the commoner. The concept of big government only came to be seen as a problem in the Reagan era. In Fact, government's role was incresead in succesive administration since the New Deal came to power. In fact Eisenhover, increased the ighest bracket from 70% tax to 90%. How is that good you wonder. I respond; who needs more then $2,000,000 annualy where the 90% bracket came into effect. Only those who want to create empires and leave their heirs who, by the way, never achieved anything on merit but secured the future by being borne in a very rich household.

Big government/ High Taxes, dampen inequalities in society, give people a chance to achieve greatness based on merit, as opposed to nepotism. Discurage greediness, because if there was a 90% tax, would the CEO's fight like hell to allow themselves the right to assign renumeration amounts, for themselves. It discuraged the companies who right now are hollding $2 trillion collecting dust in their accounts, at the same time as making the reduced number of employees do the same amout of work as before recession when there was as much work, but more employees. So the big corporations who themselves caused the recession through lobbying for deregulation i.e. exemption from the law (which is at the same time the reason why nobody was sent to jail, so nobody broke the law, because there was no laws to govern them. All this came about as the small government that so many are asking for came to be a reality, though a veneer still remains. Only because people like President Obama, stood up to his employers (since employer is whoever gives you the salary and since loby groups provide for politicians, lobbies thus are employers.

August 31 2012 at 11:07 AM Report abuse rate up rate down Reply
Hi great lady

"Ask what you can do for this country and not what the country can do for you." JF
GIVE UP WELFARE, FOOD STAMPS, MEDICAID, WASTE, DEPENDENCE ON THE GOVERNMENT!
DON'T LOOK FOR A PERFECT JOB THAT PAYS MORE THAN THE WELFARE. FIND ANYTHING! WORK HARD, IF NECESSARY WORK TWO JOBS, PAY TAXES, DO WHAT'S RIGHT and YOU too will get to live the AMERICAN DREAM.

August 24 2012 at 2:13 PM Report abuse +1 rate up rate down Reply
Hi great lady

lady "Ask what you can do for this country and not what the country can do for you." JF
GIVE UP WELFARE, FOOD STAMPS, MEDICAID, WASTE, DEPENDENCE ON THE GOVERNMENT!
DON'T LOOK FOR A PERFECT JOB THAT PAYS MORE THAN THE WELFARE. FIND ANYTHING! WORK HARD, IF NECESSARY WORK TWO JOBS, PAY TAXES, DO WHAT'S RIGHT and YOU too will get to live the AMERICAN DREAM.

August 24 2012 at 2:12 PM Report abuse -1 rate up rate down Reply
donut999

If the story I saw about how under Ryan's plan Mitt would pay legally pretty much zero tax pretty much answers the question for me. No one disputed the story so let's assume it is half accurate. It seems everyone forgets there are tax rates from tables rather than final, effective tax rates after deductions, push forwards, etc.. Look at your own return, do a little math with lines 37, 41, 43 and look at 44. The most ironic thing about all this rhetoric is that everyone agreed in the spring about where things would go starting 1/1/13. It is actually a good place. Between finally letting the Bush tax cuts expire and spending limits, $7 trillion is going to be saved over a period of years. Fella's-just leave it alone. It may not be enough, but stick to the deal--both sides. And please, quit calling the overdue expiration of the Bush tax cuts and increase. Go back and read the word expiration. This legislation would have never been passed without the 10 year expiration. How can I know that? Simply because if could have, it would have.

August 23 2012 at 4:35 PM Report abuse rate up rate down Reply
rmnd80

There are those who prefer to take care of themselves and get the gov.'t out of their lives and those who think more "gov.'t" is the answer. The politician (either party) that can effectively produce two options - one low tax, low gov.'t "benefit", and the other, high tax, high gov.'t "benefit" - is the person that will succeed. IMO, the revolution will occur within the States - some will back gov.'t provided everything (socialism) and others will choose independence. We are already seeing this with the Obamacare tax/regulation mandate. We may only end up "United" over certain items such as military protection, postal service, etc. I also think Medicare and Social Security may begin to head this direction of "choice" as well.

August 22 2012 at 9:08 AM Report abuse +1 rate up rate down Reply
James

Obama's plan to tax the rich will not even begin to solve our debt crisis. The rich are smart enough to move their money and jobs abroad. Why do you think he keeps allowing the Bush tax cuts to stand. Same senario he says that due to the economic problems this would not be a good time to let the tax cuts expire. Therefore, he is telling us that raising taxes is not good for the economy. These tax cuts will now expire in 01/2013 on everyone.

August 22 2012 at 7:15 AM Report abuse +1 rate up rate down Reply