Congressman Ryan's plan is an excellent plan, but it could still be improved. We would suggest the following four additions:
1. Cut Discretionary Spending. The weakest aspect of the Ryan plan is that it does not actually balance the federal government budget. According to a preliminary CBO scoring of the plan, the federal government's budget deficit, which was 9% of GDP in 2010, would still be an enormous 2% of GDP in 2022. House Republicans could cut the budget much further by borrowing from Republican Senator Rand Paul's excellent budget plan. Among the largest items Senator Paul would cut are $78 billion by eliminating the Education Department and most of its functions, $53 billion by eliminating Housing and Urban Development and most of its functions, $44 billion by eliminating the Energy Department and most of its functions, and $43 billion from the Transportation Department, partly by defunding Amtrak.
2. Changing to Rollover Capital Gains Tax. The Ryan plan intends to end tax loopholes for the rich, but it misses the largest loophole of them all, the top 15% tax rate on capital gains. The problem is that income is fungible and can be converted from one form to another. For example, many corporations give their top executives stock option bonuses and then buy back their own stock (consuming their own capital) to drive up the price. Their executives sell the options at a profit, only having to pay a 15% tax on the capital gain, whereas they would have had to pay a 35% tax on a straightforward bonus.
Capital gains taxes are low for a good reason -- to prevent the government from removing income producing capital from the private sector. However, taxing capital gains at a rate lower than other income is taxed has a bad side effect -- encouraging the consumption of capital. The solution is simple: raise the capital gains tax rate to the same rate that other income is taxed, but switch to the rollover treatment, which only charges the capital gains tax when capital is consumed. When people sell one asset to buy another, the capital gains tax would be deferred until the new asset is sold (i.e., the capital gain would be rolled over into the new asset).
3. Switch Transportation to Compressed Natural Gas. New discoveries of natural gas show that the United States could become completely independent of foreign oil if we switched many of our vehicles from gasoline and diesel fuel to compressed natural gas (CNG). CNG is already much less expensive than gasoline and will become an even better buy in the future. The main problem preventing its use is the lack of CNG filling stations. This lack would be remedied quickly if all public vehicular transportation switched to CNG.
4. Add a Scaled Tariff, (our invention!) to balance trade with countries with which we are experience large chronic trade deficits. Such a tariff would apply to those countries with whom we have been experiencing chronic deficits, including China, Germany and Japan, but would not apply to countries such as Canada or Brazil, with whom our trade is balanced. Moreover, it would be perfectly legal under World Trade Organization (WTO) rules that allow countries experiencing chronic trade deficits to impose tariffs upon those countries with which they have trade deficits. When the U.S. trade deficit with a country would go up, the duty rate would go up. When the U.S. trade deficit with a country would go down, the duty rate would go down. When trade would approach balance or go into surplus, the duty would disappear.
If the U.S. enacted a scaled tariff, the Chinese government, which currently only lets its people buy 30¢ from the U.S. for every $1 we buy from them, would likely remove its barriers that prevent its people from buying more American products. Also, American and international businesses would once again find it profitable to build factories in America. An additional benefit is that the scaled tariff would collect well over $200 billion in revenue during its first year.