James Pethokoukis

Politics and policy from inside Washington

Ouch! CBO says Dem healthcare plan worsens budget picture

Jul 16, 2009 17:28 UTC

Is history repeating itself?  High-cost estimates by the Congressional Budget Office helped kill Clintoncare back in the 1990s. Now here is what Doug Elmendorf of the CBO said today about Obamacare:

In the legislation that has been reported we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount.  And on the contrary, the legislation significantly expands the federal responsibility for health care costs. …  the creation of a new subsidy for health insurance, which is a critical part of expanding health insurance coverage in our judgement, would by itself increase the federal responsibility for health care that raises federal spending on health care.  It raises the amount of activity that is growing at this unsustainable rate and to offset that there has to be very substantial reductions in other parts of the federal commitment to health care, either on the tax revenue side through changes in the tax exclusion or on the spending side through reforms in Medicare and Medicaid.  Certainly reforms of that sort are included in some of the packages, and we are still analyzing the reforms in the House package.  Legislation was only released as you know two days ago.  But changes we have looked at so far do not represent the fundamental change on the order of magnitude that would be necessary to offset the direct increase in federal health costs from the insurance coverage proposals.

Obama’s self-defeating war on the wealthy

Jul 16, 2009 14:02 UTC

The push by the Justice Department, along with the Internal Revenue Service, to compel UBS  to fork over the names of some 52,000 American taxpayers with banking accounts in Switzerland may produce an important benefit for the Obama administration — or so it might think. How so? Those presumably wealthy 52,000 taxpayers, along with some two million other upper-income Americans, can be drafted to help pay for U.S. healthcare reform.

Under the $1.2 trillion plan passed by the Democratic-controlled House of Representatives, the wealthiest 1.2 percent of U.S. households would have to pay an additional $540 billion in taxes over the next 10 years via an income surtax of between 1 and 5.4 percent.

For the super-elite, those in the top 10th of 1 percent (and presumably the type of taxpayers who have Swiss bank accounts), that works out to an additional $280,000 a year in taxes on an average annual income of $2.3 million a year, according to the Tax Policy Center. If it wasn’t for those record earnings, office corridors inside Goldman Sachs would surely be overflowing with tears today.

Then again, maybe not. The wealthy have the means to manipulate tax laws to their advantage through various — sometimes outlandish — tax sheltering strategies. As Howard Gleckman of the Tax Policy Center puts it, ‘The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.’

And just as the ‘financial innovation’ of recent years took a terrible economic toll, so might this next wave. Not only is Uncle Sam unlikely to raise as much money as he expects — thereby forcing the government to push surtax rates even higher — but more and more capital allocation decisions are likely to be driven by tax considerations as opposed to economic return.

This is why tax reformers prefer lower rates with fewer deductions as a way of raising revenue. There is far less economic distortion that way. The Tax Reform Act of 1986, for instance, slashed the number of tax brackets from 14 to 2, winnowed the top marginal rate from 50 percent to 28 percent and eliminated many tax sheltering strategies. The House bill would increase the number of brackets to a post-1986 high of nine while raising the top rate to 45 percent.

Surely the Obama administration must know this sort of thing makes for terrible tax policy, though it would create more jobs for certified tax planners. As Obama himself wrote in the “Audacity of Hope”: “The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions — and did lead to the wasteful industry of setting up tax shelters.”

Faced with huge and growing budget deficits, the White House and congressional Democrats needed to pay for healthcare reform in the worst way. And that’s just how they did it.

COMMENT

Lets look at this another way. The government raises cigarette taxes. That’s good right?

Well, a funny thing happens. People decide they are going to smoke less or quit all together. Revenue drops. Yes, cigarette taxes pay for social programs.

Then what? Well you can’t raise taxes more, you can’t raise taxes on the company, so what next?

Nothing.. it ceases to be a profitable tax to pay for those social programs.

Same thing happens when you raise taxes on the wealthy, sure they will still continue to remain wealthy. They will simply find ways around the taxes, they will move to other countries, or decide to invest less. They can still be filthy stinking rich they just lose their incentive to spend more and get even richer!

And those making 2 million or more per year. Well, they simply make less than that. Does the wealth go somewhere else? Do the middle class benefit?

NO

It goes to the lower classes that rely on social welfare. They simply remain consumers..they do not create jobs they maintain jobs.

Raise taxes on the rich, it trickles down to the middle class because the government eventually needs to find more sources of revenue.

Enjoy your money and freedoms while they last. I’m already poor by most peoples standards with no kids, and no real debt. But I fear for those who make it possible for me to make as much money as I do.

US top tax rate would be 52% with health surtax

Jul 15, 2009 19:52 UTC

Curtis Dubay of the Heritage Foundation emails me:

As calculated by the Tax Foundation, when factoring in the expiration of the 2001 and 2003 tax cuts, average state and local income taxes, Medicare taxes, and the new surtax, the average top marginal income tax rate in the U.S. would be 52 percent!

The top rate in the U.S. would then be higher than countries like France, Canada, Italy, Spain and Germany. Only 3 countries in the 30-member OECD, an association of the most economically developed countries in the world, would have a higher rate. Taxpayers in the 6 highest taxed U.S. states would pay higher rates than every country in the OECD except Denmark. Taxpayers in every state, even the 9 that do not levy a state income tax, would face a higher top marginal rate than taxpayers in 21 out of the 30 OECD countries.

Read the whole paper here: http://www.heritage.org/Research/Taxes/wm2544.cfm

COMMENT

I’m one of the many Americans without healthcare. And yes, I would appreciate having it, but I’m not in need of going to the doctor often because I focus on preventative healthcare and proper diet. I would rather see this money go towards better food quality for low-income people rather than healthcare. I have a friend who, in their mid-30′s, is diabetic because he didn’t eat good food because he’s poor. Let’s cut down on the corn and sugar in our processed foods, make organic fruit and vegetables more affordable and teach people the importance of eating right, with proper proportions. Let’s alleviate stress in American’s lives to make ends meet by lowering the costs of the basics: phone, gas, food and housing. Stress is the leading factor in any kind of sickness, physical or mental. To financially stabilize our society and keep them healthy, let’s try to bring the middle class back….and taxing American’s over 50% won’t solve that.

Posted by meg | Report as abusive

Why Obama, Dems are trying to rush through healthcare reform

Jul 15, 2009 15:13 UTC

Falling poll numbers and rising joblessness = time is not on the Dems side for passing healthcare reform — as liberal blogger Matthew Yglesias just realized:

Obama remains quite popular, but his popularity is shrinking and as best one can tell the culprit is the bad economy. I think this underscores the fact that if Democratic legislative leaders are serious about reforming health care they’ll want to get as much as possible of the work done before leaving on their August recess. The unemployment rate is almost certain to be higher in four or five months than it is today and that’s very likely to weaken Obama’s ability to be an effective advocate.  … If there’s an “Obama plan” on the table in August, a lot of Republican members will be hearing mostly good things about it from their constituents. If it takes until October, they may hear different things.

COMMENT

rising joblessness = increase awareness of a safety net.

I have lost my job and I’m wondering if I can find a job with health care benefits to replace it. When my employer was paying my $800.00 a month insurance premium it was easy to be in the “keep government off our backs crowd”. But now as an early stage boomer, I’m worried sick that I a might go bankrupt over a unexpected major medical problem or if I will even find a job with benefits. I’m starting to believe that the US will become more like Japan, where most new hires are “temporary” employees which offer no benefits- but at least in Japan everyone if covered for medical.

Posted by DR | Report as abusive

9 reasons Pelosi’s healthcare surtax is disastrous

Jul 15, 2009 10:17 UTC

So what explains the crazy, cockeyed optimism of House Democrats? Maybe they still believe Team Obama’s rosy-scenario forecast that shows the stimulus package a) keeping unemployment under 8 percent this year and b) launching an economic boom next year and beyond. For some reason, though, they think the battered U.S. economy is so strong that politicians can pile tax upon tax on it with no fear of further harm. Less than three weeks after passing a costly cap-and-trade carbon emission plan, Pelosi & Co. have giddily unveiled a $1.2 trillion healthcare plan partially funded by a $544 billion surtax on the work and investment income of wealthier Americans, including small business owners.

[See why Obama's economic gamble is failing.]

The ten-year proposal calls for a 1 percent surtax on adjusted gross income — including capital gains — between $350,000 and $500,000; a 1.5% surtax on income between $500,000 and $1 million; and a 5.4% surtax on income exceeding $1 million. (Interestingly, the House fact sheet on the surtax forgets to mention the highest tax rate. Hey, they were in a rush.) How bad an idea is this? Let me count the ways:

It’s not the first Obama tax hike. This tax would be in addition to the $1 trillion in new taxes that Obama called for in his budget released earlier this year. (And then there’s cap and trade, remember.) And if healthcare reform costs more than expected — what are the odds of that, you think? — the surtax would go up.

[See 5 economic stimulus plans better than the one we've got.]

It pushes income tax rates above a key threshhold. Once you take into account state income taxes, the top tax rate would sneak above 50 percent. Research by former White House economist Lawrence Lindsey has found that rates above 40 percent really start to hit economic growth especially hard.

It’s risky in a weak economy. Democrats love the “consensus view” when it comes to climate change, so how about the economy? The consensus view is for unemployment to hit double digits this year and stay high throughout 2010 and beyond as the economy staggers to its feet. Even Treasury Secretary Tim Geithner said “it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.” In a “long recession” environment, do we really want a policy that, according to research that current White House economic adviser Christina Romer conducted at Stanford University, is “highly contractionary.”

It actually makes America’s healthcare problem worse. Entitlements, including Medicare, will eventually bankrupt the economy unless action is taken. Agreed. But lowering the potential U.S. growth rate will only make those problems worse by generating lower tax revenue and making the overall pie smaller than it would be otherwise. Yet many economists think government interventions in finance, housing, autos, energy and now healthcare will do just that. And adding layers of additional new taxes helps how?

It makes the tax code more lopsided and inefficient. As it is, the top 1 percent of Americans in terms of income pay 40 percent of taxes. Not only would this plan exacerbate this imbalance, it adds further complexity to the tax code. Most tax reformers favor a simpler system with fewer brackets and deductions matched by a lower rate. Indeed, Howard Gleckman of the Tax Policy Center points out the following:

Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.

It hurts U.S. competitiveness. America already has the second highest corporate tax rate in the world. Under the House plan, the top U.S. income tax rate would be higher than the OECD (advanced economies) average of 42 percent. France and Germany, by contrast, are looking to keep rates stable or lower them. Pro-growth China doesn’t even tax investment income.

It ignores the lessons of Clinton. Democrats love to point out how the Clinton tax increases didn’t tank the economy back in the 1990s. Oh, you mean the economy that was expanding for more than two years before he signed his tax increases? The economy is far weaker today and may be anemic for some time given the history of economies that suffered a banking crisis.

It ignores the lessons of 1937. The slowly recovering 1930s economy weakened again in 1937 and 1938. Again, Christina Romer tells all:

In this fragile environment, fiscal policy turned sharply contractionary. The one-time veterans’ bonus ended, and Social Security taxes were collected for the first time in 1937. … GDP rose by only 5% in 1937 and then fell by 3% in 1938, and unemployment rose dramatically, reaching 19% in 1938. The 1937 episode is an important cautionary tale for modern policymakers. At some point, recovery will take on a life of its own, as rising output generates rising investment and inventory demand through accelerator effects, and confidence and optimism replace caution and pessimism. But, we will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline.

Except in this the case, Uncle Sam is not taking away a lifeline but tightening the noose.

It pays for a wrong-headed healthcare reform plan. Health exchanges, a public option, subsidies, taxes … well, we could go on and on. Or we could try to create a simpler consumer-driven market. Harvard Business economist Regina Herzlinger recommends reforming the tax system by making the money spent by employers on health insurance available as cash, tax-free, to employees. “Insurers would then compete for customers with policies that offer better value for the money,” she wrote in an analysis for consultancy McKinsey. Not even on the Obamacrat radar screen, though.

All in all, it’s another sign from the Obama administration and the Obamacrats in Congress that their top priority is redistributing existing wealth — at least what’s left of it — rather than creating new wealth. That, I guess, explains those ear-to-ear smiles on Capitol Hill.

COMMENT

One difference between publicly and privately run enterprises is that public ones are publicly accountable. They not only have to account for costs, but also account for the way they’re serving their function in the community. It’s not always as simple as calculating shareholder equity. That’s what is at the heart of the injustices in the current insurance system. It’s also the reason people support fire departments as a public enterprise. Even the volunteer ones are supported by the community, in order that they be accountable to the people they serve. It would seem the enterprises protecting the health of people might benefit from the same oversight we give enterprises that protect the buildings they live in.

Posted by jt | Report as abusive

The healthcare surtax and bull semen partnerships

Jul 14, 2009 14:06 UTC

Howard Gleckman of the Tax Policy Center throws cold water on Obamacrat attempts to raise income taxes to pay for healthcare reform:

Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market. … Raising the top rates to pay for health reform would make President Obama’s fiscal math approximately impossible. We’d have a top rate of nearly 45 percent, a promise never to raise taxes for those making less than $250,000 annually, little or no government revenue from a cap-and-trade system that gives away rather than auctions pollution credits, and trillion dollar deficits as far as the eye can see.

Why is the healthcare reform effort failing?

Jul 13, 2009 16:11 UTC

Healthcare reform enthusiast Ezra Klein (WaPo) seems very worried about the troubled healthcare reform effort:

To put it another way, every wonk in Washington — conservative or liberal — will tell you that health-care costs threaten to bankrupt the nation. But it is proving virtually impossible to get serious health-care reform through a Senate that requires 60 votes to overcome the filibuster.

My spin: Any why is that, Ezra? Because wonky Washington hasn’t made the case why higher taxes in a recession and more spending in a time of huge budget deficits are good ideas. The “It costs money because it will save you money” apporach is failing …

COMMENT

Health care reform is being tackled by congress as a problem of who pays what, and that approach though politically correct is no reform at all. Wake up America! your health system is one of the worst of the world, corrupt , overregulated , it is failing to serve the needs of the people, and it is bad system even for the wealthy, in any other place in the world Michael Jackson would had been able to get a non life threatening sleeping aid, my 4 year old niece would have received emergency attention in less then 4 hours screaming with othitis in an emergency room, it would be more important for an squizophrenic to take his meds than to go to the doctor just to get the prescription refilled.

Posted by Maria A. Palacios | Report as abusive

Here comes the healthcare surtax!

Jul 10, 2009 22:41 UTC

From The Hill:

The House will propose raising taxes on people earning more than $350,000 a year to pay $540 billion for healthcare reform, Ways and Means Committee Chairman Charlie Rangel (D-N.Y.) said Friday. … Rangel said Democrats will seek to enact one large tax increase targeting wealthier workers to generate the revenue they need to finance their $1 trillion-plus healthcare reform bill. “We have decided that instead of putting pieces of different revenue raisers together, that the best that we can do [is] we would have graduated surtaxes starting at [$]350],000],” Rangel said. The tax hikes would begin in 2011 and raise $540 billion over 10 years, he said after a meeting with Democratic committee members.

My spin: The Californication of US economic policy continues as a smaller and smaller group of taxpayers shoulder more of the tax burden. Also, one more reason why American might suffer a Lost Decade of subpar economic growth.

COMMENT

Is anyone paying attention here!?! Will we have the America we all know when this guy is done wrecking EVERYTHING and driving us into the ground? Me thinks the odds are against it. Sad, just sad.

Thanks for nothing Obama voters!

Btw James, great blog, how Reuters (read: yet another leftist media outlet) allows you to write this stuff is beyond me. By all means, keep it up as long as you can. Please.

Posted by Eric, Raleigh | Report as abusive

Healthcare surtax another burden on US economy

Jul 8, 2009 13:51 UTC

As you are contemplating the idea of a (perhaps ) $300 billion surtax on wealthier Americans to help pay for healthcare reform, consider that ALREADY the potential growth rate of the US economy has been lowered by all the government intervention in the economy. In a recent research note, economist David Rosenberg said he was worried about the price-earnings ratio of the stock markets:

As an aside, with the U.S. government now putting its fingers into more than one-third of the economy (health, finance, autos, energy, housing), one would expect that the fair-value multiple in the future will be lower than it has been — given the implications for productivity and the potential non-inflationary growth potential.

Recall that already the top income rate is being raised to 40 percent … and higher investment taxes … and a possible cap-and-trade energy tax … and a possible Social Security tax hike. In addition, more of tax burden is being placed on a smaller segment of the population — nearly half of Americans pay no taxes. This is exactly one of the big problems California faces. In the end, Democrats are pusing for a costly healthcare reform measure at a time of huge deficits and tax increases during a terrible recession. Wrong formula, wrong model.

COMMENT

>In the end, Democrats are pusing for a costly healthcare reform measure at a time of huge deficits and tax increases during a terrible recession.

What are you talking about? The stimulus included $288 bln of tax cuts. It is simply not true that the Democrats have raised taxes during this recession. You’re not on Fox News or CNBC now — when you write in print these facts can easily be checked.

Posted by Kramer | Report as abusive

Wal-Mart and rent seeking

Jul 1, 2009 19:53 UTC

Government intrusion into the marketplace has so many unintended and unforeseen consequences — like Wal-Mart (!) coming out in favor of government mandate that employers provide health insurance. Why? Here is how a flabbergasted Heritage Foundation explains it:

Why would Wal-Mart – the nation’s largest employer – endorse such an idea. Simple: It would cripple many of their competitors. Much ink has been spilled on the effect Wal-Mart has on small retailers. Wal-Mart’s large size enables them to extract low prices from manufacturers, and that – combined with efficient, computerized inventory operations enables them to undercut – and sometimes drive out of business – small “mom-and-pop” retailers.

An employer mandate to provide health insurance would enhance Wal-Mart’s cost advantage. Wal-Mart has 1.4 million U.S. employees, and can negotiate a health insurance contract for them all at once. As a large multi-state employer, they can self-insure and provide coverage under federal ERISA regulations, which exempts them from costly compliance with most state health insurance regulations.

Wal-Mart’s small competitors have neither of these advantages. Employers with less than 20 employees often pay more than twice as much per employee for the same coverage, and small employers must comply with sometimes-onerous state regulations.

Supporting the employer mandate is just another way large business can harness the forces of government to hobble their smaller competitors. The employer mandate would impose much higher costs per employee on small retailers than it would on Wal-Mart. They would have to charge higher prices to compensate, which would put them at a substantial competitive disadvantage. Many of these small retailers would be forced out of business.

And the befuddled Michael Cannon of the  Cato Institute has a moment of clarity:

A couple of years ago, I shared a cab to the airport with a Wal-Mart lobbyist, who told me that Wal-Mart supports an “employer mandate.”  An employer mandate is a legal requirement that employers provide a government-defined package of health benefits to their workers.  Only Hawaii and Massachusettshave enacted such a law.

I couldn’t believe what I was hearing.  Wal-Mart is a capitalist success story.  At the time of our conversation, this lobbyist was helping Wal-Mart fight off employer-mandate legislation in dozens of states.  Those measures were specifically designed to hurt Wal-Mart, and were underwritten by the unions and union shops that were losing jobs and business to Wal-Mart.

But it all became clear when the lobbyist explained the reason for Wal-Mart’s position: “Target’s health-benefits costs are lower.”

I have no idea what Target’s or Wal-Mart’s health-benefits costs are.  Let’s say that Target spends $5,000 per worker on health benefits and Wal-Mart spends $10,000.  An employer mandate that requires both retail giants to spend $9,000 per worker would have no effect on Wal-Mart.  But it would cripple one of Wal-Mart’s chief competitors.

COMMENT

The plan that is most likely be passed excludes employers with 25 or less employees from the mandate.

Posted by carole | Report as abusive
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