August 19, 2012
The Ryan Plan and bipartisan compromise
I have a dream.
Let me begin by making clear my personal position up front. I think America faces a serious long-term fiscal challenge. Not one that needs to be addressed in 2013-- trying to fix this all at once would be highly counterproductive. But I believe that the American political system is badly broken. The voting public expects to get something for nothing, and the two parties compete to promise to give them exactly that. I'm persuaded that both tax increases and drastic entitlement reform will eventually be necessary. I would like to see debate and even a consensus reached today on exactly how we plan to implement both measures over time.
One thing I liked about Representative Paul Ryan's (R-WI) approach to slowing the growth in entitlement spending was that he was trying to frame the question exactly the way I think it needs to be posed. We need a system in which we debate and choose each year not the type of medical services the government is going to provide, but instead the dollar amount the government is willing to contribute out of the total. That ultimately is the only way to live within a finite budget. The key step is finding a system that could operate on the principle of setting limits on the budget itself on an annual basis.
Another thing I liked about Ryan's approach is that he was initially trying to find a consensus by working with moderate Democrats like President Clinton's OMB Director Alice Rivlin and Senator Ron Wyden (D-OR).
I did not like the Ryan Plan (nor did Rivlin or Wyden) as it actually came out, because it attempts to package entitlement reform with big tax cuts. I also think that would be a losing strategy politically if Romney and Ryan try to run on such an idea-- pushing Granny off a cliff in order to give tax cuts to people like Mitt Romney is never going to sell.
Miles Kimball thinks that Romney might do reasonably well as President if the Democrats hold the Senate, but worries that if Republicans were to take the House, Senate, and White House, a Romney presidency would make many serious mistakes in trying the implement the ideas on which the Republicans campaigned.
But here's an idea for you. What if Romney were to say, no, this problem is too big for one party to solve by itself-- both parties got us into this mess, and both parties have to agree on a way out, promising to veto anything that does not have bipartisan support?
And here's another idea, or let me even call it a campaign suggestion-- Romney should begin the process right now. Having secured the nomination, if he wants to win the election, he'll have to move toward the center relative to where either he or Ryan were a few months ago.
Just to continue that thought, if President Obama sees this bipartisanship theme getting traction, he might want to jump on the train, too, before it leaves the station.
Call it an idea, call it a campaign suggestion for both presidential candidates-- or call it a dream.
Posted by James Hamilton at August 19, 2012 07:48 AMdigg this | reddit
This seems much like the strategy employed by the current administration as it took office in 2009. And we see how that turned out.
Posted by: Mitch at August 19, 2012 08:04 AM
Here's specifically what I don't like about Ryan's approach:
1. Medicare: the idea is that "competition" will reduce costs so the voucher system will not dump all the extra costs on old people and their families. Where in the name of heaven is an example of this working? There is no incentive in such a system for cost control. The limit the system can expand to is the depth of the aggregate pockets of the elderly and their families. The idea that somehow price competition would meaningfully develop is a nonsensical ideological statement ungrounded in fact.
2. Medicaid: the Ryan plan shoves all the responsibility for this plan to the states. It says here's a relatively small amount of money, not enough to cover any stretch of need - for a program that mostly covers the old and children. And then leaves it to the states to determine whether they'll be generous or stingy. I don't like that for moral reasons. I can understand it from a political philosophy rationale in which we empower states to be different from one another. But I also believe those differences are in the end destructive to the country because the "low cost, high poverty" states will keep benefits low to maintain a cost edge. Again, lots of people believe that's the best way to have competition among states and that competition among states is best for the US. I don't believe that. I believe that competition between states is just as capable of eroding the nation's overall position versus international competitors. While I can understand the ideas behind this one, I don't see it as a clear winner in the long term for the country as opposed to addressing the health needs of the old and particularly of children. I don't believe assisting in the establishment of permanent poverty is good for the country.
3. As for tax reform, if it were really tax reform, great. It isn't. It's a huge transfer of money to the wealthiest. Not even to the upper middle class but literally to the richest. As to tax reform, I would like to see the rules simplified so people aren't caught by things like the AMT - thank you, Mr. Reagan - but I can't understand why the drive for simplicity leads to lower rates for the rich. Why? And I can't understand the obsession among many economists with eliminating "distortions" like home mortgage deductions. Societies are free to choose the things they value. Just as so many of our states are choosing to value "traditional marriage", we are also free to choose to value home ownerships. Yes, if it gets out of hand, like with the deregulation of the financial industry and the securitization mania of the housing bubble, but the same would be true if we said we so value "traditional marriage" that all men and women would be required to marry - and stay married, with no divorce.
4. Compare ObamaCare's Medicare approach: set a limit for the amount which the providers of care can spend. Tie that limit, btw, to the same growth target as Ryan does. Which approach is more likely to generate savings? I would say a cap that transmits information to the suppliers who then have the ability to restrain cost because they are limited in what they can recover. The other way assumes a magical result in which costs come down with no limit on what actually might be charged.
Posted by: jonathan at August 19, 2012 08:19 AM
Both sides have settled on gdp plus 0.5% so there is no difference there. However if you see this as a government spending problem then you might see this as the solution, but if you see healthcare costs themselves as the problem, you would not. Pushing public costs on to the private sector just leads to the more rapid collapse of provisioning by the private sector. In the end we have to come face to face with the fact that cost control requires cost control.
Posted by: Lord at August 19, 2012 08:33 AM
" I'm persuaded that both tax increases and drastic entitlement reform will eventually be necessary."
If you include the Dept of War in entitlements, I could agree with you.
Posted by: dilbert dogbert at August 19, 2012 08:40 AM
I think Obama's already screwed the pooch for himself ramming Obamacare through (see public opinion polls and the time they took a nosedive).
But I am sympathetic to your idea in general.
Posted by: Perhaps at August 19, 2012 08:55 AM
I've worried that the purpose of the "name a price" strategy is that it actually rejects cost/benefit analysis.
We don't learn that health care standard A would cost so much, and standard B would cost so much more. We don't learn that setting food stamp qualifications here would cost so much, and setting them there would cost so much more.
Whenever I've heard caps discussed they are simply set at historic levels, lopping them back to pre-recession funding in some cases.
Posted by: john personna at August 19, 2012 09:09 AM
Definitely a dream.
Posted by: Adam P at August 19, 2012 09:14 AM
JDH call it a dream
I'd call it delusional. :-O
Obama tried (and he seriously tried) bipartisanship and look what it got him. A bipartisan world that includes Mitch McConnell is delusional.
We need a system in which we debate and choose each year not the type of medical services the government is going to provide, but instead the dollar amount the government is willing to contribute out of the total.
I don't think this makes a lot of sense. The total amount of medical services we need each year will tend to follow a fairly predictable trend, largely based on demographics. So if we decide to vary the amount of the cost absorbed by the government each year, then all we are doing is shifting the residual onto some other group. I don't see how residual shifting is a smart strategy. The government is better able to manage yearly deviations than are private individuals. And it's also likely to be a counter-cyclical strategy because governments will want to reduce healthcare costs when other parties are least able to absorb those costs. What we need instead is a fairly clear long run policy that spells out what kinds of services people should expect over their lifetimes and that the level of services they commit to during their healthy working years will determine the level of support they should expect during their older years.
The Miles Kimball piece was interesting, but I think he is also engaging in some self-delusions. First, the probability of a GOP win in the Senate is not independent of a Romney win. If Romney wins, then that will because he turned out the GOP base which will make a GOP Senate all but certain...not just 64% likely. It's really hard to imagine a scenario in which Romney wins and the GOP doesn't also control the Senate. That's largely because the swing states in the Presidential election are also the critically close swing states in the Senate races. But Kimball's second problem is that he ignores the most likely path to a successful compromise, which is Obama winning in November and forcing the GOP to confront the "fiscal cliff" option. We will not come to political agreement through rational dialogue between two different but well-intentioned political parties. They say hangings concentrate the mind. The "fiscal cliff" is the political equivalent of a hanging.
No one is saying we don't need changes to Medicare. Hey, Obama took flak in 2010 because he tried to cut $716B from providers, which may very well mean less services for certain patients needing risky, expensive and unproven treatments. I think that's a pretty big step. The Ryan plan tries to get most of its savings by way of seniors making more informed choices. And that's fine for "young seniors." But anyone who has had to deal with older parents suffering from dementia knows that Ryan's approach is marginal at best. Ryan's mom lives in an upscale seniors community today because she is still a relatively young senior. But we'll see about that 10 years down the road.
Posted by: 2slugbaits at August 19, 2012 09:50 AM
"I'm persuaded that both tax increases and drastic entitlement reform will eventually be necessary."
There is another choice that does not require auterity for the bottom quintiles:
The maintenance of the last remaining shreds of a social safety is far more important to the average citizen than the military industrial complex. At some point an angry and desperate citizenry will realize this. Social democracy is coming to the USA.
Posted by: yuan at August 19, 2012 10:18 AM
The national debt and deficit would be minimal or 0 if it were not for 3 things:
1. The Iraq and Afgan wars.
2. The massive "Bush" tax cuts tilted towards the very wealthy.
3. The financial meltdown caused by lack of adequate regulatory laws and/or enforcement.
The Romney Ryan team wants to double down on each of these.
1. They want an INCREASE in the military budget even tough we are ending the two wars.
2. They want to give even more tax reductions to the wealthy. The top 400 taxpayers have seen their effective tax rates go from approx 30% in the early 90s to 15% now (search the IRS website and you can see the actual numbers). Have your taxes been cut in half? For heaven's sake Ryan's plan would have Romney paying less than 1% due to eliminating cap gains taxes.
3. Romney/Ryan want to loosen regulations on wall street, while even Sandy Weill the former CitiGroup CEO who was largely responsible for creating the too big to fail banks wants to break them up!
To borrow a term from Warren Buffet, we have two giant "tapeworms" in our country. The first is healthcare. Romney recently went to Israel and praised their healthcare system and it's cost of only 8% of their GDP. We pay 18% this makes our country and our companies less competitive. Revenue from the corporate income tax fell from between 5 and 6 percent of GDP in the early 1950s to 1.3 percent of GDP in 2010. The 10% of GDP penalty corporations (and individuals) pay for healthcare is more than 7 times then entire corporate tax burden.
The individual income tax has been the largest single source of federal revenue since 1950, averaging 8 percent of GDP. This again is less than the 10% of GDP penalty we pay for healthcare. Every other major country has a healthcare cost similar to Israel's. Why don't we change our system. Look around pick anyone's system or pick the best ideas from several. Why don't the republicans rail against this instead of trying to protect the status quo?
According to the Congressional Budget Office, defense spending grew 9% annually on average from fiscal year 2000–2009. Our biggest potential adversaries (Russia, China, Iran, and North Korea) spend a COMBINED 200B per year on defense. We spend 1000B and it's been growing at 9% and we want to grow it more. Why???? Another tapeworm burden on our country. Why can't we get by with say, for example, twice what our biggest adversary spends?
Posted by: George at August 19, 2012 10:44 AM
Harvard University's Malcolm Sparrow estimates that improper payments account for 20 percent of spending in federal health care programs.14 That suggests Medicare alone makes $100 billion in improper payments annually. The Government Accountability Office has for two decades designated both Medicare and Medicaid as posing a high risk for fraud.15 [http://www.cato.org/publications/congressional-testimony/waste-fraud-abuse-government-health-care]
Add to that the waste and fraud around military expenditures, dubious energy subsidies to unproven technologies, wasteful agricultural programs, and all manner of spending for special interests in nearly every bill that crosses the Oval Office desk... and we're beginning to talk real money.
So, here's the answer: an across-the-board reduction in SPENDING by 2% annually for the next 5 years. Not 10% all at once. 2% annually for 5 years. Let each department determine how to absorb the cuts... either through better auditing, better planning, or through better management... I like the last part. But we mean REAL CUTS, NOT CUTTING ESTIMATED INCREASED SPENDING.
Let the GAO and a consortium of private accounting firms be the watchdogs. Then we can see where the wheels are squeaking the loudest after 5 years.
If there is that much waste and fraud in government spending, a guy in a trailer park in Arkansas could figure out how to manage 2% cuts. After all, it still leaves him 98% of the money to screw around with.
While the above seems like rather small potatoes and 10% of $3.8 trillion is only $380 billion... over five years of projected growth, the annual government expenditures would be about $4.5 trillion. If the 2% annual reductions were implemented from a base of $3.8 trillion, then the annual savings in five years would be $1.1 trillion per year. That's not small potatoes.
Posted by: Anonymous at August 19, 2012 10:52 AM
One area where reform makes sense is capital gains and dividends. The effecitve tax rates for the rich that the left often quotes are wrong. The rates quoted ignore the tax already paid on dividends by the corporation.
Assume a corporation has $100 in taxable income and pays tax at a rate of 30%. It also decides to retain 20% of after tax income as retained earnings to support its growth strategy. That leaves 50% or $50 to pay as dividends. If dividends were not taxed at the corporate level the dividend payment would have been 50/(1-.3) higher, or ~ $21.40 higher. Thus, if you want the "rich" to pay more in taxes then tax them at the corporate rate on dividend income, while at the same time making dividends a before tax expense for the corporations.
Otherwise, it makes no sense to say that the rich are paying a lower rate. In the example above, the 30% tax rate on the corporation reduced the dividend income for the individual. It effectively increased the individual tax rate from 15% to 45% on dividend income.
Posted by: tj at August 19, 2012 11:28 AM
Call it a "dream"? No, more like CRACK ROCKS. We've just watched the GOP spend the last three years shrieking that a HCR plan that was originally from the HERITAGE FOUNDATION was actually a Soshamalist plot to take over Merika and corrupt our precious bodily fluids, FFS. We've seen more than one GOP representative announce that "bipartisanship is when Democrats do what the GOP wants", and others accusing literally everyone to the left of Barry Goldwater of being a Communist.
There's no "compromise" with people like that.
Posted by: Matt at August 19, 2012 11:42 AM
tj: "One area where reform makes sense is capital gains and dividends. The effecitve tax rates for the rich that the left often quotes are wrong. The rates quoted ignore the tax already paid on dividends by the corporation."
How come corporate taxes are considered a tax on the company's rich shareholders instead of a tax on the company's wage earners?
On the other hand, if shareholders consider corporate taxes as part of their tax burden, shouldn't wage earners consider their doctor's, landlord's, grocer's and auto mechanic's taxes as part of their tax burden. In this light, does the shareholder or the wage earner have the higher effective tax rate?
In other words, your argument doesn't make much sense.
Posted by: Joseph at August 19, 2012 12:12 PM
I agree with Jim's analysis.
However, I might add that, if we want politicians to deliver balanced, sustainable growth, then we might consider paying them to deliver balanced, sustainable growth.
Posted by: Steven Kopits at August 19, 2012 01:36 PM
In reply to Joesph the way the tax is viewed starts from the small business person sole proprietor model. In that case any tax is a tax on the proprietor. When you move to a C corp consistent treatment suggests the tax be viewed as a tax on capital. Now the forces that do this have the mistaken view of an efficient market, thus the wages paid to an employee are the " correct wages" as the all knowing market has determined them.
Posted by: Anonymous at August 19, 2012 02:10 PM
The biggest problem with our budget isn't health care (that's #2) but defense. The amount of money we spend on the military is simply crazy. We face only two possible security threats here in America: Either an all-out nuclear attack from Russia or China, or a smaller-scale terrorist acts like 9/11. In neither case, is massive defense spending going to save us.
We simply are not going to face an invasion by land, sea or air from any other country. And as for fighting multiple wars overseas as we are in Afghanistan and Iraq, I hope the country is losing its stomach for such actions. I doubt it, but I hope, and in any case its the one argument that we should be having and are not. It is simply insane for us to be spending ten times what the rest of the world is spending on its military.
And yet if you call for a penny of cuts, everyone starts screaming like the country is going to topple tomorrow. (And of course the biggest holler of all is that it will cost jobs; yet if you ask for a penny of an investment in infrastructure it's oh the government can't create jobs wah wah wah.) So both Mitt Romney and Barack Obama want to continue dumping billions upon billions of dollars into the defense department.
I'll believe people are serious when they start seriously discussing the defense budget.
Posted by: AndrewBW at August 19, 2012 02:16 PM
Joseph How come corporate taxes are considered a tax on the company's rich shareholders instead of a tax on the company's wage earners?
Because tj doesn't understand the concept of tax "incidence." The burden of the corporate tax rate is split (more or less evenly) between capital and labor. Apparently tj's point about "double taxation" is supposed to come as a revelation that has completely escaped the notice of stupid and clueless liberals. If only we paid more attention to the op-ed pages of the WSJ we would know better. ;-) I think the liberal response is supposed to something along the lines of "Oh my gosh, you're completely right! I never heard of or thought about the fact that profits are taxed once as corporate earnings as once again as dividends!"
Posted by: 2slugbaits at August 19, 2012 02:26 PM
I was with you until you started to trash the tax plan. We can have a much simpler tax code with lower rates that will provide plenty of funds to be spent by a rational government. The Tax Reform Act of 1986 was an example of a step in that direction. Immediate balance is not necessary, just a clear path to it.
I predict that the recovery will gain momentum once it is clear that Romney and Ryan will win.
Posted by: Rich Berger at August 19, 2012 02:33 PM
Wow. The Tax Reform Act of 1986 is why the Alternative Minimum Tax has any bite at all. People are apparently so in love with the idea of lower marginal rates that they interpret anything which lowers those as a "simplification."
In fact, the Reagan years saw a dramatic increase in taxation complexity. At many levels. For example, after the disastrously low tax collections following ERTA - the famous "supply side" tax rate cut - the GOP run Senate and Reagan (with the Democrat run House, but to point out the GOP controlled the course of policy) passed not only the largest tax increase in US history but completely changed the relationship of government to taxpayers. To be brief, the government used to tax the results of transactions. The IRS looked to see whether transactions were shams, meaning fake, and then pushed to tax transactions entered into for no business purpose other than tax reduction. Their record on that was mixed because reducing cost is a business purpose, the cases were very complicated and there was always another reason other than tax reduction. So what did the government do? Under GOP direction, they changed the way transaction are allowed to occur by mandating that all transactions be considered economic AND that they bear a specific rate of interest. No more zero interest loans to relatives. No more low interest lending between friends or related companies. Every demand obligation was set as bearing short-term interest rates, every mid-term that rate and every long-term that rate. These rates are set by the IRS. You can look them up. That inserted government into literally every transaction, including those among family members. I was outraged. Nearly lost it at a seminar I gave on the changes.
The 1986 Act - and the tax increases in 1983, 1984, 1985 - added layers of complexity. They were jokingly referred to as the accountants' full employment acts.
But simplicity in the conservative mind is lower marginal rates. Forget the actual complexity. Forget the AMT. Forget all that.
Posted by: jonathan at August 19, 2012 04:44 PM
A worthy idea, Prof. Hamilton.
I'm intrigued/amazed that some of your commenters perceive the mendacious Anointed One as already having done it.
Posted by: Bryce at August 19, 2012 05:36 PM
"We need a system in which we debate and choose each year not the type of medical services the government is going to provide, but instead the dollar amount the government is willing to contribute out of the total."
Let me see if I've got this straight. We don't care that you're 85 (I'm thinking of my Mom here) and can't get to or from a job anymore. We don't care that your housing, energy, food, and most other costs are largely fixed. We don't care that you're trying to make a fixed amount of money last for the rest of your life. We're sorry that you picked this year to get cancer, but we're off invading a second-tier country that pissed us off somehow, and aren't paying for cancer treatments this year.
Posted by: Michael Cain at August 19, 2012 07:06 PM
"The 1986 Act - and the tax increases in 1983, 1984, 1985 - added layers of complexity. They were jokingly referred to as the accountants' full employment acts. "
My late wife won one of the 140 awards for scoring high in the CPA exam. We were invited to the local CPA group to receive the award. At the meeting a tax lawyer gave talk in which he called the act "The Tax Lawyers and Accountants Full Employment Act". Seems the idea got around.
Posted by: dilbert dogbert at August 19, 2012 07:50 PM
Actually, Obama is making a dent in entitlements. The entire point of the GOP argument now is that he's "raiding" Medicare by taking $700B from it - over a period of years of course. The next thing they say is Obama has no plan to deal with entitlements. I assume that disconnect reflects the typical inability people have when wedded to ideas to hear or see what the other side is actually saying and doing. ObamaCare actually changes the growth in Medicare to the same level as Ryan's now famous or infamous plan. That's as much of a plan to deal with Medicare as the GOP has offered.
Note that while one can claim - with some justification - that Medicare is being integrated with a larger program and is being used for that, there is no justification for saying the Ryan plan uses the same savings to reduce the deficit or to prop up Medicare. None. Ryan's plan doesn't even balance the budget - under his absurd, make-believe revenue assumptions - until 2040. I would note that CBO says ObamaCare extends the projected life of Medicare. Also note that literally today Romney's advisor Ed Gillespie on FoxNews (with Chris Wallace, not unfriendly to the GOP) said they'd raise Medicare's age to 67 after Wallace pointed out that Romney/Ryan's plans wouldn't even take effect until 7 or 8 years after Medicare A is projected as insolvent. As with all the Romney numbers, no one credibly believes doing that would save much money for the government - let alone for seniors.
So from I can see, there is a blind faith that the GOP will attack entitlements when all I can see is that the Democrats are actually reforming them while the GOP is making a lot of contradictory statements that amount to God knows what. It's the same faith that the GOP will be better for the deficit, when the history of the debt and the deficit is that Democrats have done better. It's amazing how quickly we forget the GWBush - whom I voted for - turned a projected $5T surplus into over $6T of additional debt, that we moved from talking about paying off the national debt, which had substantially accumulated under Reagan and GHWBush, to "deficits don't matter" to massive debts. Given the Romney/Ryan approach, I'm willing to bet money the GOP will increase the deficit and by a lot.
I'm also amused by the way people focus on spending without thinking about the balance of spending and revenue. We may spend somewhat less under the GOP. But if we collect less than that, we end up with more debt. If we enact the Romney/Ryan plan, we could add trillions to the debt while spending less (on the non-defense discretionary part of the budget). I suppose saving a few billion a year by cutting all arts funding, as Romney wants, is symbolic (of what?) but it doesn't matter financially.
Posted by: jonathan at August 19, 2012 08:07 PM
I'm persuaded that ... drastic entitlement reform will eventually be necessary.
You've come to the wrong conclusion. What needs to be reformed isn't "entitlements" but America's health care system. The two large government medical programs, Medicare and Medicaid, can't be fixed without fixing the entire health care system, and fixing the medical system will take care of most of Medicare and Medicaid's problems. As for Social Security, the fix is quite simple - lift the cap. The rest of what might be referred to as "entitlements" - unemployment insurance, food stamps, and the like - are small parts of the budget and not in need of reform.
Posted by: PeakVT at August 19, 2012 08:59 PM
Niall Ferguson on Obama. Amazing.
Posted by: Steven Kopits at August 19, 2012 10:37 PM
I'm persuaded that both tax increases and drastic entitlement reform will eventually be necessary.
I feel like a Lone Ranger but I simply disagree with the Professor.
George W. Bush came into Washington with a "dream" that since he worked with Democrats for the good of Texas he could do the same in Washington. He learned the hard way especially when the Democrats took over in 2006 and ruined the economy.
We have to understand that we are not in a beauty contest where we are trying to make nice with everyone. We are in a battle of ideas, collectivism versus liberty and freedom.
Mitch is totally wrong above when he says that the Obama administration did this in 2009. It was not bipartisanship that passed the health care fiasco. It was a Democrat party hell-bent on expanding the power of government come hell-or-high water, totally agaisnt the wishes of a huge majority of the American people. That was manifest in the polls at the time and in the election of 2010.
If you love collectivism then you will love a bipartisan love-fest, but if you want a prosperous country that honors liberty and freedom you will want very partisan statesmen standing against the statist tide.
The professor is wrong in his statement above. Menzie has written a number of times on the serious problems in the UK. If you look at the professor's statement above you will see it is exactly what the UK did wrong.
We will never solve our problems without economic growth. We must remove the wedges that government has built to impede economic growth. We are facing two alternatives a mirror of the decades of Japanese stagnation or the prosperity of the 1980s and 1990s created by the Reagan revolution.
It is time to be partisan - very, very partisan.
Posted by: Ricardo at August 20, 2012 05:24 AM
JDH: "We need a system in which we debate and choose each year not the type of medical services the government is going to provide, but instead the dollar amount the government is willing to contribute out of the total. That ultimately is the only way to live within a finite budget. "
Could you please explain the logic behind that assertion? Particularly the last sentence? I'd like to better understand the implicit assumptions it makes.
I would have thought that the difficulty in projecting govt. revenues, particularly at multi-year horizons, makes certainty in expenditures neither a necessary nor a sufficient condition for controlling government deficits and debts.
I'd also like to understand whether this approach to government financial management is one that you think is specific to the health care sector or to all areas of government.
Would it affect your opinion in any way if health care inflation were particularly hard to predict? If the demand for health services were subject to shocks? (Think Asian Flu.)
Posted by: Simon van Norden at August 20, 2012 06:16 AM
The MAJOR problem is government salaries and benefits. The spending in this area exceeds revenues without a penny spent on 'real' government.
Posted by: Steve Hammer at August 20, 2012 06:18 AM
joseph and 2slugs
Your response is exactly the reason why I posted about dividends. Yes, everyone knows it's taxed twice, but few, including the 2 of you, realize, or are willing to admit the extent to which the dividend holder's income is reduced. It's completely inaccurate to compare the effectice tax rate's of those with more dividend income to those with more wage income.
Joseph, you also need to realize that more dividends are paid to pension plans than the "1%". The retirement accounts of tens of millions of households would increase a more rapid rate if dividends were expensed before tax. It's really pretty simple. Move dividend expense higher up on the income statement, then tax it as regular income for individuals, with a reduced rate for pension funds.
Why so bitter about this? You are letting your ideology get in the way of common sense.
Posted by: tj at August 20, 2012 06:51 AM
tj, why do you consider dividends to be such a special case of double taxation?
I pay taxes on my income and then use after-tax income to pay my doctor $100. I only get $65 of medical services from the doctor. The other 35% goes to the doctor's income taxes. My income has been taxed twice. Why the obsession just with dividends?
Posted by: Joseph at August 20, 2012 07:48 AM
You own shares of You Didn't Build That (stock ticker - YDBT). YBDT pays corporate income tax on its earnings. It then pays you a dividend. You pay income tax on the dividend. Then you pay your doctor who pays tax. What you have in your example is triple taxation, not double.
Posted by: Rich Berger at August 20, 2012 08:32 AM
This is far too defeatist. The richest nation on earth should not have to ration medical services beyond what far less rich nations do. Entitlements in the US are modest by the standards of the first world. What is needed is almost entirely on the revenue side: ie higher taxes on the rich and on corporations. High taxes did not damage the US in the 1950s and 1960 and would do it a world of good now. It might be useful to add a VAT in addition and a steep tax on ridiculously lavish housing. Ryan is transparently a servant of the 1% and the 1% has far too much of national income as it is.
Posted by: Chris at August 20, 2012 10:09 AM
Shareholders are owners of the firm's income, just as you own your individual income. Taxing dividends at the corporate level and individual level is like haivng your employer deducting 30% of your income when your employer issues your paycheck, and then deducting another 15% when you cash your paycheck. You paid 45% on YOUR income you, but your left leaning friends claim you only paid 15%.
Posted by: tj at August 20, 2012 10:35 AM
Don’t forget that corporations do not deduct dividends from income prior to paying income tax, although interest expense may be deducted. If dividends are disadvantaged then the incentive is to issue more debt rather than equity. Emphasizing debt seems to be what helped to get us into the mess at the national government level. Do we really want to incentivize corporations to issue debt over equity?
Posted by: AS at August 20, 2012 11:17 AM
Lots of loose thought about corporate taxation. If indeed as the Court says and as taught in law, corporations are entities of their own , even "persons", then you need to follow that through. Corporations have limited liability exactly because they aren't pass through entities. You contract with a corporation, not its beneficial owners. You can choose a pass through form and be subject to attempts to "pierce the veil" of limited liability.
The notion that corporate taxation is just double taxation is simplistic. It's part of the bargain made through history to isolate corporate owners, officers and directors from liability. Part of that is the entity is treated as an individual for taxes. No one wants to be liable for the acts of a corporation.
I doubt anyone would trade pass through of income and losses to owners; they just want dividends for no tax. To carry out the logic, why aren't you liable for your share of the corporation's income statement? Imagine reporting your piece, especially if there is no cash dirtibuted.
My point is that corporate taxation is not as simple as the idiot repetitions imagine. You want one piece without the parts that make you uncomfortable or which might cost you. All the benefit, none of the downside. Typically inane.
Posted by: Jonathan at August 20, 2012 01:28 PM
tj I think you misunderstood my comment. Please go back and reread. I said that the incidence of the corporate tax was more or less evenly divided between capital and labor. This is an economics blog, so I'm assuming you understand the difference between impact and incidence. If not, google it. This means that (roughly speaking) only half of the dividend income is taxed previously under the corporate tax.
Steven Kopits I don't think you want to crow about the Niall Ferguson piece. The poor hapless lad has been getting blasted bigtime...not just for his opinions, but for getting basic facts wrong like dates (not good if you're a historian), misquoting people (also not good if you're a historian), and then after having been called out telling a whopper his lame excuse amounted to blaming the reader for not realizing that he was trying to be deceptive. If only the reader had paid really, really, really close attention to a carefully placed "but" in his sentence, then the reader would have known that the two clauses in his statement were not actually related. Pathetic.
Simon van Norden You pretty much echoed my thoughts regarding JDH's argument for annually reviewing what costs should be covered. It just shifts all of the variability and "unknowns" onto those least able to absorb the risk.
Posted by: 2slugbaits at August 20, 2012 01:55 PM
"The poor hapless lad has been getting blasted bigtime...not just for his opinions, but for getting basic facts wrong like dates (not good if you're a historian), misquoting people (also not good if you're a historian), and then after having been called out telling a whopper his lame excuse amounted to blaming the reader for not realizing that he was trying to be deceptive."
You must have listened to Obama's press conference today.
Posted by: Rich Berger at August 20, 2012 03:10 PM
Yes, I get tax incidence. I guess your claim is that if firms write off dividends that capital and labor will split the tax savings 50/50. So, in that case, the dividend holder is paying 15% individual rate + ~ 30%/2 = 15% corporate for a 30% effective rate, while his/her left leanding friends claime it is only 15%.
Here's another way to look at it.
70% of a firms costs go to labor, pretax. Then another 20% to 25% go to other expenses, pretax. So with an assumed $100 in revenue - $70 labor - $20 other expenses = $10 taxable income, taxed at 30%. Thus, shareholders (i.e. capitalists) end up with $7. The firm retains $2 for growth opportunities then divvy's out $5 to the owners (which inlcudes pension funds) as dividends. Of course households, including labor, also have pension fund accounts. So bottom line, labor gets ~75% of the captilalist's revenue and the capitalist get's 5% for bearing all the risk.
All the capitalist wants is to write off the dividend as an expense then pay taxes on his/her dividend income at the individual rate.
As AS points out above, it has the added benefit of placing equity and debt on more equal footing as a source of funds. Why are does the government encourage debt over equity anyway?
C'mon, what's not to like? Who loses in this scenario?
Posted by: tj at August 20, 2012 04:01 PM
Rich Berger Here's just one of at least several dozen attacks that I'm aware regarding just one of Ferguson's lies.
Noah Smith has a devastating take down as well:
The one thing Noah missed was that regarding the Iranian nuclear issue, Ferguson completely forgets what he wrote in 2004 with his book "Colossus: The Rise and Fall of the American Empire." Of course, even back then Ferguson was still longing for the glory days of the Empire. Harrumph! Harrumph! Quite.
Posted by: 2slugbaits at August 20, 2012 04:07 PM
Forgot to reiterate that the 1%'rs we are so concerned about not paying their fair share, currently pay 15% on dividend income. If it were expensed at the firm then taxed at their individual rate, it would rise to 35%, the same as the top corporate rate. However, the left would lose an important weapon often used to vilify the "rich".
Posted by: tj at August 20, 2012 04:16 PM
AS: "Don’t forget that corporations do not deduct dividends from income prior to paying income tax, although interest expense may be deducted. If dividends are disadvantaged then the incentive is to issue more debt rather than equity. Emphasizing debt seems to be what helped to get us into the mess at the national government level. Do we really want to incentivize corporations to issue debt over equity?"
You make a very good argument, which many economists support, for not allowing deduction of interest on debt by corporations. It creates a market distortion just like the mortgage interest deduction.
Posted by: Anonymous at August 20, 2012 06:13 PM
tj No, you don't get the point about tax incidence. Not even close.
Posted by: 2slugbaits at August 20, 2012 06:23 PM
tj: " Taxing dividends at the corporate level and individual level is like haivng your employer deducting 30% of your income when your employer issues your paycheck, and then deducting another 15% when you cash your paycheck. You paid 45% on YOUR income you, but your left leaning friends claim you only paid 15%."
It isn't MY income until the corporation pays me a dividend. Before that it is the corporation's income and subject to corporate income tax.
Likewise my income is taxed and the doctor I pay is also taxed. There's nothing special about dividends.
If it really bothers you, you could possibly eliminate the corporate tax, but it would require a significantly higher personal income tax rate than 35% to be revenue neutral. Otherwise you are simply talking about yet another deficit increasing tax cut for the rich.
Posted by: Joseph at August 20, 2012 08:15 PM
If you think Ezra Klein's piece is a rebuttal, you don't read very closely. Sort of in the same vein as his piece about the economists being misquoted on Romney's program. Lil' Ezra is the unofficial press secretary for the Obama administration.
Saying that Obama is a failed president is sort of like saying water is wet. I don't think you need an entire article to demonstrate it.
Posted by: Rich Berger at August 21, 2012 03:20 AM
My take on Jim's point is that much of healthcare spending, let us be honest, is charity.
If we provide healthcare to the elderly--and that's primarily where the incremental money's going--then that's not an investment. It will produce virtually no more GDP--the recipients of this spend are almost all retired.
How much should society spend on this segment? Like Jim, I see the more logical approach being some fixed share of GDP. We spend as much as we can afford, but not more.
An example: There's a new treatment for breast cancer called herceptin. It's given as a drip every three weeks for certain types of breast cancer post chemo and radiation. Price per 15 min session: $11,000. Price for course of treatment: $120,000. Now, in some places, you can guy a good college education for that amount. How much herceptin should we buy?
You can run an open ended tab--which we have. And then you see Medicare/caid spending rising at almost twice the pace of NGDP (per Obama's 2013 budget). Is that the right solution?
So I'm with Jim. Let's do our charitable giving the same as most households: as some share of the budget. Let's limit spending to what we can afford.
Posted by: Steven Kopits at August 21, 2012 06:37 AM
If we limit "our" spending to what we can afford, can I decide who we spend the money to save? I don't trust my congressman or his political appointee.
Posted by: Ricardo at August 21, 2012 08:15 AM
1. How much can we afford for Medicare? We can afford as much as we like as the richest OECD nation in the world and the OECD nation with the lowest tax rate in the world. The voters have many times decided that they really, really like Medicare. The honest thing to do would be to raise taxes to support those wishes.
2. The U.S. has the worst health care system in the world. It is a least twice as expensive as any other developed nation and it still doesn't cover everyone. Every other developed nation in the world has figured out how to do this at half the cost except the U.S. which insists on sticking to its overly costly, inefficient system. Pick the system you like best -- Canada, UK, Germany, France, etc -- and do that here and you have immediately solved both the Medicare problem and the national debt.
3. You should question why Genentech is permitted to use a government enforced monopoly to collect a billion dollars a year for a drug that is based on public university research. Generic drugs cost between 1% and 10% of patented drugs. End the patents and you reduce the costs. There are much more efficient methods than government enforced monopolies for financing medical research.
4. Comparative effectiveness research is an important cost saving feature of the ACA that conservatives like you want to repeal. Here you seem to be endorsing what conservatives are fond of calling "Death Panels".
Posted by: Joseph at August 21, 2012 08:54 AM
Kopits: ... healthcare spending, let us be honest, is charity. ...breast cancer post chemo and radiation. Price for course of treatment: $120,000. Now, in some places, you can guy a good college education for that amount.
Let's be honest completely. That $120,000 education that some kids get is pure charity on the part of parents, especially when the kid grows up to be an ungrateful selfish bum. $20,000/year private school, $20, 000*12 years = $240,000 + $200, 000 (private college) = $440, 000 +interest, not counting all the nice things and a car at the 16th birthday - that would buy a lot of health care. Parents need to limit their spending on children if they want to have any health care in their unproductive years.
Posted by: Anonymous at August 21, 2012 09:02 AM
Having had a chance to see the US healthcare system in action up close and personal in the last year, let me tell us, it's pretty awesome, at least in Princeton. It is highly efficient, increasingly comfortable and humane, and highly competent.
It is also very expensive.
I'm not sure I like my Congressman (Rush Holt, by the way) any more than you do. (Although Holt strikes me as a nice guy.) But there are only two ways to allocate healthcare budgets: by market principles or through redistributive policies. If an elderly woman with a broken hip came to your hospital, what would you do? Honestly, what would you do? We are rich enough that not all forms of suffering need be tolerated.
I have called to align the incentives of politicians here many, many times. But in the absence of that, we're reduced at the extremes to pure market mechanisms or some sort of political intervention. I don't like it any more than you do, but the "rational conservative" understands that he's going to be picking up someone else's bill at least some of the time. The rational conservatives, after all, are the guys paying the taxes, no?
But, Anon, if you're equating a healthcare spend of say, $200,000 on an 80+ senior with that for the education (or other investment) on an 18 year old, then we part ways there. Healthcare and pensions can cannibalize a society. And I think that's Jim's point. Let's figure out what we can afford, allocate that, and then work on making the most of that budget. Personally, I think that's the right approach.
And, Joseph, to complain that we have the most expensive healthcare system in the world and then see the Obama budget increasing Medicare/caid spend at twice the rate of NGPD growth, well, that would seem to be going in the wrong direction, no?
Posted by: Steven Kopits at August 21, 2012 10:12 AM
Some thoughts about the GOP and medicare, particularly the 2 versions of Ryan's voucher plan - given that Romney's plan has no details at all other than "vouchers" and contradictory statements that it's like Ryan's and then that it's unlike Ryan's:
1. Much is made of efficacy of treatments and waste. Why then does the GOP oppose efficacy testing? That has become a sort of litmus test: you must oppose attempts to test medications, devices and treatments because, I can only conclude, those constitute restraints on the ability of business to market stuff. (At the extreme, some want to do away with the FDA and allow the market to sort out danger and efficacy.) I think this is a horrible idea.
2. The Ryan plans have mutated but retain their essential point: they dump extra cost on the elderly. Period. The first version was blunt: you get a voucher and those rise in value by a limited amount, no matter what happens to health costs. The second version dresses this up. It adds a sort of bidding process in which you choose Medicare or get the 2nd lowest bid for your area, whichever is lower. That doesn't sound bad on its own. In fact, it essentially mimics what you can do now; you can buy supplemental insurance if you want today. That is the part being pushed in the press: you get Medicare or you can buy something else. Not really a big deal because, as I said, you can buy supplemental insurance now and since the bidding process begins with a specified set of coverages - meaning what Medicare covers - it's essentially the same as now because you can buy more coverage. But how does it control cost? Simple, it does the same thing as the first version: no matter the bidding process, the value of the voucher you get, whether for Medicare or whatever, is only allowed to grow so much. So the plan is the same with some bows and ribbons tied on: it shifts costs to the elderly. How much? Estimates are in the thousands per person per year, beginning relatively low and building over time as the voucher gap grows.
3. The Ryan plan isn't cost control for medical costs. It's cost control for government spending. I know that appeals to many people, especially here, but don't confuse that with cost controlling medical care. To do that, you need a mechanism that acts to limit medical costs. The Ryan voucher plans have only the limit of how much the aggregate pockets of Americans can afford. By contrast, the ObamaCare approach is to take the same growth limit and apply it to providers: you can offer medical care but you won't get paid if you let the costs grow too fast. By looking at it, I'd say that controls medical costs better. That acts as a limit to what can be spent on medical costs, not as a limit to what the government will spend on medical costs. Big difference. The Ryan plan, to me, is cruelty personified.
Posted by: jonathan at August 21, 2012 11:15 AM
What is money better spent, $1,000,000 to extend the life of Mr. Buffet (>80) for 5 years or $200, 000 for some aspiring investor to finish an Ivy League school? I would go with the former.
Besides, most who are in college don't belong there, as a result a degree does not mean what it use to mean, nor often does it provide a useful set of skills, and so we have college educated waiters and custodians.
Posted by: Anonymous at August 21, 2012 12:18 PM
That may be your take on Jim's point. But it still doesn't answer any of the questions that I asked.
You're asking Americans (not me, btw) to limit health care spending to some fixed fraction of their budgets. Let me ask you again why that is a good idea. We know all kinds of situations in which arbitrary "notional budgets" are stupid ideas and suboptimal. You want us to take it seriously? Give us a serious argument justifying that approach.
Let's remember that there is no shortage of expert opinion from health economists, medical ethicists, administrators with decades of real-world experience, and many, many different real-world systems that serve as laboratories. Perhaps you could draw on some of that rich expertise to make a convincing case.
Posted by: Simon van Norden at August 21, 2012 01:20 PM
Steven Kopits If an elderly woman with a broken hip came to your hospital, what would you do? Honestly, what would you do? We are rich enough that not all forms of suffering need be tolerated.
I think you're arguing aganist yourself. My reading of JDH's comment was that each year we should rebaseline and re-evaluate what will and what won't be covered. Your case of the elderly woman with the broken hip makes a very different argument. In this case you're really arguing for an implicit social contract in which generations are able to form long run expectations of coverage based on commitments made while young. The unfortunate woman might try and argue for hip surgery by appealing to our sympathies, but that would be a pretty miserable basis for making social policy. In essence it would make the availability of treatment contingent on how worthy we deem someone based on that person's ability to tug at our heartstrings. That's bad social policy. The woman's claim on social resources arises out of an implicit social contract that should legally bind society to honor certain expectations of medical care based on that woman's willingness to honor her previous debts when she was young. The woman's claim against economic resources should be connected to her generation's commitment to distributive justice. Pay it forward. From that perspective the woman would be entitled to expect hip surgery, but not necessarily heroic efforts to preserve her life at all costs. This also argues for taking a very long run view of what kind of medical services society should provide rather than rebaselining each year.
Posted by: 2slugbaits at August 21, 2012 03:20 PM
"Kasich, Scott, Walker, Snyder and Corbett have indeed managed to spark their respective state economies by enacting fiscally conservative policies that seem, by most measures, to have worked.
The unemployment rate in each of these states has plummeted between November 2010, when the new GOP governors were elected, and now. Ohio has gone from a 9.4 percent jobless rate to the current 7.2 percent. Florida’s unemployment ratio has dropped from a whopping 11.2 percent to 8.6 percent, while Michigan’s has plunged from 11.6 percent to 8.6 percent. Similar, though less dramatic, reductions have taken place in Pennsylvania and Wisconsin — both of which boast rates far below the 8.3 percent national jobless level.
On the budget front, Walker in Wisconsin transformed the $3.6 billion shortfall he inherited into a $275 million surplus, while Snyder’s Michigan cost-cutting converted a $1.5 billion deficit into a cool $400 million surfeit. Obama, meanwhile, has exploded the national debt by $4 trillion."
California High speed rail ticket anyone?
Posted by: Nancy at August 21, 2012 03:57 PM
You're arguing a transactional view of responsibility. That's an American, not European, perspective.
You could also take a systemic--more European-- view, in which agency roles define responsibilities. Thus, when I give my seat on the subway to a pregnant woman, I have no anticipation of reward or repayment. I do it because that's my role in society.
In a socially conservative arrangement, roles are determined by defined agencies--"son", "mother", "father"--all contain commonly accepted meanings which are not transactional in the sense of give-and-get. The treatment of a broken hip is not dependent on merit or earlier good living. It's simply a human need that has to be addressed.
Posted by: Steven Kopits at August 21, 2012 07:36 PM
It really bothers me when people post "facts" that aren't right. For example, Michigan's unemployment rate wasn't 11.6% when Snyder took office and had already dropped by 3.2% when Snyder took office. Menzie has posted about the lack of promised job growth in WI but when Walker took office the unemployment rate was below the national level and had already dropped 2.5%.
Is this part of a plan to confuse? I wonder. I still hear nonsense about how lowering tax rates increases tax collections. The Detroit News ran an editorial - by their editor - which repeated this claim for capital gains tax cuts and extended that to all cuts despite CBO saying clearly that there was no net gain from cutting capital gains taxes. There was a short term boost as people cashed in what they had held until rates dropped and then lower collections going forward. The long term effect was lower collections. But it's repeated over and over.
I guess we're a nation of idiots who want to hear made up facts that justify what we want to believe.
Posted by: jonathan at August 21, 2012 08:07 PM
A heads up to those with access to the WSJ. Austan Goolsbee has a piece in the op ed section today on Romney's tax plan. It will be interesting to see how Team Romney respond.
Posted by: tj at August 22, 2012 06:21 AM
The quote said when they were elected. Yes, 700 net direct "auto bailout" jobs were created in Ohio in vehicle and parts manufacturing from the time Ohio's governor took office until 04/12. Who can take credit or what those jobs might have cost US taxpayers? Dunno. Let's let the President.
Ok. Have things gotten worse? Did OH, Wis, Penn., Fl, collapse with the elimination of billions in deficits? Um, no. I haven't noticed a thing. If you have, please describe. And The alternative would have been more like, um, Illinois. Higher taxes, especially regressive ones - 10.25% sales tax on goods in Cook county with no end in sight to the mess.
How many Medicare claims get audited? How much is waste and fraud? Would we notice much by cutting it? And yes the same goes for the Pentagon.
Speaking of facts that just ain't right, take a listen to Rep. Issa asking the DOL (there's a yeasty department of innovation) on what Pres. Obsma' admin defines as a green job:
Posted by: Green at August 22, 2012 05:25 PM
Like most commenters, I largely agree with one side vs the other. What I have a hard time understanding is why ya'll are so acidic.
Here's some rhetorical questions:
It seems to me that JDH has a reasonable suggestion. I don't think there is a right, wrong or "dream" in the post or the comments, just a lot of brash overconfidence and unwillingness to compromise. This is not what the idiots need.
Posted by: An Idiot at August 22, 2012 05:40 PM
No matter which system of care allocation you choose your little old lady may or may not receive treatment. You are actually asking who will decide how care will be allocated? I oppose any system of allocation where the politically connected make that decision whether HMOs bureaucrats or government bureaucrats.
Such decisions should be based on the benevolence of the health care providers. This will include doctors, hospitals, and charitable institutions set up for this purpose. Unlike those on the left I have a less cynical view of those in the health care business and a more cynical view of those in the political rent-seeking business.
Health care providers are in the business of providing health care and money is secondary so their decisions will be more likely to be based on compassion. Rent-seeking politicians are in the business for power and money. Providing services and compassion are simply a tools they use to buy votes and influence.
By giving the allocation authority to "government" that means some nameless bureaucrat and all you are doing is sticking your head in the sand and hoping for the best. That opens the door for abuse. Deciding who will allocate care will determine the basis of allocation?
Posted by: Ricardo at August 23, 2012 10:37 AM
It takes two to tango --- and the Republican party nominee and many other of its leading lights have said they won't take a deal a deal 90% in their ideological favor if it means raising taxes on the wealthy by a penny or a basis point.... how do you negoatiate like that...
Posted by: Dave Anderson at August 23, 2012 11:54 AM
Will you drink a beverage laced with 10% arsenic?
Posted by: Ricardo at August 23, 2012 04:45 PM
To An Idiot:
"Health care providers are in the business of providing health care and money is secondary so their decisions will be more likely to be based on compassion."
I am not sure what health care provider you are referring to. My wife has worked for several in her long career and their management standpoint, even for non-profit and religions hospitals, focuses on how to preserve their profits and increase their business. The compassion you may encounter comes from the employees, not the institutions.
Posted by: Fraud Guy at August 31, 2012 01:42 AM