Paul Ryan’s Roadmap, and the Difference between Costs and Spending
Rep. Paul Ryan (R-WI) ably defends his “Roadmap for America’s Future” in today’s Washington Post. He doesn’t mention Paul Krugman’s attacks thereon, nor should he. (To read why, consult The Atlantic‘s Megan McArdle and Ted Gayer of the Tax Policy Center.)
I haven’t officially weighed in on the health-care aspects of the Roadmap, but hope to do so in the near future. For the moment, I’ll use Ryan’s oped to stress a distinction that is crucial to thinking clearly about health care costs.
Ryan writes of the dangers of an un-reformed Medicare program (emphasis added):
Under an ever-expansive, all-consuming central government, costs will be contained with Washington’s heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors’ care.
While those forms of government rationing may reduce spending, that’s not the same as reducing costs. On the contrary, those rationing measures may increase health care costs.
Suppose Medicare set its prices for hip and knee replacements so low that no medical-device manufacturer would provide the hardware and no surgeon would perform the procedures. Medicare spending on hip and knee replacements would fall. But costs may rise: more seniors would be walking around — or not walking around — in severe pain. Pain and reduced mobility are costs, even if they don’t show up in the federal budget or household budgets. (Indeed, those costs would be so severe that overall Medicare spending could rise as seniors bought more wheelchairs, sought treatment for pressure sores, etc.). This is the main reason conservatives criticize Canada’s Medicare system and the British National Health Service: reducing health care spending often increases costs.
I therefore request universal compliance with Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.
‘YouCut’ Spending by 0.017%
House Republicans unveiled a bold strategy to cut 0.017 percent from the $3.7 trillion federal budget this week. Republican Whip Eric Cantor unveiled the GOP’s “YouCut” website, which includes five possible spending cuts for citizens to vote on. Mr. Cantor promised to take the favored cut to the House floor next week for members to consider.
The basic idea of YouCut is a good one — getting citizens actively involved in solving the government’s giant deficit problem and focusing congressional attention on cutting the bloated budget.
But the GOP leadership make themselves look silly by offering such small cuts. The suggested cuts on the new website average just $638 million in annual savings, which is just 0.017 percent of total federal spending. Put another way, it is just $1 of cuts for every $5,800 of federal spending. The average YouCut savings idea is just 0.04 percent of this year’s federal deficit of $1.6 trillion. So we would need 2,500 cuts of this size to balance the budget.
It’s a mystery why the Republican leadership can’t offer more than tiny spending reforms. They’ve got lots of sharp staffers who know how wasteful many large programs are and understand the need to terminate whole agencies. It’s true that YouCut will offer new cuts every week, but so far the cuts are very timid.
The second-largest YouCut idea this week is to refocus “community development” spending on those cities that are the most needy. But the whole idea of the federal government spending money on local projects such as parking lots is both economically absurd and an obvious violation of the Tenth Amendment.
The Four Congressmen of the Cotton Subsidy Apocalypse?
Yet another show of that rare commodity, bipartisan efforts to reduce the size of government today. Four members of the House—two Republican and two Democrat—have sent a letter to President Obama, calling on him to reverse the insane policy of bribing Brazilian farmers with subsidies in an attempt to correct, in accordance with the perverse two-wrongs-make-a-right school of logic, for illegal U.S. subsidies. (There were other questionable parts of the deal with Brazil).
Barney Frank (D, MA), Ron Kind (D, WI), Paul Ryan (R, WI) and Jeff Flake (R, AZ) make compelling arguments for finding a better and more permanent solution to the dispute than the current (dodgy) deal with Brazil, including arguments about fiscal responsibility, the adverse effects of distorting markets in this way, and the implications for the U.S. economy of continuing to operate the cotton program in its current form.
They also cleverly allude to President Obama’s emphasis on enforcement in his trade policy, pointing out that enforcement runs two ways:
Should we fail to effectively reform [the cotton] program now, American businesses and workers wil pay the price because we refused to write a law that complies with our international obligations. We cannot expect our trading partners to play by the rules if we are not willing to do the same. [emphasis added]
The press release from Rep. Flake’s office contains some great quotes, too. Flake, for example, says, “This proposal takes our federal farm subsidy policy from the impractical to the absurd.”
But I’ll give the last word to Rep. Frank, who has this gem to offer:
[T]he Obama administration apparently feels compelled to preserve our right to subsidize American cotton farmers by extending that subsidy to Brazilian cotton farmers. People looking for an illustration of the meaning of the phrase, ‘from bad to worse,’ need look no further.
Wyden-Gregg Tax Plan
Senators Ron Wyden and Judd Gregg recently introduced the “Bipartisan Tax Fairness and Simplification Act.” There is a lot of interest in this plan, so I’ve put together some “pros” and “cons” from my small-government, flat-tax perspective.
INDIVIDUAL TAX CHANGES – PRO
- Scraps the alternative minimum tax.
- Cuts the number of rates from six to three.
- Reduces the tax subsidy for municipal bonds.
- Creates Lifetime Savings Accounts (LSAs)–like Roths IRAs except better because all withdrawals are tax-free. This is a very important reform, and by the way, one that Canada has enacted already. See here.
INDIVIDUAL TAX CHANGES – CON
- Keeps the top tax rate at 35 percent, which is quite a bit higher than the 28 percent acheived by the Tax Reform Act of 1986.
- Increases the top capital gains and dividend tax rate from 15 percent to 23 percent.
- Triples the standard deduction, which would likely take more people at the bottom end off the income tax rolls. That would simplify the code, but at the expense of increasing the demand for big government.
- Repeals the exclusion on income earned abroad by U.S. citizens, which would likely damage the operations of U.S. multinational companies.
- Retains all the most distortionary tax breaks under the individual code, including the mortgage interest deduction.
CORPORATE TAX CHANGES – PRO
- Cuts the top corporate tax rate to 24 percent. This is a crucial reform.
- Cuts corporate welfare spending, which Wyden-Gregg notes is about $90 billion a year, based on a Cato Institute analysis.
CORPORATE TAX CHANGES – CON
- Subjects the foreign income of U.S. multinational companies to immediate taxation. That tax approach is not followed by any major advanced economy, and it would put U.S. firms at a disadvantage in global markets.
- Broadens the business tax base in other ways that move in the wrong direction, such as repealing the expensing of energy exploration and development costs. Note that some of the plan’s corporate base broadening ideas make sense–such as reducing the value of interest deductions–but only if the revenue raised is used to reduce the statutory rate (which it does seem to be here).
Overall, I would take the Wyden-Gregg plan over the current code. But Wyden-Gregg is a very limited reform compared to the Paul Ryan two-rate individual tax or the recent National Academy of Sciences tax plan, which features individual rates of 10 and 25 percent and a corporate rate of 25 percent.
Wyden-Gregg is a start, but it hardly simplifies the tax code at all and it doesn’t reduce individual rates. However, it does cut the corporate rate and it includes LSAs, which would revolutionize personal savings. So we can take heart that supply side tax policies still garner some support on Capitol Hill.
For more on tax reform, see here.
A Value-Added Tax Is Not the Answer…Unless the Question Is How to Finance Bigger Government
While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.
Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.
I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.
But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.
Reforming the Insane Tax Code
We’ve got an IRS Commissioner who doesn’t even do his own taxes, and is not embarrassed about it. We’ve got complex deductions that nobody understands, including the government, as the Maryland nurse with the MBA found out. We’ve got a Treasury Secretary and other high appointees who apparently cheated on their taxes. And we’ve got the Democrats hell-bent on greatly increasing the power and responsibilities of the overwhelmed IRS with their health care bill.
Now, more than ever, it’s time to scrap the current income tax and put in a flat tax. Or at least we could take a big jump in that direction with a “Simplified Tax,” as discussed in a new National Academies report. Get rid of all almost all deductions, exemptions, and credits and drop individual rates to 10 and 25 percent. While we’re at it, let’s drop the federal corporate rate to 25 percent or less.
For more on the two-rate tax idea, see my Options for Tax Reform and Rep. Paul Ryan’s American Roadmap.
GOP Health Care Alternative: Not as Bad as Advertised
Like my colleague, Michael Cannon, I was convinced by the staff summary and general spin accompanying the Republican health care bill introduced by Sens. Tom Coburn (R-OK) and Richard Burr (R-NC), and Reps. Paul Ryan (R-WI) and Devin Nunes (R-CA) that the bill headed, albeit more slowly, down the same road to government-run health care as expected Democratic proposals. However, a closer reading of the actual bill shows that, while there are still reasons for concern, it may be much better than originally advertised.
First, it should be pointed out that the centerpiece of the bill is an important change to the tax treatment of employer-provided health insurance. The Coburn-Burr-Ryan-Nunez bill would replace the current tax exclusion for employer-provided health insurance with a refundable tax credit of $2,300 per year an individual worker or $5,700 per year for family coverage. This move to personal, portable health insurance has long been at the heart of free market healthy care proposals. The bill would also expand health savings accounts and make important reforms to Medicaid and Medicare.
And, the bill should receive credit for what it does not contain. There is no individual or employer mandate. (I could live without the auto-enroll provisions, but they look more obnoxious than truly dangerous). There is no government board determining the cost-effectiveness of treatment. There is no “public option” competing with private insurance. In short, the bill avoids most of the really bad ideas for health reform featured in my recent Policy Analysis.
Other aspects are more problematic. The authors still seem far too attached to the idea of an exchange/connector/portal. The summary implied that states would be required to establish such mechanism. In reality, however, the bill merely creates incentives for states to do so. Moreover, I have been repeatedly assured that the bill’s authors are aiming for the more benign Utah-style “portal,” rather than the bureaucratic nightmare that is the Massachusetts “connector.” Still, I would be more comfortable if the staff summary had not singled out Massachusetts as the only state reform worthy of being called “an achievement.”
And, if states choose to set up an exchange, a number of federal requirements kick in, such as a requirement that at least one plan offered through the exchange provide benefits equal to those on the low cost FEHBP plan. There is also a guaranteed issue requirement.
Elsewhere, there are also requirements that states set up some type of risk-adjustment mechanism although the bureaucratic ex-post option that I criticized previously, appears to be only one option among many for meeting this requirement. And, I wish the authors hadn’t jumped on the health IT bandwagon. Health IT is a very worthy concept, but one better handled by the private sector.
And, if we should praise the bill for what it doesn’t include, we should criticize it in the same way. The bill does not include one of the best free market reform proposals of recent years, Rep. John Shadegg’s call for letting people purchase health insurance across state lines.
The bills (there are minor differences between the House and Senate versions) run to nearly 300 pages, and additional details, both good and bad, may emerge as I have more opportunity to study them. But for now, the bill, while flawed, looks to have far more good than bad.
The Coburn-Burr-Ryan-Nunes Mandate-Price-Control Bill
Today, Senators Tom Coburn (R-OK) and Richard Burr (R-NC), along with Reps. Paul Ryan (R-WI) and Devin Nunes (R-CA) announced that they will introduce a health care reform bill. If my reading of the bill summary is correct, their bill would:
- Mandate that states create a new regulatory bureaucracy called a “State Health Insurance Exchange,”
- Mandate that all plans offered through those exchanges meet federal regulatory standards,
- Mandate “guaranteed issue” in those exchanges,
- Mandate “uniform and reliable measures by which to report quality and price information,”
- Impose price controls on those plans by prohibiting risk-rating,
- Launch a government takeover of the “insurance” part of health insurance, by means of a “risk-adjustment” program intended to cope with the problems created by price controls, and
- Fall just short of an individual mandate by setting up (mandating?) automatic enrollment in exchange plans at “places of employment, emergency rooms, the DMV, etc.” — essentially, trying to achieve universal coverage by nagging Americans to death.
Needless to say, I am troubled.
The bill summary is self-contradictory. On the one hand, it lists “No Tax Increases” as a core concept. Do its authors not know that imposing price controls on health insurance premiums imposes a tax on healthier-than-average consumers? And where do they think the money for “risk-adjustment” payments will come from? Heaven?
The bill sponsors seem to want to cement in place the monopoly regulation that currently exists at the state level — when they’re not encouraging Congress to take over that function. Have they abandoned their colleague Rep. John Shadegg’s (R-AZ) proposal to allow for competitive regulation of health insurance?
And if Massachusetts created an “exchange” on its own, why do other states need federal legislation?
The bill includes some ideas for which I have more sympathy, like its tax-credit proposal and expanding health savings accounts.
But the above provisions would sow the seeds of a government takeover of health care — so much so that The Washington Post‘s Ezra Klein is salivating:
The word of the day is “convergence.” That — and that alone — is the definitive message of the conservative health reform alternative developed by Sens. Tom Coburn (Okla.) and Richard Burr (N.C.), as well as Rep. Paul Ryan (Wisc.). For now, some of the key provisions are about as clear as mud. The plan’s changes to the tax code, in particular, are impossible to discern. So I’ll do another post when I can get some clarity on those issues. The politics, however, are perfectly straightforward.
A superficial read of the Patients’ Choice Act — which I’ve uploaded here — would make you think you’re digging into a liberal bill. A fair chunk of the rhetoric is lifted straight from Sen. Ted Kennedy’s office. “It is time to publicly admit that the health care system in America is broken,” begins the document. “Health care is not a commodity in the traditional sense,” it continues. “States should provide direct oversight of health insurers to make sure they are playing by fair rules,” it demands. The way we pay private insurers in Medicare “wastes taxpayer dollars and lines the pockets of insurance executives,” it says. Elsewhere, it praises solutions that have worked in several European countries.”
And though it’s still too early to say how the policy fits together, it’s clear that many traditionally Democratic concepts have been embraced. To put it simply, the plan wants to encourage a version of the Massachusetts reforms — which it calls a “well-known, bi-partisan achievement of universal health care” — in every state. There are some differences, of course. The plan doesn’t have an individual mandate. It doesn’t have an obvious tax on employers. But it strongly endorses State Health Insurance Exchanges. And that, for Republicans, is a radical change in policy.
This idea — present in every Democratic proposal but absent in Arizona Sen.John McCain’s plan — would empower states to create heavily regulated marketplaces of insurers. The plans offered would have to “meet the same statutory standard used for the health benefits given to Members of Congress.” Cherrypicking would be discouraged through risk adjustment, which the PCA calls “a model that works in several European countries.” The government would automatically enroll individuals in plans whenever they interacted with a government agency and states would be able to join into regional cooperatives to increase the size of their risk pool.
In essence, Coburn, Burr, and Ryan are abandoning the individual market entirely. Like Democrats, they’re arguing that individuals cannot successfully navigate the insurance market, and they need the protection of government regulation and the bargaining power that comes from a large risk pool. This is literally the opposite approach from McCain, who attempted to unwind the employer-based insurance and encourage families to purchase health coverage on the individual market. The core elements of this plan, in other words, make it the same type of plan Democrats are offering. A plan that enlarges consumer buying pools rather than shrinks them. It’s pretty much exactly what I’d expect a Blue Dog Democrat to propose. And it’s further evidence that the argument over health reform is narrowing, rather than widening. And it’s narrowing in a direction that favors the Democrats.
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