Tag: federal tax code

(Un)Happy Tax Day

Today is that unofficial American holiday where we mourn the loss of a year’s worth of productive private resources to our bloated federal government. And it’s not just the actual dollars paid to Uncle Sam – it’s also the economic loss due to all the time and money wasted trying to comply with an increasingly complex tax code:

For an increasing number of Americans, approximately 47 percent, it might be cause for celebration as they don’t effectively pay income taxes. In fact, for a lot of Americans April 15th has turned into a pay day. Thus, the burden of paying for a lot of the federal government’s activities is being foisted upon a shrinking base:

And those federal activities are growing:

But on this Tax Day we shouldn’t just mourn what we lost to Uncle Sam, nor should we celebrate what the federal government allowed us to gain from others. The federal budget is on an unsustainable trajectory that, if not reined in, will mean reduced living standards for future generations – whether they are effective taxpayers or not:

How to Reform Health Care? ‘Let Them Have Choice’

This is big.

The federal tax code creates a large tax preference for employer-sponsored health insurance.  As a result, 61 percent of non-elderly Americans obtain health insurance through an employer.  That tax preference creates all sorts of problems.  It encourages more comprehensive health insurance and wasteful health care spending.  It deprives many workers of their health coverage at the moment they need it most: when they get sick and can no longer work.  And it denies workers the benefits of being able to choose their health plan.  Eighty percent of those who work for an employer that offers health benefits have at most two health-plan choices, which are typically both run by the same insurer.

To date, no one had really quantified the damage done by denying workers the ability to choose their own health insurance.  The only guesstimate of which I had been aware was by Mark Pauly, Allison Percy, and Bradley Herring, who “infer[red] that the true value of the welfare loss may actually be in the neighborhood of 5–10 percent,” which was enough to negate any advantage that employer-sponsored insurance offers by virtue of its lower administrative costs.

A new working paper titled, “Let them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and Toward an Individual Exchange,” by Leemore Dafny, Katherine Ho, and Mauricio Varela, offers a more precise estimate of how much workers suffer because the federal tax code denies them their choice of health plan – and how much they would gain if they had greater choice.  (The authors have a shorter paper explaining their results here.)  They write:

We estimate the median welfare gain from expanding choice amounts to roughly 20 percent of premiums.  For the vast majority of employee groups and alternative model specifications, the gains from choice are likely to outweigh potential premium increases associated with a transition from large group to individual pricing.

Dafny, Ho, and Varela’s results provide a huge boost to free-market health care reforms.

One of the main goals of free-market reforms is to eliminate the tax code’s preference for employer-sponsored insurance – and the corresponding tax penalty imposed on people who purchase health insurance directly from an insurer.  There are many ways level that playing field, including health-insurance tax credits, a standard deduction for health insurance, and (my preference) “large” health savings accounts.  Those reforms would give people seamless coverage between jobs, protection against premium increases if they got sick, and much greater choice.

The standard criticisms of those proposals is that they would tax health benefits (“for the first time in American history,” no less!) and move people onto the “individual market,” where medical underwriting and higher administrative costs would increase premiums. In a recent paper, I explain how Large HSAs would result in an effective tax cut of nearly $10 trillion over 10 years, with the largest effective tax cuts going to the sickest workers.  I further explain how Large HSAs would reduce the problem of pre-existing conditions enabling people to purchase seamless coverage that doesn’t become more expensive just because you get sick.

Dafny, Ho, and Varela buttress the argument for Large HSAs and other tax reforms by showing that even though administrative costs may rise slightly, the benefits of giving workers more health insurance choices would overwhelm those costs.

Of course, advocates of greater government regulation will claim that Dafny, Ho, and Varela’s results show that the “exchanges” implemented in Massachusetts and envisioned in President Obama’s health plan would also benefit workers by giving them more choices than their employers currently offer.   As I explain elsewhere, however, the Massachusetts and Obama health plans would actually limit health insurance choices, both immediately and over time, until they marched all Americans into a narrow range of health plans, or just one type of plan.  Dafny, Ho, and Varela’s results are an argument against ObamaCare, not for it.

Many thanks to Dafny, Ho, and Varela for highlighting the harm done by government interference in health care markets, and the benefits of free-market reforms.

Homebuyer Tax Credit Complications

Most people would agree with Chris Edwards that the federal tax code is insanely complicated. The IRS Commissioner doesn’t do his own taxes, the Treasury secretary and other Washington policy experts haven’t paid what is owed, and the already overwhelmed IRS would be given an expanded role under the Democrat’s health care legislation.

A key problem is that the social engineers on Capitol Hill have run amok. Recently, they have been enamored with home-buying tax credits, and CNN.com notes how it is further overwhelming the IRS bureaucracy:

On Thursday, CNNMoney revealed that buyers who purchased their properties after Nov. 6 were unable to claim the refund because the Internal Revenue Service had yet to release a new form and instructions. But on Friday, the IRS finally posted the new form 5405.

Claiming the credit now requires sending paperwork to the IRS – no e-filing allowed:

And these new buyers can no longer file electronically. They have to mail in paper forms, including the new 5405, whether they are amending their 2008 taxes or claiming it on the 2009 taxes that are being filed this spring. That is going to dramatically slow refunds, but taxpayers can’t blame the IRS. Instead, it’s people scamming the system who are at fault. For example, in October tax preparer James Otto Price III was the first person convicted of this crime. He falsely claimed the credit for 15 clients. So buyers must now file documentation with their taxes – including proof of residency, a signed mortgage statement and drivers license – which the e-file system is not equipped to handle.

The original homebuyer tax credit, which became available in April 2008, generated a nightmare of fraud. In one case, the credit was claimed by a four-year-old. Even IRS employees filed “illegal or inappropriate” claims for the credit. As a result, when Congress extended and expanded the credit in November, the IRS began requiring extra documentation.

Thus, micromanagement through the tax code is a bureaucratic Catch-22. If the IRS streamlines the paperwork, tax breaks get riddled with fraud and abuse. If it tries to cut down on the fraud and abuse, taxpayers and federal workers get bogged down in a pile of wasteful paperwork.

The solution to the problem is for the government to get out of the social engineering business. Federal attempts to foster homeownership are a perfect example of why such attempted engineering can ultimately cause more harm than good. The homebuyer tax credit should be allowed to expire at the end of April, and the federal tax subsidies for homeownership should be ended.

Week in Review: Tax Day, Pirates and Cuba

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

gallery-somali-pirates-pi-003USA 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.

Topics:

Obama’s Tax Commission

The Obama administration has announced the formation of a task force to recommend major changes to the federal tax code. According to Congressional Quarterly today:

[Obama budget director Peter] Orszag said the task force will focus on three areas: tax simplification, reducing “corporate welfare” and shrinking the estimated $290 billion a year “tax gap” between taxes owed and taxes paid.

Isn’t Orzag missing something here? For goodness sakes, what about about economic growth? The economy is in the crapper, America has huge competitive challenges ahead with the rise of China, and the ratio of unproductive retirees to productive workers is soaring – it’s obvious that we need to reduce government hurdles to economic growth every way we can, and the high-rate federal tax code is one giant hurdle that policymakers need to start cutting. U.S. companies are not investing in China and elsewhere because our business tax code is too complex, but because our business tax rates are far higher than just about anywhere else.