James Pethokoukis

Politics and policy from inside Washington

Where healthcare reform is heading

Aug 28, 2009 11:51 UTC

Karen Tumulty of Time opines:

The bill most likely would attempt to cover children who have not received coverage under other federal programs, and possibly their parents. It might also expand the Medicaid program to low-income people who do not currently qualify.  … If the Senate decides to pass the bill under parliamentary rules that prevent a filibuster, it may also have to get rid of other provisions that do not directly affect federal spending, such as those that attempt to encourage wellness programs and more preventive care.

Another problem with trying to write a scaled-back bill is that so many elements of health reform are interconnected, politically and substantively. … Making an individual mandate work requires subsidizing people who could not buy insurance on their own, and that is expensive. Cut the subsidies and the mandate back too far, and insurance companies — deprived of the millions of new paying customers promised under broader proposals — could end their support of the deal, which would include new requirements that they sell affordable policies to people with pre-existing conditions.

Me: This is what I have been saying. A rump bill passed in the senate under reconciliation would expand children’s health insurance (SCHIP) and expand Medicaid and perhaps pay for it all with a surtax on upper incomes, though some Dems think they can push through a public option, too. Anything else — regulations, health exchanges — would have to pass in a separate bill. But  a hard-line move by Dems would through Congress into an uproar and I doubt anything else would pass.


From the Tumulty article: “may have to get rid of other provisions…….that attempt to encourage wellness programs and more preventative care”

Good. The American people know these types of “programs” are always where major pork is buried.

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The New York Times, the super-rich, income inequality and taxes

Aug 21, 2009 18:22 UTC

Some thoughts on today’s NY Times story about the falling fortunes of the once super-rich:

1) Yay! It actually made the point that tax rates affect economic behavior:

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

2) Boo! It also seems to accept this explanation, by Piketty co-author Emmanuel Saez, as to why income inequality has risen in recent decades (via a Saez paper):

A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II – such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality.

3) Boo! It underplays the role of globalization and technology in creating greater income inequality in favor of blaming asset bubbles and tax rates. Here is bit from a story I wrote about income inequality, quoting Saez:

At the top, what you primarily have is executives at large companies who are paid very large salaries with bonuses and stock options,” Saez says. “It has really become a truly global market for the talent of executives.” So it’s not so much that globalization has driven down wages because the average U.S. worker has to compete with a low-paid competitor in China or India. (About a quarter-million jobs are lost annually to offshoring, which works out to only 0.18 percent of the workforce.) Rather, globalization has increased the demand for top corporate managers, and it has made companies more valuable as it has spurred economic growth and higher stock market values. That has boosted executives’ income-from salaries, stock options, and capital gains.

Then there’s technology:

Rapid technological change, which itself is driving globalization, is also pushing wage inequality. “Inequality is related to technology, and … you really require more skills to operate in a challenging economy driven by technology,” says Daron Acemoglu, an economics professor at MIT. According to the liberal Economic Policy Institute, inflation-adjusted wages for male high school graduates have slipped 6 percent since 1980, while rising 20 percent for college graduates and 35 percent for those with an advanced degree. Technology places a premium not only on computer skills but on the managerial and organizational abilities needed to run a modern, networked company.

4) Boo. It failed to mention how globalization had made real-world income inquality virtually non-existent. Again, from me:

More and more research is revealing that the supposed rise in income inequality is a bit of a crock. One reason is the “China Effect.” A recent University of Chicago study found official income inequality statistics fail to take into account that lower-income Americans tend to consume more inexpensive Asian goods. As the study’s authors conclude, “This price effect offsets almost all the rise in inequality measured by official statistics.” And whatever slight rise in inequality that’s left over can easily be explained by technology and the expanded global market for CEO talent.

Another look at the VAT

Aug 20, 2009 14:36 UTC

Chris Edwards of the Cato Institute notices that several New Europe countries are raising their VATs to deal with huge budget deficits and concludes thusly:

1) VATs are handy money machines for governments. Governments fear raising income taxes during recessions because of concerns over damaging their economies. But they have less such concerns with respect to VATs.

2) International tax competition continues to generate pressure for countries to keep income tax rates down. Policymakers don’t want businesses and investment capital fleeing abroad for lower taxes, particularly during economic downturns.

VATs are generally less damaging to economic growth than income taxes. But the flip side to that widely-understood result is that politicians have less fear about using them to grow the size of governments during good times and bad.



Surely you miss the political point – politicians won’t raise VAT because it hits the voters. Witness France changing its mind two years ago on a proposed 5% increase.

I guess the trick is to get an increase in early on in the election cycle – VAT in the US anyone?

I read an article on this site http://www.tmf-vat.com that everyone (UK, France, Spain etc) will have to increase VAT in the next 1-2 years to combat the crisis. Seems like it is not restricted to Central Europe.


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Taxes? Through the roof, America!

Aug 17, 2009 16:43 UTC

There was a Saturday Night Live skit after the 1988 election called “Dukakis after Dark.” In it, failed veep candidate Lloyd Bentsen asks failed presidential candidate Michael Dukakis, “You were going to raise taxes, weren’t you?” Dukakis, wearing a Hugh Hefneresque smoking jacket, shiftily replies: “Through the roof.”

Lots of Washington politicians could give the same response today. This blog post from TaxVox sums up the common wisdom around here:

Politically feasible tax increases alone won’t solve the problem. Neither will cutting spending. In fact, if history is any guide, we’re unlikely to do much of anything on the outlay side. We will certainly have to slash the growth of healthcare to keep the budget from spiraling totally out of control. But that’s likely to take the form of “bending the cost curve” to get gradual savings over many years. In the near term, I suspect taxes will do the heavy lifting. And that will require either major tax reform or tapping new revenue sources.


Sad little man James Pethokoukis seems to think Democrats are all tax and spend, while conveniently ignoring the 8 years under the Bush Administration where deficit spending skyrocketed to levels exceeding the Reagan era, and the national debt doubled.

Republicans have managed to trick many americans into believing that tax cuts are equal to spending cuts, when the reality is that it is a “deferred tax” that has to be paid later…..usually when the GOP falls out of favor and the democrats have to play cleanup, and then the tax increases come which are inevitable due to the fiscal irresponsibility of the republicans.

Repeat after me, tax cuts are NOT spending cuts.

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Tax the rich. Good luck with that

Aug 6, 2009 18:17 UTC

Government revenue estimates of future tax hikes on the wealthy always overestimate how much dough they will bring in.  This is certainly the case with the 1993 Clinton tax hikes. Now why is that? First up is my Reuters compadre, the so-smart-he’s-scary Christopher Swann:

It has been many years since the rich had a powerful incentive to test the limits of the tax code. The top rate of income tax has fallen with only minor interruptions since its vertiginous peak of 92 percent in 1953. But a foretaste of what might be expected was offered by Maryland’s ill-fated creation of a millionaires-tax bracket in 2008.

A year later 1,000 millionaires had disappeared — a third of the total — and revenues from this group had fallen by $100 million. Some may have left the state while others may have found ingenious ways to reduce their reported income.

And now Richard Rahn in the WaTimes:

Quite simply, upper-income people have options. History shows that when tax rates are raised, many will choose to work less (leisure is nontaxable), retire earlier than they had planned and save and invest less in taxable, productive activities. Those making more than $160,000 per year would need to have their taxes roughly tripled to take care of just this year’s deficit. (One merely has to look at the tax evasion practiced by the chairman of the congressional tax writing committee, the secretary of the Treasury and the former majority leader, et al. at today’s tax rates to know that they and their colleagues, as well as most everyone else, will find either legal or illegal ways to avoid paying the tax.

Double taxes on the rich and you still wouldn’t balance the U.S. federal budget

Aug 5, 2009 14:22 UTC

Here is some fun tax information: The top five percent of tax filers in terms of adjusted gross income earned $3.3 trillion and paid $676 billion in taxes in 2007.  (That accounted for 61 percent of taxes, by the way.) So if we doubled their average tax rates, America would still be running a budget deficit for years to come. And that assumes no economic impact from the higher tax rates.



To initiate an advance on the lengthy economic turnaround, the joy ride of debt-spending-with-wanton-abandon mindset enjoyed by Bush and continued by Obama must be brought to a close.

Here come the real tax increases on Everybody.

http://pacificgatepost.blogspot.com/2009  /08/obama-middle-class-income-tax-incre ases.html

5 reasons why Obama will hike middle-class taxes

Aug 4, 2009 10:16 UTC

JamesPethokoukiscrop.jpgC’mon, how about some Walter Mondalesque candor from the Obama White House on taxes? Yes, yes, it was 25 years ago this summer that the Democratic presidential candidate self-immolated on the issue at his party’s convention in San Francisco. But surely Americans have become more urbane and sophisticated since then as to what makes for sound economic policy, oui?

[Find out five ways to boost the economy and create jobs]

Nope. If you had any doubt that higher taxes are still poisonous policy in center-right America, all you had to do was listen to White House Press Secretary Robert Gibbs yesterday. He briskly and precisely walked back the White House from the ambiguous statements made by Tim Geithner and Larry Summers on the Sunday chat shows. “I am reiterating the president’s clear commitment in the clearest terms possible that he’s not raising taxes on those who make less than $250,000 a year,” Gibbs said.

But what’s so clear, Mr. Gibbs? “Commitment” in this context is a schemer’s word, the much-weaker-yet-more-conniving sibling of “guarantee.” Did Broadway Joe express a mushy “clear commitment” to winning the 1969 Super Bowl? Clearly not. In any event, feel free to ignore Gibbs or any other White Housespinmeister who gives the impression that President Obama raising middle-class taxes would be the equivalent of playing himself in a Hollywood biopic — so unlikely as to be fanciful. It’s not and here’s why it will happen eventually:

1) Obama knows the budget math doesn’t work. Put aside today’s budget mess. It’s gospel among center-left wonks (the kind of folks who give Obama economic advice) that structural government spending as a percentage of GDP is headed sharply higher over the long term because of entitlements — and there’s little that can be done about it. The ratio has been around 20 percent or so the past few decades, and number crunchers forecast a sharp rise to 25 percent (best case scenario) to 30 percent (worst case) of GDP over the next few decades. Tax revenues typically hover around 18 percent of GDP. That gap — representing $500 billion to $1 trillion a year — will need to be closed or else cause economic chaos. The possible answers: a) less spending, b) higher tax revenues from higher growth, or c) higher tax revenues from higher rates on the non-wealthy. Oh, and the wonks are convinced “a” is a political impossibility and “b” an economic one. They’re wrong, but that’s what they think.

[See if Obama's big economic gamble is paying off]

2) Obama seems to prefer tax hikes to spending cuts. Reduced future healthcare spending needs to be a huge part of the budget solution, and ObamaCare doesn’t make the grade at this point. Right now the various Obamacrat plans actually make things worse by failing to “bend the curve.” What’s more, Obama has proposed nothing as president to make Social Security solvent. And during the campaign, his preferred fix was higher payroll taxes rather than commonsense measures like extending the retirement age or changing how benefits are calculated. Of course, Obama has also proposed raising income, investment, corporate and energy taxes. Cut spending or raise taxes – forObama it’s an easy pick, unfortunately.

3) Obama has already tried raising taxes. Let’s, for the sake of argument, ignore the increased federal cigarette tax that would certainly seem to be a violation of Obama’s tax pledge. Call it a misdemeanor offense. But what about his cap-and-trade proposal, a de facto energy tax on everyone? Before the plan was modified in the House, the White House expected the plan to bring in some $80 billion a year from 2012 to 2019 by auctioning off carbon emission permits (probably to pay for healthcare reform). And making energy more costly is as about as broad-based a tax as you can get.

[Find out how healthcare taxes would affect you]

4) Obama’s advisers are for higher taxes. Let’s review, for example, what White House economic adviser and guru Larry Summers said on Sunday about tax hikes: “There is a lot that can happen over time. It is never a good idea to absolutely rule things out no matter what.” Indeed, Summers won’t rule it out because he thinks all the Bush tax cuts need to go, not just the ones for so-called rich folks. Here is Summers from earlier this year on Meet the Press when he put no qualifiers on letting the Bush tax cuts expire at the end of 2010: “I don’t think there’s any question they have to be repealed. The country can’t afford them for the long run. … They can’t be, they can’t be part of the long-run budget picture.” Not for anyone, it seems.

5) Obama doesn’t seem to think high taxes are harmful. Think about this: Not only was the top income tax rate a stratospheric 70 percent when President Reagan took office in1981, the tax code was not indexed to inflation. A lethal combo for economic growth. But here’s what Obama wrote about the Reagan tax cuts 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.” That’s it! Heavens, if Obama doesn’t think the pre-Reagan tax code wasn’t a disincentive to working, saving and investing, is there any tax system that he would find anti-growth?

Bottom line: The belief in the need for higher, European-style taxes (like a VAT) fills the policy cloud that surrounds Obama. It’s hard to overstate this. It’s right up there with global warming. Obama knows he faces a looming fiscal crisis and higher taxes will be his weapon of choice. To paraphrase Mondale, “Obama will raise middle-class taxes. He won’t tell you (yet). I just did.


What about help for the lower class?

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Why Team Obama thinks your taxes are going up

Aug 3, 2009 16:28 UTC

The White House can try and walk back from the comments yesterday by Geithner and Summers, but don’t buy it. Pretty much — like 99.9 percent — of center-left economists think Americans don’t pay enough in taxes to support the modestly-large welfare state/military superpower that they seem to prefer. And by not enough, I mean $500 billion to $1 trillion a year too little.

There is no reason to believe Summers, Orszag, Goolsbee, Bernstein and even Obama don’t also believe that. The only question is what will be the taxing mechanism. All the wonks love a value-added tax. It is efficient and somewhat below the radar. That second thing is important since Team Obama is certainly smart enough not to buy into the theory that Americans are ready to pay vastly higher taxes. There is nothing in recent polls or election results to imply that. Just ask the folks in California ….

America’s top 1 percent pay 40 percent of all taxes

Jul 30, 2009 14:17 UTC

The Tax Foundation review of new IRS data (through 2007) finds some remarkable things about America’s progressive tax system:

1) The top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government — the highest percentage in modern history — while the top 1 percent paid 24.8 percent of the income tax burden.

2) The share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

3) To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

4) Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.



The last post is 45% off. The top 1% owns half the wealth in this country but that is a mute point. Income taxes are bases on INCOME for a specific year. The Estate Tax taxes accumulated wealth after it has been taxed many times in a lifetime. In 2005 the top one percent EARNED 18% of total income and PAID 38% of federal income taxes.

Also, why do we not analyze work habits when we talk about income disparity. Those in higher income brackets have more education, put in more hours at work and watch less television than those in the bottom income brackets. My husband works at least 70 hours a week in a very stressful job and has to travel and be away from his family. He has been doing this for 25 YEARS. He is a first generation college graduate not a trust fund baby. Only 2% of the top 1% are trust fund babies. The rest started out as the average American. You want to be in the top 1%, go for it but you will have to work for it.

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China’s tax-cut success story

Jul 27, 2009 14:00 UTC

Chinese and American officials meet today in the latest edition of the “strategic dialogue” between the two nations. Here is an interesting 1998 take from Alvin Rabushka of the Hoover Institution about the role of tax policy in China’s economic ascent.

In 1978, the late Chinese leader Deng Xiaoping launched economic reforms that set China on a path of rapid growth. … Deng’s reform package included the establishment of coastal economic zones, increased investment by foreigners, liberalized trade, and a free market in agriculture. But the application of supply-side tax policy was the main component. In 1978, total government revenue consumed about 31 percent of GDP. Deng’s policies reduced China’s tax burden relentlessly, year in and year out. By the end of 1995, the tax burden had fallen to 10.7 percent of GDP, a cut of more than 20 percentage points, or two-thirds in relative terms.

Tax cuts fueled the privatization of the economy. Deng’s policy of massive tax reduction shifted one-fifth of all resources from government hands to the emerging town and village enterprises and private firms, which productively used those resources. The private sector grew faster than the country’s 10 percent annual average. Since the government didn’t tax away the private sector’s prosperity, the fruits of growth were plowed back into expanded activity. This had a snowballing effect, speeding the transformation toward private ownership.



You are forgetting something very important; in opening agriculture to the free market, China has essentially impoverished the vast majority of its rural populace… we’re talking about 700m (out of 900m) living in third world conditions. While it’s true, the boom in major cities like Shang’hai is staggering, it has come at an equally staggering price of basic humanity. And I think that is the fundamental problem with conservative thinking… the overall economic bottom line is more important than overall standards of living. There needs to be balance between the two – that’s the whole basis of society! – and China, and America, certainly are not striking a proper balance now. Yes, taxes are high, but if not for the high taxes it is very possible to imagine starving masses in the street seeking ‘justice’ re: French Revolution. I don’t want to sound so nihilistic, but there I think it’s closer than a lot of us like to believe. Leave taxes, trim fat, shut down lobbying, and pay off debts – THAT is a longterm solution, not cutting taxes to nearly nothing and hoping for the best.

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