Tuesday, February 23, 2010
ObamaCare 3.0: Higher Implicit Taxes, Quicker Death Spiral
Posted: 23 Feb 2010 05:49 AM PST
By Michael F. Cannon
In a recent paper, I showed that the health care legislation passed by the House and Senate would impose punitive implicit tax rates on low- and middle-income workers. Those bills would also result in higher health insurance premiums over time because they would create large financial incentives for healthy people to drop coverage and only purchase it when they become sick.
The health care proposal that President Obama released yesterday essentially splits the difference on most areas of disagreement between the two bills. But a preliminary analysis shows that ObamaCare 3.0 would make these perverse incentives even worse. Families of four earning $22,000 under the Senate bill (100 percent of the federal poverty level) or $30,000 under the House bill or the Obama plan (133 percent FPL) would face the following effective marginal tax rates as they climb the economic ladder:
Senate bill – Average: 62 percent. High: 73 percent.
House bill - Average: 74 percent. High: 82 percent.
Obama plan – Average: 72 percent. High: 90 percent.
In other words, over broad ranges of income, families of four would see their take-home pay rise by an average of 28 cents of each additional dollar earned. In some cases, it would rise as little as 10 cents for each additional dollar earned. Using smaller changes in income reveals the Obama plan would create EMTRs as large as 200 percent or higher. That is, earning more money would leave many families worse off financially.
In addition, by requiring insurers to cover all applicants without regard to illness, each of these health plans would remove any penalty on waiting until you are sick to purchase coverage. Therefore — even after accounting for all relevant taxes, subsidies, and penalties — these plans would create large financial incentives for healthy people to drop out of the market, which would cause premiums to rise for those who remain. That would in turn encourage more healthy people to drop out, which would cause premiums to rise further, and so on. Those perverse incentives are much worse under the Obama plan than under the House or Senate bills. Here are the maximum financial incentives to drop coverage that each plan would create for families of four:
Senate bill: $8,000
House bill: $7,800
Obama plan: $9,900
By increasing the financial incentives to drop coverage, the Obama plan would cause private insurance markets to unravel even faster than the House and Senate bills would.
Go, Obama, go. Each new entreaty you and your company come up with just assures the ultimate result. Can't wait for November 2010, and then November 2012.
A mere three days before President Obama's supposedly bipartisan health-care summit, the White House yesterday released a new blueprint that Democrats say they will ram through Congress with or without Republican support. So after election defeats in Virginia, New Jersey and even Massachusetts, and amid overwhelming public opposition, Democrats have decided to give the voters what they don't want anyway.
Ah, the glory of "progressive" governance and democratic consent.
"The President's Proposal," as the 11-page White House document is headlined, is in one sense a notable achievement: It manages to take the worst of both the House and Senate bills and combine them into something more destructive. It includes more taxes, more subsidies and even less cost control than the Senate bill. And it purports to fix the special-interest favors in the Senate bill not by eliminating them—but by expanding them to everyone.
For readers who enjoy this sort of thing, give Barro's article a read. Then ask yourself why BHO and company are pursuing the fiscal stimulus policies they have. Ask yourself why Christina Romer, Chair of the President's Council of Economic Advisors, says what she has to say about the whole issue.
For readers who just don't care about this sort of thing --- sorry.
Monday, February 22, 2010
Friday, February 19, 2010
from The Wall Street Journal
President Obama will announce plans to provide an additional $1.5 billion to a state-assistance program for homeowners worst-hit by the downturn in U.S. housing values.
The program, which Obama will announce in Las Vegas, is for states where the average home value for all homeowners in the state has dropped more than 20% from its value at the height of the housing bubble. About a half-dozen states qualify, including Nevada, Florida, California and Michigan
Aren't you happy that your tax dollars will be going to help people who made poor choices. You and I will be penalized for the good choices we made. Those who made poor choices will be rewarded. If that sounds upside down to you, then don't vote for Democrats. They evidently don't understand basic economics.
Thursday, February 18, 2010
If you don't complete your federal income tax return yourself, do it this year, especially if you have any kind of a small business. If you just hand your records over to a CPA, don't do that this year. Instead, see if you can do it yourself. I'll bet you can't, especially if you don't use any other assistance, such as Turbo Tax or some other tax preparation service.
If you are unwilling to try this, then you may just be part of the problem. If you do try it, you have my sympathy, and you will see immediately (okay, it may take an hour or two) why you should call your member of congress and demand that he or she support the Fair Tax.
I dare you. I double dog dare you. Can you take the dare? Tell me how it works out for you.
Did you know that nearly 50% of the households in the United States DO NOT PAY federal income taxes? That's part of the reason why those of us who do pay federal income taxes have to pay so much.
I know how much I paid in federal income taxes in 2008. Do you know how much your household paid? If you don't, then you deserve all the wretched government you are paying for ( or not paying for, if yours is one of the households that doesn't actually pay federal income taxes).
Wednesday, February 17, 2010
Can't wait for November 2010 and November 2012.
Tuesday, February 16, 2010
I invite readers to consider an even sterner standard for when federal debt is dangerous. I argue that federal deficit spending is dangerous whenever it is financed by money creation instead of through the savings of the household sector. In other words, deficit spending today is just fine, so long as households increase their savings today to pay for the debt plus interest in the future.
Deficit spending certainly makes sense for financing investment spending. That's what businesses do. It makes sense because the investment repays the debt, plus interest, plus additional real growth in the economy. For example, ABC corporation borrows $100 million to build a new factory. The new factory produces goods that sell for $150 million over the next 10 years. $100 million repays the loan; $10 million pays interest on the debt; $40 million is pure economic growth.
Deficit finance often makes sense for spending on durable goods that deliver services into the extended future, even though the spending isn't an investment. A good example at the consumer level is buying a house. After all, the house provides "housing services" to the home owner over several years. It makes sense to pay for those services over several years.
Deficit spending to finance current consumption spending can even make sense, provided consumers are merely moving consumption to the present with every expectation of forgoing consumption in the future when the loan is repaid plus interest. A good example is taking a vacation this year, with the expectation that there will be no vacation next year.
Does the federal deficit spending called for by Obama match up with any of these three cases? No, not at all. Instead, federal deficit spending is financing current consumption with absolutely no expectation of forgone consumption in the future.
Does anyone seriously doubt that the huge federal budget deficits proposed by Obama for the next few years will be financed by money creation, not saving by households? I have no such doubt; I'm utterly confident that the Fed will finance the U.S. Treasury's deficit spending, if increased tax collections fail to do so.
Will the economy grow sufficiently fast to allow greater tax collections without raising tax rates? That has happened in the past. Will it happen over the next decade? Anyone that claims they know the answer is kidding themselves (including the CBO and all other economic forecasters).
Is Obama proposing policies that favor real economic growth? He is not. Obama is all about "spreading the wealth"; he is not about growing wealth. Can he kill the goose that's laying the golden eggs? He can if the American people let him. Let's see what happens in November of 2010.
Sunday, February 14, 2010
Saturday, February 13, 2010
Maybe the Dems are trapped in a self-imposed echo chamber inside the DC beltway. They must not have noticed the Tea Party movement all across this great land.
The majority in the House has forgotten that they are "representatives," not princes in the land of a king. November 2010 will remind them, and January 20, 2013 will follow soon enough --- the end of an error.
Friday, February 12, 2010
Of course not. Neither is owning a Mercedes or a fast bass boat. By the way, owning a home is no more an investment than owning a Mercedes or a fast boat, regardless of what you may have heard before. The long term rate of return for home ownership in the United States has been substantially lower than the return to owning an S&P 500 index fund.
A house is a consumer durable consumption good; it is not an investment. For decades, Congress has subsidized the housing industry and given consumers strong incentives to overspend on housing. Why? Not because consumers wrote their member of congress and asked for it. But there was lobbying for it. Where do you suppose the lobbying came from? If the banking industry comes to mind, good for you. Of course, home builders were not opposed, either.
Now we are suffering the harsh reality of Congress having helped direct way too many dollars of capital to flow to the housing market. That very same capital had alternative uses, don't forget. We are a long way from out of the woods on this. Just because the subprime mortgage debacle is out of the news doesn't mean the problems it caused have gone away; they are just out of sight, thanks to the Fed.
You and I have been compelled by our Congress and our Presidents (both Bush and Obama are guilty) to bail out the banks. Goldman Sachs has done particularly well as a result, which isn't surprising, considering Hank Paulson's former digs. Lehman Brothers didn't fare so well. Someone in the Bush administration evidently didn't think as highly of the owners of Lehman Brothers as they did of Goldman Sachs. They also didn't like Martha Stewart much, but that's anther story.
A $100,000 mortgage at just 5% annual percentage rate will end up costing the borrower $93,000 in interest. More than half of that interest will be paid during the first 15 years of a 30-year mortgage ($65,500). If the interest rate is just 1% higher at 6%, the interest bill would be $116,000! If you think renting is "throwing money down a rat hole," what would you call paying $93,000 (or $116,000) in interest to a bank?
But won't your $100,000 house be worth a lot more after 30 years? Yes; it will be worth $100,000 plus inflation minus depreciation for how ever much of your 30-year old house has now been used up. If inflation is just 3% per year, your 30-year old house will likely be worth $242,700 after 30 years. And by the way, with 30-years of inflation at 3% per year, that $242,700 asset, if sold, would buy just what $100,000 bought 30 years back.
And don't forget all the money a homeowner ends up putting into the house for routine maintenance and repair over a 30-year period. No, home ownership really isn't for everyone, regardless of what Barney Frank thinks.
By the way, banks don't' use some other household's hard earned savings to make mortgage loans. They use newly created money, made possible by our ridiculous banking laws and the Fed. That's right. Banks earn their money the old fashioned way; they create it out of thin air.
Thursday, February 11, 2010
In my February 8th EconoBlast post, I copied Title I: Health Care Reform, taken from Paul Ryan’s Roadmap for America’s Future. Today’s EconoBlast offers a critical analysis of Ryan’s second article of Title I for reforming health care. Future posts will consider additional articles of Title I.
Article 2: Ryan's Roadmap proposes to eliminate the federal tax code provision that allows payments made by companies for group health care insurance for their employees, to be excluded from taxable income of their employees.
Under current federal tax law, payments made by a company for employee health insurance are not counted as income paid to employees for federal or state income tax purposes. In 2007, had there been no such exclusion in the federal tax code, the IRS would have collected $246 billion in additional income taxes from workers. Clearly, the tax code provides an enormous tax advantage for workers whose companies sponsor a group health insurance plan.
Section 106(a) of the Internal Revenue Code established this particular tax preference in 1954. As you might imagine, the details and operational complications for this particular income tax exclusion are complicated and eye-glazing, just like the rest of the Internal Revenue Code.
Economists have criticized Section 106(a) of the tax code for several reasons. First, this tax preference (a.k.a., loophole) gives people an incentive to consume more health care than they otherwise would. Of course, the increased demand for health care caused by Section 106(a) is one of the chief factors driving the ever-rising cost of health care in America.
Others have criticized this tax exclusion because they see it as unfair. Higher-paid employees are more likely than lower-paid employees to work for companies that offer their employees a "company paid" health care insurance plan.
Of course, companies never really pay for their employees' health care insurance; they just remit insurance premiums to insurance companies instead of paying higher wages to their workers. Health care insurance companies really like that arrangement, and so do doctors and hospitals, as you might imagine.
Employees tend to think they are getting a freebie when they are not. Insurance companies, doctors, and other health care providers get more income than they otherwise would without Section 106(a) in place.
Others have criticized the Section 106(a) exclusion because it benefits higher-paid workers more than lower-paid workers, even within the same company that offers a health care "benefit." That's because higher-paid workers have a higher marginal tax rate than lower-paid workers, so the exclusion saves higher-income employees more in tax payments not made.
The Section 106(a) exclusion is a regressive provision of the tax code, benefiting higher-income workers more than lower-income workers. But that's nothing new for the tax code; the very same thing is true of payroll withholding taxes (a.k.a., withholding for social security, medicaid, and the like).
Still others have criticized the Section 106(a) exclusion because the code doesn't stipulate anything about the kind of health care insurance plan that is eligible for the exclusion. That means that so-called "Cadillac" plans that are typically enjoyed by very high income earners qualify for the exclusion, just like bare-bones plans offered by small companies. Some folks think that's unfair, too.
I support Ryan's call for eliminating the Section 106(a) exclusion, but I do so with the proviso that we also eliminate all the other tax preferences that are now included in the Internal Revenue Code. In fact, I propose that we eliminate the Internal Revenue Code entirely and replace it with HR 25/S 296, the Fair Tax.
Ryan is calling for removing the exclusion so that his proposal for giving individuals a tax credit (Article 1 of Title I) could become part of the tax code. As I stated here, I cannot support Ryan's proposed tax credit to consumers of health care insurance. Ryan's proposal does have merit, if it is compared to the current tax code only. But compared to eliminating the federal income tax altogether, Ryan's Article 2 of Title I losses its attractiveness.
Ryan's proposal for eliminating Section 106(a) simply substitutes one tax preference for another, all within an income tax code that is directly responsible for monumental inefficiency in our economy.
The federal income tax is also directly responsible for making possible an ever-expanding federal government. Yes, the federal government could expand even without the federal income tax. But it is also true that the Internal Revenue Code, as we have it today, makes it ridiculously simple.
To sum up, Ryan's proposal to eliminate Section 106(a) of the Internal Revenue Code would be better than doing nothing, but not better than getting health care divorced from tax collections altogether. Replacing the Internal Revenue Code with the Fair Tax would do just that, and at the same time, eliminate thousands of other tax preferences that distort our economy.
I repeat from an earlier post; the federal tax code should do one thing only. It should provide for funding activities of the federal government with the least distortion of choices people make through voluntary exchange. The federal tax code should not favor some to the disadvantage of others; it should not nudge people toward one choice instead of another; it should not enhance the revenue of a particular industry over others. Our current federal tax code does all these and more.
Wednesday, February 10, 2010
It's really hard to see how we can escape a run up of inflation, given the fiscal and monetary policies already underway from the Obama administration and the Fed. It's easy to understand why the higher inflation hasn't started with a vengeance just yet. Read Rahn's explanation here.
It is possible that sufficient economic growth could stunt the onset of higher inflation. But economic growth requires voluntary exchange, entrepreneurship, and confidence in the future, not government regulation, redirection of capital by bureaucrats, and monumental uncertainty about what the future holds.
Sadly enough, the Obama administration is going in the all the wrong directions.
In my February 8th EconoBlast post, I copied Title I: Health Care Reform, taken from Paul Ryan’s Roadmap for America’s Future. Today’s EconoBlast offers a critical analysis of Ryan’s first article of Title I for reforming health care. Future posts will consider additional articles of Title I
Article 1: Ryan proposes a tax credit of $2,300 for individual tax filers and $5,700 for joint filers and families. No doubt, the intent is to make health care insurance appear cheaper to households via a refund of $2,300 per adult person of the premium paid for health care insurance. Everyone would like to pay less for their health care, right?
I oppose Ryan’s proposal for three main reasons: (1) health care insurance cannot be made cheaper with a tax refund; (2) using the federal tax code to influence choices people make is a bad idea; (3) the tax credit would simply transfer income from households who pay income taxes to households who do not, giving us yet another income transfer provision embedded in the tax code.
Health care insurance cannot be made cheaper with a tax refund, anymore than housing can be made cheaper with a tax deduction for interest paid on a mortgage. The tax credit proposed by Ryan would definitely make the “price” of health care insurance to the consumer lower, but the true cost of health care insurance would rise as a result. “Price” is not the same thing as “cost,” as all serious students of economics know.
The cost of health care insurance depends ultimately on the value of resources – land, labor, and capital – used to produce health care for the insured people who get sick. Increasing the quantity of health care demanded by artificially reducing the price paid by the consumer, other things unchanged, would increase the quantity of health care insurance policies purchased. More policies purchased means more resources used to produce health care services, other things unchanged, which would increase the cost of health care insurance policies. This result must be the case, unless producing more health care is costless. There ain’t no such thing as a free lunch (TANSTAAFL), just as Robert Heinlein reminded us in The Moon Is A Harsh Mistress.
Using the tax code to give people incentives to act in a particular way is a mistake. I will argue that the federal tax code should do one thing, and only one thing; it should raise revenue to finance the activities of the federal government. The tax code should do its job as efficiently as possible, with the least disturbance possible to the choices people make through voluntary exchange. Of course, lots of people will disagree with that proposition.
The federal tax code is already an abhorrent, grossly unfair, wildly inefficient disaster. The last thing we need to do is tack on yet another complication that deceives people into thinking their government is giving them something that it does not have to give. Government cannot give the people what it does not first take away from the people. What part of that observation is either unclear or untrue?
People do not need an incentive to purchase health care insurance. They already have one, if the insurance they choose to buy or not, is truly insurance. What we today call health care “insurance” is really not insurance at all; it is prepaid health care that broadly features healthy people subsidizing unhealthy people. Given the demographics of society, and the nature of human health, that means younger people broadly subsidizing older people.
What we call “health care insurance” today also features households consuming health care services with little or no regard whatsoever for the price that is actually paid to health care providers. Predictably enough, the result is households consuming vastly more health care services than they would voluntarily choose to consume, if they had to pay for what they consume directly. America’s health care system does need reform, but we don’t need even more consumption of health care without regard to what it costs to produce.
Those who criticize do not have to offer alternatives; pointing out the harm and unintended consequences of public policy is valuable in and of itself. Nonetheless, I will offer an alternative to Ryan’s proposed tax credit for health care insurance.
All households want health care that costs them as little as possible, offers the level of quality they want, is available on demand, and is provided by the docs of their own choosing. In other words, what households want is what we get when we solve the economic problem through voluntary exchange. History is full of evidence that voluntary exchange – and only voluntary exchange – gives us lower prices for higher quality, on demand, for the goods and services we want. What is true of cars, food, clothing, housing, and the full range of other goods and services is also true of health care.
My alternative to Ryan’s tax credit is simple; leave health care out of the tax code altogether. Do not subsidize health care through the tax code. Do not transfer income via the tax code. Allow households to choose the quantity and quality of health care they consume, in full view of the price they must pay to do so. It’s so simple that many people will disregard my proposal out of hand.
What about the households who “can’t afford” the health care they “need”? I will offer additional ideas that address that issue in future EconoBlast posts. But for now, I will simply say what is true.
First, there is no quantity or quality of health care that every or any household “needs.” Instead, there are infinitely variable quantities and qualities of health care that households “want.”
Second, strictly speaking, only a very small percentage of American households “can’t afford” health care. That is not to say that households like to pay as much as the health care they want costs. Most households "can't afford" a Mercedes Benz in just the same way they "can't afford" health care. In other words, a huge majority of American households do have the income or wealth it takes to buy a Mercedes and the health care they want, but they would rather not have to give up so much of other goods and services they also want to do so.
Couching the argument in terms of what households “can afford” and “need” is simply a red herring that leads to obfuscation and loss of meaning. Such language is rhetorical language that surely influences people, but does so without logical content.
Finally, to end this rather long post, I offer readers the following articles, one by Milton Friedman, the other by Greg Mankiw. Friedman’s article is foundational for anyone who wants to consider health care reform seriously. Mankiw’s article dispels a couple of myths that cavort as facts in the media about health care in America.