James Pethokoukis

Politics and policy from inside Washington

Don’t fund healthcare by taxing capital

Mar 25, 2010 02:32 UTC

Washington will have difficulty producing a stranger bit of public policy than raising investment taxes to pay for healthcare reform. Remember, the consensus critique of the U.S economy is that it’s been plagued by too much consumption and debt. O.K., fine. So the answer is penalizing savings and investment? Really? Pure Bizarro economics for that and a number of other reasons:

1) It will hit the middle-class eventually. Wealthier Americans — families making over $250,000, individuals $200,000 — are the supposed targets here. Add in the new 3.8 percent Medicare tax to the year-end expiration of the 2003 Bush tax cuts, and they will see their capital gains and dividend rates will soar from 15 percent currently to 23.8 percent and 43.4 percent in 2013, respectively. But the income levels aren’t indexed for inflation. So the taxes will reach further down the income ladder each year. Assuming steady inflation, the tax in 2013 will actually affect households making over $226,000 and individuals $183,000. Another crack in the Obama tax pledge.

2) It is an expensive way to raise government revenue. Most studies show that raising the cost of capital lowers business investment and productivity. That translated into a lower standard of living. Hardly surprising, really. Taxes matter. Tax something and you tend get less of it. That’s a principle embedded, for instance, in calls to put a price on carbon, something the White House supports. Or in this, less economic growth.
3) It creates an accidental industrial policy. People should make economic decisions based on economic merit and efficiency, not because the tax code puts its thumb on the scale. For instance: Companies are financed either by issuing debt or selling shares. By raising taxes on equity, you further bias the tax code toward debt since interest can already be deducted from taxes. This imbalance was something an Obama tax commission, led by Paul Volcker, thought needed remedy. Instead, it will be worsened. The differing cap gains and dividend rates also tilt the tax code in favor of profit-poor companies (but with bright prospects and high stock price appreciation) over those throwing off cash.

4) It moves the tax code in the wrong direction. Economists favor paying for healthcare, as well as cutting the U.S. budget gap, with consumption taxes. (That would include eliminating the mortgage interest deduction to reduce housing consumption.) That could be a straight value-add tax. Or, better, a Hall Rabushka flat consumption tax. Actually, taking investment taxes to zero is a quick and dirty way to create a consumption tax since all you can do with income is save it or spend it. Of course, cutting spending should be the first order of business. Create a better tax system, reduce expenditure and then see where you are at as far as the deficit goes.

5) It puts politics over sound policy. For an administration that tries to follow economic consensus, this is an odd deviation. Politics explains it. Consumption taxes are broad taxes. The only taxes Washington finds palatable are those on upper incomes, such as found on Wall Street. But taxing the capital they provide to pay for healthcare will only sicken the American economy.

COMMENT

There’s currently a Medicare prescription drug loophole between roughly $2700 and $6200 worth of medicine. The reform bill each supplies a $250 rebate to Medicare beneficiaries that fall into this loophole and offers for the gap’s closing.healthcare fund

Posted by sharon111 | Report as abusive

Spreading the wealth

Mar 24, 2010 17:20 UTC

David Leonhardt of the NYT just noticed that tax rates are going up  and wealth is being redistributed. This makes him happy. But right now American faces a wealth creation problem. And if that isn’t working, every other problem facing America looks a lot worse. He also assumes that wealthier Americans won’t change their behavior, reducing the government’s take. Again, here is WH CEA Chair Christina Romer’s take on higher taxes when she was a econ prof at Berkeley: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] that tax cuts have very large and persistent positive output effects.”

COMMENT

Hmm, so what is her position on these issues now? Did she sell out just to get an appointment in Obama’s administration? Or does she argue these positions internally, but to no avail. Inquiring minds wnat to know.

Posted by Bill, Fairfax, VA | Report as abusive

Iraq debt almost as safe as California’s

Mar 24, 2010 17:20 UTC

Wow (from the Boston Globe):

Iraq is now considered a safer bet than Argentina, Venezuela, Pakistan, and Dubai — and is nearly on par with the State of California, according to Bloomberg statistics on credit default swaps, which are considered a raw indicator of default risk.

“Compared to California, I’d rather bet on Iraq,’’ Daher said. “Iraq is a country where there are still bombs going off and people getting murdered, but they are less indebted than the United States. California is likely to have more demands on its resources, and there is no miracle where California is going to have more revenue coming out of the sky. Iraq has prospects for tremendously higher revenues, if they can manage to get their act halfway together, which they seem to be doing.’’

The crushing cost of the public sector

Mar 24, 2010 16:38 UTC

Great post with oodles of charts from Mike Mandel. I did want to highlight one chart, though:

benefit chart

  •