As President Obama is finding out, spending a trillion dollars on health care reform is easy; paying for it is a bit harder. 

Both the House and Senate versions contain huge tax increases.  But they take completely different approaches toward which taxes are hiked and who would pay them.  And, as President Obama discovered in yesterday’s contentious meeting with labor bosses, those differences will not be easy to resolve.

The Senate wants to slap a 40 percent excise tax on so-called “Cadillac” insurance plans, that is plans with an actuarial value of more than $8,500 for an individual and $23,000 for a family.  The tax technically falls on the insurance company that offers the plan, but there’s widespread recognition that insurers will merely pass that tax on to their customers in the form of still-higher premiums. The Congressional Budget Office estimates that initially about 19 percent of insurance plans would be subject to the tax, and union surveys suggest that it could hit as many as 25 percent of union workers.  Moreover, as inflation drives costs higher, more and more plans will be subject to the tax.  That is because the threshold for the tax is indexed to general inflation not medical inflation which runs higher. 

As today’s Washington Post editorial points out, economists and deficit hawks see this measure as one of the few cost-control provisions left in the bill.  Its goal is not just to raise some $150 billion in revenue over 10 years, but to discourage the type of “gold plated” insurance plans that encourage over utilization and drive up costs.  That is why the Obama administration has endorsed this approach.

However, as labor leaders made clear in yesterday’s meeting with the president, this middle-class tax hike is unacceptable.  AFL-CIO president Richard Trumka has even threatened to retaliate at the polls against Democrats who vote for it.  In addition, 124 House Democrats have signed a letter opposing the “Cadillac tax.”  With just a three vote margin, House Speaker Nancy Pelosi cannot afford to have any defections from tax opponents. 

The House, on the other hand, has gone with a “soak the rich” strategy, calling for a surtax on incomes of $500,000 or more a year.  But Democrats already plan to allow the Bush tax cuts to expire next year, raising income taxes for millions of Americans.  An income tax surtax on top of that would mean marginal tax rates of more than 50 percent in many states with devastating consequences for economic growth.  Moderate Democratic Senators like Ben Nelson (Neb.) and even liberals from states with high cost of living like Chuck Schumer (NY) are unlikely to go along with this tax.  And, in the Senate, Democrats can’t afford even a single “no” vote. 

The conventional wisdom in Washington is that a health care bill is inevitable.  But if the growing fight over taxes is any indication, inevitability is overrated.

Obama’s Health Tax Conundrum is a post from Cato @ Liberty - Cato Institute Blog

The fat lady hasn’t even started to warm up yet.

The narrow 220-215 victory in the House on Saturday night was a step forward on the road to a government takeover of the health care system.  But as close and dramatic as that vote was, that was the easy part.  The Senate must still pass its version of reform—which will not be the bill that just passed the House.  Nancy Pelosi was, after all, able to lose the votes of 39 moderate Democrats.  Harry Reid cannot afford to lose even one.  A conference committee must reconcile the two vastly different versions.  And then, Pelosi must hold together her 3 vote margin of victory (if it gets that far).  Yet several House Democrats who voted for the bill on Saturday said they did so only to “advance the process.” Their vote is far from guaranteed on final passage.  And, House liberals are almost certain to be disappointed by the more moderate bill that may emerge from the conference.

Among the more contentious issues:

Individual Mandate: This should’ve been low-hanging fruit. Democrats agreed on a mandate early in the process. But it became increasingly plain that a mandate would hit those with insurance as well as the uninsured — forcing people who are happy with their plan to switch to a different, possibly more expensive plan. With this mandate now being seen as a middle-class tax hike, qualms have developed.  The House bill contains a strict mandate, with penalties of 2.5 percent of income backed up by up to five years in jail.  The Senate Finance Committee, on the other hand, watered down the mandate’s penalties and delayed the mandates implementation.

Employer Mandate: The House bill also contains an employer mandate, a requirement that all but the smallest employers provide insurance to their workers or pay a penalty tax of up to 8 percent of payroll.  The Senate,  looking at unemployment rates over 10 percent, seems unlikely to include an employer mandate.

The Public Option: The House included, if not a “robust” public option, at least a semi-robust one.  But moderate Democrats in the Senate are clearly not on board.  Joe Lieberman (I-CT) says that he will join a Republican filibuster if the public option is included.  Harry Reid is trying various permutations: a trigger, an opt-in, an opt-out.  But as of now there is not 60 votes for any variation.

The Sheer Cost: Fiscal hawks like Sen. Evan Bayh (D-IN) say they will not support a bill that adds to the deficit or spends too much.  But the house bill cost a minimum of $1.2 trillion.

Taxes: The House plan to add a surtax on incomes of $500,000 or more a year has no support in the Senate. At the same time, the Senate plan to slap a 40 percent excise tax on “Cadillac” insurance plans is unacceptable to key Democratic constituencies like labor unions.

Abortion: Conservative Democrats insisted on a strict prohibition on the use of government funds for abortion.  The bill could not have passed without the inclusion of that provision.  House liberal swallowed hard and voted for the bill, despite what they called “a poison pill” anyway with the expectation that it will be removed later.  If the final bill includes the prohibition at least a couple liberals could defect.  If it doesn’t, conservative Democrats won’t be on board.

Immigration: The Senate Finance Committee included a provision barring illegal immigrants from purchasing insurance through the government-run Exchange.  The House Hispanic Caucus says that if that provision is in the final bill, they will vote against it.

As if these disagreements among Democrats wasn’t bad enough, public opinion is now turning against the bill.

President Obama has called for a bill to be on his desk before Christmas—the latest in a series of deadline that are so far unmet.  It is hard to see how Congress can meet this one either.  The Senate has not yet received CBO scoring of its bill and is not prepared to even begin debate until next week at the earliest.  That debate will last 3-4 weeks minimum, assuming there are 60 votes for cloture.  That means, the bill cant’ go to conference committee until mid-December, even if everything breaks the way Harry Reid wants.  Privately, Democrats are now suggesting late January, before the State of the Union address, is the best they can do.

The fat lady can go back to sleep—this isn’t over yet.

Health Care: Not Close to Over is a post from Cato @ Liberty - Cato Institute Blog

An earlier post revealed that higher tax rates in Maryland were backfiring, leading to less revenue from upper-income taxpayers. It seems New York politicians are running into a similar problem. According to an AP report, the state’s 100 richest taxpayers have paid $1 billion less than expected following a big tax hike. The story notes that several rich people have left the state, and all three examples are about people who have redomiciled in Florida, which has no state income tax. For more background information on why higher taxes on the rich do not necessarily raise revenue, see this three-part Laffer Curve video series (here, here, and here):

Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth.

…[New York Governor David] Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated.

…So far this year, half of about $1 billion in expected revenue from New York’s 100 richest taxpayers is missing.

…State officials say they don’t know how much of the missing revenue is because any wealthy New Yorkers simply left. But at least two high-profile defectors have sounded off on the tax changes: Buffalo Sabres owner Tom Golisano, the billionaire who ran for governor three times and who was paying $13,000 a day in New York income taxes, and radio talk-show host Rush Limbaugh.

…Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes.

Revenge of the Laffer Curve, Part II is a post from Cato @ Liberty - Cato Institute Blog

That’s my favorite placard from the Washington tea party protests on Saturday. No Child Left a Dime underlines perhaps the central concern of the protesters — the ongoing massive fiscal irresponsibility in Washington by both parties.

We’ve got deficits of more more than $1 trillion for years to come. Federal debt will approach World War Two levels within a decade. Even so, the Democrats are trying to ram through a $1 trillion health care expansion, and the head of the Republican National Committee, Michael Steele, is defending against any cuts to Medicare, the program that is the single biggest threat to taxpayers. People are marching not just because Obama and the Democrats are scaring their pants off, but because most Republicans in positions of power are spendthrifts as well.

The chart illustrates that no child will be left a dime because the government will have it all. This is the CBO’s “alternative fiscal scenario,” which essentially means the business-as-usual scenario if Congress doesn’t cut anything in coming years.

Note that the most rapidly growing box, the white box, is the program that Michael Steele doesn’t want to touch. The program is expected to grow by 6.3 percent of GDP by 2050. In today’s money, 6.3 percent of GDP is about $900 billion a year in added spending. So it’s like Steele doesn’t see anything wrong with tomorrow’s young families forking over an additional $900 billion a year in taxes on this one program, or about $7,700 a year for every American household.

It’s worse than that. The biggest box on the chart by 2050 is interest on the government debt, and by far the biggest contributor to the growth in interest is Medicare. So including interest, Michael Steele’s (ridiculous) Medicare position is sort of like supporting a more than $10,000 tax hike on every young family for this one program.

Come on Republicans, you can do better than that. How about starting simply by proposing some of CBO’s modest and commonsense Medicare reforms like raising deductibles?

(By the way, interest costs rise in coming years because of an excess of spending, not a shortage of revenues. Under this CBO scenario, all current tax cuts are extended, and yet federal revenues still rise as a share of GDP over time above the historical norm of recent decades).

‘No Child Left a Dime’ is a post from Cato @ Liberty - Cato Institute Blog

As Mike Tanner has written, the health care bill means a big tax hike — indeed, a lot of tax hikes.  It also means a reversal of one of President Ronald Reagan’s great achievements, bringing down the top marginal income tax rate. 

Reports the Washington Times:

Small-business owners are warning that the economy would suffer under a health care bill proposed by House Democrats, which would drive tax rates for high-income taxpayers to levels not seen since before President Reagan’s tax reform of 1986.

The top federal income tax rate, which Mr. Reagan and a bipartisan Congress lowered from 50 percent to 28 percent, would reach 45 percent in 2011 if Congress and President Obama enact the surtaxes that are part of the health care reform plan that House Democrats announced Tuesday.

Small-business owners, who would take a direct hit from the surtaxes, expressed dismay over the proposal, saying it would force them to curtail hiring and reduce wages amid the worst recession in a generation.

“If they institute a 5 percent surtax on income, it will have a severe impact on small businesses that are already hurting,” said Michael Fredrich, whose Wisconsin company, MCM Composites, molds plastic parts.

“We run maybe three days a week, sometimes four days a week, sometimes zero days,” he said. “I can tell you that at some point, people … running a small business are just going to say, ‘To hell with it.’ “

Individuals tend to focus on their tax burden.  After all, our overall tax bill reflects the amount of money we lose as legislators speed about the country allegedly “serving” us while promoting their own political ends. 

Marginal tax rates more directly affect decisions on saving, investment, business formation, work effort, job creation, and more.  Even politicians not enamored of the “rich,” whatever that term means, should recognize that we all benefit from an economic system which encourages entrepreneurship.

Proponents of big tax hikes might want to recall Aesop’s Fable, The Goose that Laid the Golden Eggs.  Wreck the economy, and the health care system will crash too.

Back to the Bad Old Days of High Marginal Tax Rates is a post from Cato @ Liberty - Cato Institute Blog

The New York Times reports that House Democrats want to raise money for health care with a $550 billion tax hike on people who produce the most wealth. The Times says,

the proposal is perhaps the clearest expression yet of the mandate that Democrats believe they won last November, when voters expanded Democratic majorities in Congress and sent Barack Obama to the White House.

If Democrats think they won a mandate for huge tax increases — without talking about them — then 2010 ought to be fun.

Mandate for Taxes? is a post from Cato @ Liberty - Cato Institute Blog

A column in the Washington Post makes an excellent general observation about how taxes on business are actually paid by people. The piece also cites a couple of examples, including an explanation of why the Administration’s big tax hike on American multinational firms will backfire – which is the same argument I made in this video. The moral of the story, of course, is that a bigger burden of government is good for politicians, but bad for regular people.

Geoff Colvin explains:

The average citizen had to conclude that most big U.S. companies are tax cheats. Only a dedicated student of accounting would figure out that the term “tax haven” as defined by the Treasury Department means any country with a lower corporate tax rate than America’s, which is all countries except Japan.

The reality is that the administration is lashing out against perfectly legal behavior. A U.S. company that makes money in Country X pays Country X’s taxes on that money. If the company ever brings the money back to the United States, it must also pay the tax that would be due under America’s higher rate. The administration argues that because the United States has almost the world’s highest corporate tax rate (and even Japan’s is only a fraction of a point higher), current rules create incentives for U.S. companies to operate anywhere but here, at the cost of U.S. jobs. The White House therefore proposes charging all American companies full freight — the whole difference between their overseas taxes and the U.S. corporate rate — on all their profits as soon as they’re earned, no matter where. This measure, in their minds, would bring jobs home.

If the logic eludes you, you’re not alone. The bottom-line effect of the change would be a steep tax hike — more money vacuumed out of corporate coffers. Would that make U.S. companies competing in a global economy more inclined to hire additional workers in the highly expensive United States? The answer is clear. It’s why Microsoft chief executive Steve Ballmer said recently that if the change is enacted, “we’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.”

…Tax-wise, a company is just a bunch of incorporation papers; all taxes are paid by people — customers, shareholders and employees. And guess who would bear most of the burden of these tax increases? It’s the U.S. employees of the companies being taxed.

Research has shown that when business taxes are raised by a dollar, 70 to 92 cents comes out of employees’ pay. When workers wake up to that fact, they may decide this is one time they don’t want the White House beating up on business.

Obama’s Back-Door Tax Hike on American Workers is a post from Cato @ Liberty - Cato Institute Blog

As I warned in my “deferral” video, the president’s proposal to increase the tax burden on U.S. companies competing in global markets is horribly misguided. The White House has now been put on notice by high-tech executives that they will be compelled to move jobs out of America if this destructive policy is adopted.

Bloomberg reports:

Microsoft Corp. Chief Executive Officer Steven Ballmer said the world’s largest software company would move some employees offshore if Congress enacts President Barack Obama’s plans to impose higher taxes on U.S. companies’ foreign profits. “It makes U.S. jobs more expensive,” Ballmer said in an interview. “We’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.” 

…Ballmer is one of 10 U.S. software company executives pushing back against the tax proposals in meetings today with White House officials including Jason Furman, deputy director of the National Economic Council, and the heads of congressional committees such as House Ways and Means Committee Chairman Charles Rangel, a New York Democrat. …In a roundtable discussion today, Ballmer, Symantec Corp. Chairman John Thompson and the heads of smaller companies such as privately held Bentley Systems, an Exton, Pennsylvania-based maker of engineering software, said such policies would hurt domestic investment, reduce shareholder value and increase the cost of employing U.S. workers. …Ballmer said…fiduciary responsibility to shareholders would require Microsoft to cut costs, he said, meaning many jobs would be moved out of the country.

High-Tech Companies Warn White House about Tax Hike is a post from Cato @ Liberty - Cato Institute Blog

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!

On Taxing Employer Health Benefits is a post from Cato @ Liberty - Cato Institute Blog

President Obama campaigned on a promise of change. But the first 100 days of his administration have seen a continuation of the Bush administration’s irresponsible fiscal policies: more bailouts, higher spending, and mounting debt.

The president has already signed a tax hike that disproportionately hurts lower-income people, and is seeking additional tax increases to fund a transition to a more centrally-planned, European-styled economy.

Just as previous administrations have done, the president is using the current economic ‘crisis’ to justify further government encroachment upon the private sector. In doing so, dangerous precedents are being set that could have negative repercussions for future economic growth and individual liberty.

First 100 Days: More of the Same is a post from Cato @ Liberty - Cato Institute Blog

The headline from Stateline.org‘s top story today reads, “State budget gaps top $200 billion; fee, tax hikes in the works.” But as Chris Edwards noted back in February, these so-called “budget gaps” are mainly fiction.  Put simply, previous revenue forecasts overstated the amount of money that would be coming into state coffers.  Now that revenues are drying up because of the slow economy, state politicians can’t spend the amount of money they intended.

For individuals and businesses, the economic downturn and resulting financial crimp means less spending and more prudence.  For politicians and those living at the expense of taxpayers, it means raising taxes to keep the spending spigots turned on.  As the table below shows, total state spending has increased at an excessive pace this decade:

Too often journalists report on the present plight of pro-tax and spend policymakers without considering decisions made in the past.  Readers should bear the above table in mind the next time they come across such amnesic reporting .

State Tax Increases on the Rise is a post from Cato @ Liberty - Cato Institute Blog

Tax Day: The Nightmare from Which There’s No Waking Up

Cato scholars were busy exposing the burden of the American tax system on Wednesday, the deadline to file 2008 tax returns.

At CNSNews.com, tax analyst Chris Edwards argued that policymakers should give Americans the simple and low-rate tax code they deserve:

The outlook for American taxpayers is pretty grim. The federal tax code is getting more complex, the president is proposing tax hikes on high-earners, businesses, and energy consumers; and huge deficits may create pressure for further increases down the road…

The solution to all these problems is to rip out the income tax and replace it with a low-rate flat tax, as two dozen other nations have done.

At Townhall, Dan Mitchell excoriated the complexity of the current tax code:

Beginning as a simple two-page form in 1913, the Internal Revenue Code has morphed into a complex nightmare that simultaneously hinders compliance by honest people and rewards cheating by Washington insiders and other dishonest people.

But that is just the tip of the iceberg. The tax code also penalizes economic growth, distorts taxpayer behavior, undermines American competitiveness, invites corruption and promotes inefficiency.

Mitchell appeared on MSNBC, arguing that every American will soon see massive tax hikes, despite Washington rhetoric.

Don’t miss the new Cato video that highlights just how troubling the American tax code really is.

U.S. Navy Rescues Captain Held Hostage by Somali Pirates

USA Today reports that the captain of a merchant vessel that was attacked by Somali pirates was freed Monday when Navy SEAL sharpshooters killed the pirates. The episode raises a larger question: How should the United States respond to the growing threat of piracy in the region?

Writing shortly after Capt. Richard Phillips was freed, foreign policy expert Benjamin Friedman explained the reasons behind the increase in piracy:

It’s worth noting the current level of American concern about piracy is overblown. As Peter Van Doren pointed out to me the other day, the right way to think about this problem is that pirates are imposing a tax on shipping in their area. They are a bit like a pseudo-government, as Alexander the Great apparently learned. The tax amounts to $20-40 million a year, which is, as Ken Menkhaus put it in this Washington Post online forum, a “nuisance tax for global shipping.”

The reason ships are being hijacked along the Somali coast is because there are still ships sailing down the Somali coast. Piracy is evidently not a big enough problem to encourage many shippers to use alternative shipping routes. In addition, shippers apparently find it cheaper to pay ransom than to pay insurance for armed guards and deal with the added legal hassle in port. The provision of naval vessels to the region is an attempted subsidy to the shippers, and ultimately consumers of their goods, albeit one governments have traditionally paid. Whether or not that subsidy is cheaper than letting the market actors sort it out remains unclear to me.

Appearing on Russia Today, Friedman discussed the implications of the increased threat and what ships can do to avoid future incidents with Somali pirates.

Since the problems at sea are related to problems on Somali land, what can Western nations do to decrease poverty and lawlessness on the African continent? Dambisa Moyo, author of Dead Aid, argued at a Cato Policy Forum last week that the best way to combat these issues is to halt government-to-government aid, and proposed an “aid-free solution” to development based on the experience of successful African countries.

Obama Lifts Some Travel Bans on Cuba

The Washington Post reports:

President Obama is lifting some restrictions on Cuban Americans’ contact with Cuba and allowing U.S. telecom companies to operate there, opening up the communist island nation to more cellular and satellite service… The decision does not lift the trade embargo on Cuba but eases the prohibitions that have restricted Cuban Americans from visiting their relatives and has limited what they can send back home.

In the new Cato Handbook for Policymakers, Juan Carlos Hidalgo and Ian Vasquez recommend a number of policy initiatives for future relations with Cuba, including ending all trade sanctions on Cuba and allowing U.S. citizens and companies to visit and establish businesses as they see fit; and moving toward the normalization of diplomatic relations with the island nation.

While Obama’s plan is a small step in the right direction, Hidalgo argues in a Cato Daily Podcast that Obama should take further steps to lift the travel ban and open Cuba to all Americans.

Week in Review: Tax Day, Pirates and Cuba is a post from Cato @ Liberty - Cato Institute Blog

It is curious that President Obama keeps claiming that he is not raising taxes on lower-income Americans, yet a tax hike that will impose a disproportionately large burden on the poor goes into effect Wednesday. 

In February, Obama signed into law a large tax hike on cigarette consumers. The federal tax on cigarette consumers is jumping from 39 cents per pack to $1.01 per pack — a huge 159 percent increase. If you smoke two packs per day, President Obama has raised your taxes by a $453 annually.

Next on the Obama low-income tax hike agenda: global warming taxes of about $80 billion per year, as revealed in the Obama budget, which equals an annual tax boost of $700 for every household in the United States.

Obama’s First Tax Hike Hits the Poor is a post from Cato @ Liberty - Cato Institute Blog