On Taxing Employer Health Benefits
Democrats in Congress are reportedly considering taxing employer-provided health insurance benefits as a way to pay for their health care reform plan. And, even though he brutally attacked John McCain for something similar (see below) during the campaign, President Obama may now go along with the idea.
Much of the media coverage around the idea has equated this tax hike with the McCain plan and other proposals by advocates of market-based health reform over the years that would shift the tax break from employer-provided insurance to individual insurance. However, there is an important distinction. The market-based proposals would have taxed employer-provided health benefits (treating them as taxable compensation), but would have provided workers with a deduction or credit for purchasing insurance regardless of whether they receive it through work or pay it on their own. The result, for all but a handful of workers with the most expensive gold-plated employer plans, would have been tax neutral. In fact, many workers would receive a net tax cut. The shift in tax treatment was simply part of a larger strategy to move from a system of employer-provided insurance to one where health insurance was personal, portable, and owned by workers.
The plan being discussed by Congress, on the hand, is simply a tax hike. It is not revenue neutral—it is a $1 trillion tax increase that will fall heavily on the middle-class. It is designed not to change the system, but simply to raise revenue.
That’s a very different thing!
Robert H. Frank, A 200% Tax Even Socialists Will Hate
In the latest issue of Forbes, Cornell University economist Robert H. Frank is pushing “A Tax Even Libertarians Can Love.” I hope he wasn’t counting on this libertarian’s support.
What he advocates is “replacing the income tax with a progressive tax on spending. …A family’s income minus its savings is its consumption, and that amount minus a large standard deduction — say, $30,000 a year for a family of four — would be its taxable consumption. …Rates would start low, perhaps 20%, then rise gradually with total consumption. …With savings tax-exempt, top marginal tax rates on consumption would have to be significantly higher than current top rates on income.”
His concept of “significantly higher” includes tax rates of 100-200% on marginal income that isn’t saved. This is about minimizing affluence, not maximizing revenues. There is ample evidence from Emmanuel Saez and others that the amount of reported income drops sharply as marginal tax rates rise above 25-30% (and even less on capital gains).
In his 2007 book, Falling Behind: How Rising Inequality Harms the Middle Class, Frank suggests marginal tax rates of 50% above $220,000 and rising to 200%. Since seniors (like me) commonly finance retirement from past savings, Frank’s tax scheme amounts to rapid confiscation of past savings.
For young people, Frank’s tax can’t possibly encourage savings because it discourages earning any income in the first place. Consumption is, after all, the motive for both earning and saving. The prospect of facing future consumption taxes of 50-200% would surely discourage saving much, because the rewards from invested savings (namely, future consumption) would be subjected to such prohibitive tax brackets. Under this steeply progressive tax on unsaved income, any income exempt from taxes today would be subject to brutal taxes whenever folks wanted to buy anything of value, like a car or house, or to retire on their accumulated savings.
What “Taxpayers?”
In an editorial yesterday on President Obama’s proposal to end federal guaranteed student lending and turn everything into loans and grants direct from Uncle Sam, the New York Times had an interesting take on what constitutes putting ”taxpayers’ interests first”:
Private companies that reap undeserved profits from the federal student-loan program are gearing up to kill a White House plan that would get them off the dole and redirect the savings to federal scholarships for the needy. Instead of knuckling under to the powerful lending lobby, as it has so often done in the past, Congress needs to finally put the taxpayers’ interests first.
So let me get this straight: Redirecting tax dollars from lenders — who do get cushy fees and security through the guaranteed loan program — and giving it to students is somehow in the best interest of taxpayers? Maybe I’m old fashioned or something, but wouldn’t the best thing for taxpayers be to get their money back, not just see it shuffled from one special interest to another?
Obviously it would, and not just because taxpayers are best off when they decide how their ducats are used. As Andrew Gillen and I made clear in a Capitol Hill briefing last week, the best thing that could happen for taxpayers, students, and all of society would be for the federal government to provide much less aid to students, not more. The reality is that student aid drives massive, self-defeating college price inflation, creates ugly bloat and waste in our ivory towers, and ultimately cramps economic growth.
And we wonder why there are tea parties!
Health Policy Death Match: Klein vs. Ponnuru
I count both Ramesh Ponnuru and Ezra Klein as friends. (I’m so post-partisan.) Why, oh why must they force me to choose between them??
Ponnuru had an op-ed in yesterday’s New York Times where he reaffirmed his membership in the Anti-Universal Coverage Club. Klein responded in a way that’s sure to satisfy his base, but I think he left the reality-based community wanting. Are you ready for the fisk?
Klein suggests that if “80+ percent of Americans . . . think the system needs fundamental changes or a complete rebuild,” then 80+ percent of Americans must support universal coverage. Hmmm, bit of a stretch. In fact, I can recall one poll where nearly one-third of likely Democratic primary voters rejected universal coverage.
Klein suggests that giving consumers the freedom to avoid unwanted state health insurance regulations would mean that Arizonans wouldn’t get coverage for colorectal cancer screening, and that there would be no mammogram coverage in Idaho. Mmm, that’s good crazy. I refer my right honorable friend to the episode where The New Republic‘s Jonathan Cohn made a similar claim about mandates for prostate and cervical cancer screening. I looked up the services covered by the plans made available to the Cohn family by the University of Michigan. It turned out that six out of the seven available plans cover both prostate and cervical cancer screening — even though Michigan requires insurers to cover neither. (I offered to wager Cohn a fancy dinner that his family has coverage for both, but I never heard back from him. Foolish, really, to let me know where he gets his insurance. Klein would never give me such an opening . . . or would he?) What Ponnuru proposes is to let Arizonans and Idahoans and everyone else choose what their health plan covers. Imagine that: people rationing medical care according to their preferences, rather than the preferences of employers, interest groups, bureaucrats, health policy wonks… Why Klein clings to such regulations despite zero evidence that they actually increase access to the targeted services is beyond me.
Klein criticizes Ponnuru for proposing to replace the current tax preference for job-based coverage with a tax credit available to everyone, much like John McCain proposed during his (latest) presidential campaign. Ponnuru cites a study estimating that tax credits would reduce the number of uninsured by 20 million. Klein counter-cites one study estimating that tax credits would have zero net effect on the number of uninsured, and a second study estimating that those who transition from job-based coverage to the “individual” or “non-group” market would pay an additional $2,000 per year for an identical policy. Klein’s criticisms sound persuasive — provided you know precious little about the topic. For one thing, the two studies Klein cites are actually the same study. Pity, really. Had Klein found a second study to support his position, perhaps it would not have been quite so flawed as the one he did find. Here’s what I wrote back in September about that study’s flaws:
McAuliffe-nomics
Good news for Virginia taxpayers! Turns out that gubernatorial candidate Terry McAuliffe, longtime Democratic fundraiser and former national chairman, understands the power of tax cuts. At a forum on Wednesday, he said that $1.25 million in tax cuts could generate $80 million in economic activity. I’m not sure even Art Laffer or Christina Romer would claim that much return on tax cuts. But here’s McAuliffe:
At George Mason University yesterday, McAuliffe said Virginia’s appeal to Hollywood filmmakers could improve the state’s economic picture. McAuliffe said he became familiar with the potency of the film industry while serving as chairman of the Democratic National Committee.
During a roundtable discussion with local filmmakers and producers at George Mason, he unveiled a proposal to offer additional tax incentives and other benefits to film crews making movies in Virginia. He said the state has been losing out to such states as North Carolina and Georgia, which offer greater benefits and have seen their film industries flourish.
He pointed to the HBO miniseries “John Adams,” about the nation’s second president, as an example of a film project that had benefited the state. The miniseries, filmed partly in Williamsburg and at the College of William and Mary, cost Virginia $1.25 million in tax breaks, but it boosted the local economy by $80 million and created 3,500 jobs, he said.
Unless . . . wait a minute. Could it be that McAuliffe only favors targeted tax cuts, tax cuts that would direct economic activity in a particular direction, tax cuts that would in fact help his Hollywood fundraising friends? Hard to say. He’s not calling for tax increases during his gubernatorial campaign, but of course he helped President Clinton raise taxes and he supports President Obama’s tax-spend-and-borrow policies. According to this liberal blogger, McAuliffe tells liberals privately that he can’t run for governor of Virginia on a tax-increase platform . . . if you get my drift.
But hey, if a $1.25 million tax break can generate $80 million of economic activity, what could a $125 million tax break do for Virginia?
Week in Review: No End to Spending and Regulation in Sight
Geithner to Propose Unprecedented Restrictions on Financial System
The Washington Post reports, “Treasury Secretary Timothy F. Geithner plans to propose today a sweeping expansion of federal authority over the financial system… The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on the scope and risk of their activities.”
Calling Geithner’s plan another “jihad against the market,” Cato senior fellow Jerry Taylor blasts the administration’s proposal:
What President Obama is selling is the idea that government must be the final arbiter regarding how much risk-taking is appropriate in this allegedly free market economy. It is unclear, however, whether anybody short of God is in the position to intelligently make that call for every single actor in the market.
Cato senior fellow Gerald P. O’Driscoll reveals the real reason behind the proposal:
Federal agencies have long had extensive regulatory powers over commercial banks, but allowed the banking crisis to develop despite those powers. It was a failure of will, not an absence of authority. If the authority is extended over more institutions, there is no reason to believe we will have a different outcome. This power grab is designed to divert attention away from the manifest failure of, first, the Bush Administration, and now the Obama Administration to devise a credible plan to deal with the crisis.
A new paper from Cato scholar Jagadeesh Gokhale explains the roots of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve’s actions to prop up the financial sector. Gokhale argues that recovery is likely to be slow with or without the government’s bailout actions.
In the new issue of the Cato Policy Report, Cato chairman emeritus William A. Niskanen explains how President Obama is taking classic steps toward turning this recession into a depression:
Four federal economic policies transformed the Hoover recession into the Great Depression: higher tariffs, stronger unions, higher marginal tax rates, and a lower money supply. President Obama, unfortunately, has endorsed some variant of the first three of these policies, and he will face a critical choice on monetary policy in a year or so.
Obama Defends His Massive Spending Plan
President Obama visited Capitol Hill on Wednesday to lobby Democratic lawmakers on his $3.6 trillion budget proposal. Both the House and Senate are expected to vote on the plan next week.
In a new bulletin, Cato scholar Chris Edwards argues, “Sadly, Obama’s first budget sets a course for more government bloat, more economic distortions, and ultimately lower standards of living for everyone who is not living off of federal hand-outs.”
On Cato’s blog, Edwards discusses Obama’s misguided theory on government spending:
Obama’s budget would drive government health care costs up, not down. But aside from that technicality, the economics of Obama’s theory don’t make any sense.
Obama’s budget calls for a massive influx of government jobs. Writing in National Review, Cato senior fellow Jim Powell explains why government jobs don’t cure depression:
If government jobs were the secret of success, then the Soviet Union wouldn’t have collapsed, because it had nothing but government jobs. Communist China, glutted with government jobs, would have generated more income per capita than Hong Kong where, at least before the Communist takeover, there were hardly any government jobs, but Hong Kong’s per capita income was about 20 times higher than that on the mainland.
Multiplying the number of government jobs did nothing then and does nothing now to revive the private sector that pays all the bills, in large part because of the depressing effect of taxes required to pay for government jobs.
Cato on YouTube
Cato Institute is reaching out to new audiences with our message of individual liberty, free markets and peace. Last year, we launched our first YouTube channel, which has garnered thousands of views and subscriptions. Here are a few highlights:
You Don’t Say
President Obama recently indicated that he would cut the fiscally irresponsible (yet minimally market distorting) direct payments that flow to farmers regardless of their production. An outcry from farming groups has, predictably, ensued.
Just as predictably: “A source in the administration says the proposal is being reconsidered because of the opposition it has received.“
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
