Tag: tax hike

Obama’s Health Tax Conundrum

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

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

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

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

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

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

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

Health Care: Not Close to Over

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

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

Among the more contentious issues:

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

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

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

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

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

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

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

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

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

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

Revenge of the Laffer Curve, Part II

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

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

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

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

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

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

‘No Child Left a Dime’

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

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

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

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

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

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

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

Back to the Bad Old Days of High Marginal Tax Rates

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

Reports the Washington Times:

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

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

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

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

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

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

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

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

Mandate for Taxes?

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

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

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

Obama’s Back-Door Tax Hike on American Workers

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

Geoff Colvin explains:

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

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

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

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

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