Topic: Government and Politics

Truth-Squading Fursbee

I just got a media inquiry from someone who was on a conference call with Obama economic advisors Jason Furman and Austan Goolsbee.  According to this source, they claimed that McCain’s health insurance tax credit “will surely prove a trojan horse tax increase on middle class familes” (my source’s words) because the amount of the tax credit would grow only at the rate of the Consumer Price Index (i.e., inflation).  That’s much slower than the growth rate for the value of the current tax exclusion for employer-sponsored health insurance, which grows at the much-faster rate of premium growth.  (BTW, it also grows with the rate of increase in marginal tax rates.  Ahem.)

Others have made this charge before.  I’m sorry to hear that Fursbee have picked it up.

Here’s what I wrote to our media friend:

Fursbee are correct, in the sense that providing a tax break that is standardized (i.e., a fixed credit versus an exclusion whose value varies with one’s premiums and marginal rate), and whose growth is limited (to CPI versus today’s unlimited exclusion), would tax currently untaxed activity. 

But they’re flat wrong in concluding that would be a net tax increase.  The ‘why’ requires some explanation. 

Employers provide health insurance principally because those benefits are excluded from income & payroll taxes, while individual-market coverage is not.  A recent survey of health economists found that 91 percent agree that workers pay for health benefits through reduced wages.  The average “employer contribution” to the average family policy is roughly $9k.  That means that if employers weren’t providing health benefits, the labor market would force them to return that $9k to workers.  We call the current exclusion a tax break, even though it denies workers the ability to control $9k of their compensation.  If government took $9k from workers and used it to provide workers with health insurance, then we would call that a tax.  Yet when government effectively takes that money from workers and gives it to employers, we rather curiously call it a tax “cut.” 

McCain’s tax credit would level the playing field between job-based and individual-market health insurance.  With no tax penalty encouraging workers to let their employer control that $9k, the labor market would gradually force employers to add that money to workers’ cash wages.  Letting workers own and control that money is nothing if not a tax cut.  And it would swamp the tax-increasing effect of limiting the tax credit’s value to CPI growth. 

Fursbee are being too cute by half.  And I don’t even like the McCain tax credit.

I might have added that McCain’s credit would encourage Americans to be much more economical about their health insurance, which could restrain premium growth.  (Any excess premium growth due to the exclusion is itself a tax.)  Or I might have noted that the McCain credit would be a pure tax cut to people without access to job-based coverage. 

Or I might have mentioned that Fursbee should know better.  They know that tax exclusion for employer-sponsored health insurance is horribly inefficient, that reform is crucial, and that any reform will be imperfect.  Assuming my source is correct, they are being selective about their facts, demagoguing a serious effort to fix this problem, and making it harder for anyone to do so.

Federal Worker Pay Blasts Off

Newly released data show that federal employee wages and benefits continue a rapid ascent above and beyond private sector pay levels. The data was released last week by the Bureau of Economic Analysis. (See tables 6.2, 6.3, 6.5, and 6.6).

The new data show that the 1.8 million federal civilian workers earned an average wage of $77,143 in 2007, which is 61 percent higher than the $48,035 average in the U.S. private sector. That 61 percent pay advantage has increased from a 34 percent advantage in 2000.

Looking at total compensation (wages plus benefits), federal workers earned an average $116,450 in 2007, which is more than double the $57,615 private sector average. The federal compensation advantage increased from 68 percent in 2000 to 102 percent today. Federal workers not only earn much more than private sector workers, their earnings advantage is getting more pronounced every year.

Federal compensation rose quickly during the 1990s, but even faster during the 2000s. I call this the “Bush Bounce” because it appears that the Bush administration has caved into federal union demands for expanded pay year after year. Between 2000 and 2007, average federal compensation increased at an annual average rate of 6.3 percent, which compares to the private sector increase of 3.5 percent. During the 1990s, average federal worker compensation increased at an average rate of 5.1 percent. The charts below illustate the “blast off” in federal wages and compensation. 

The upshot is that with a federal budget deficit of $500 billion, federal pay restraint should be a priority of the next administration. I’ve proposed freezing federal pay for a period of years, while privatizing costly activities such as air traffic control. The BEA data show that compensation for federal civilian workers cost taxpayers $213 billion in 2007, so there are substantial savings possible here. (Those costs do not include the $166 billion in military compensation costs in 2007).

The Wall Street Journal has called the overly generous federal pay environment “Club Fed.” How long will average American wage earners be willing to foot the tax bill for this elite Washington club?


For further information, see

http://www.cato.org/pubs/tbb/tbb-0605-35.pdf

GOP Governors Lead the Way!

In recent years, Republican governors have been doing a fantastic job of carrying the torch for fiscal conservatism and burnishing the GOP’s brand name as the tax-cutting party. This leadership is clear from two stories in State Tax Notes today [subscription req’d]:

  • “In an effort to break the budget impasse that has lasted over a month, California Gov. Arnold Schwarzenegger (R) has proposed a temporary 1 percentage point sales tax increase. The increase would run for three years and is expected to raise between $5 billion and $6 billion yearly, or over $15 billion for the three-year period.”
  • “Mississippi Gov. Haley Barbour (R) said August 4 that he would plug the state’s $90 million Medicaid funding hole by raising taxes on state hospitals. Barbour wants to raise hospitals’ gross revenue assessment – the tax hospitals pay on the money that flows into their coffers – from 0.45 percent to 1.08 percent. … The increased tax rate would raise $88 million; the remaining $2 million would be saved by cutting funds from other services. But don’t expect the state’s hospitals to accept this plan lying down. The Mississippi Hospital Association filed a lawsuit against the governor in 2005 when he proposed something similar. …’It’s a good, fair deal that taxes the hospitals, not our citizens – and rightly so,’ Barbour said in a press release describing the plan.”

Voters and taxpayers in these states will appreciate the strong conservative thrust of these policies. Schwarzenegger’s tax hike is only “temporary,” and will surely expire after runaway state spending has been cut and current fiscal problems solved. And Barbour wisely wants to impose his tax hike on hospitals, which clearly won’t burden the people of Mississippi or the state economy at all.

Putin: “War Has Started” with Georgia

Some unfortunate “he said/he said” violence in the breakaway Georgian province of South Ossetia looks likely to escalate into full-blown war. Unsurprisingly, Eduard Kokoity, the leader of the province, and the Russian prime minister and president are blaming the Georgians for starting it. The Georgians are blaming the Russians for starting it. Washington is several thousand miles away, so it’s hard to tell from here.

What’s not hard to tell, however, is how dangerous the situation is. Recall that President Bush made a full-court press to get Georgia (and Ukraine) onto Membership Action Plans at the recent NATO summit in Bucharest. In a heroic move, the Germans spiked the deal, saving us from ourselves. But both Barack Obama and John McCain favor Georgian accession into NATO — and with it, a full-on security commitments as Article V of the NATO charter makes clear. 

Here’s Barack Obama’s absurd statement on the question from last month:

As I stated in April this year, I am committed to upholding the sovereignty and territorial integrity of Georgia. This commitment has long been a fundamental building block of U.S. policy, and it will not change under the Obama administration. I also affirm Georgia’s right to pursue NATO membership. This aspiration in no way threatens the legitimate defense interests of Georgia’s neighbors.

I’m sure the Russians are interested to learn that Obama considers himself an expert on “the legitimate defense interests” of their country. I wonder what the Kremlin thinks are the legitimate defense interests of the United States. 

Unfortunately, of course, McCain is hardly a paragon of good sense on the question. He has been fairly pawing at the ground for years to get a run at Russia, and this opportunity seems as good as any.

Also of note is the fact that McCain’s chief foreign policy adviser, Randy Scheunemann, was a paid lobbyist for Georgia until March of this year — even acting simultaneously as McCain’s chief adviser on foreign policy while he was being paid by the Georgians.  A man of many hats, Scheunemann apparently could separate out (a) being paid by the Georgians to lobby for them, (b) advising McCain on foreign policy (including, presumably, U.S.-Georgia relations), while (c) lobbying McCain’s Senate staff on behalf of Tbilisi.

The other point is how robust U.S. support for Georgian NATO membership may have created a moral hazard situation where the Georgians may have convinced themselves — any official urgings from the U.S. administration aside — that they would have U.S. backing should any conflict break out.

For any U.S. president, current or future, to give so much as a second’s thought of committing American blood and treasure to the defense of a tiny Caucasian country that few Americans could so much as point to on a map is ridiculous and unforgivably reckless. It would raise the prospect of restarting the Cold War, and completely poisoning our relations with a country that happens to possess both a large quantity of nuclear weapons and a permanent spot on the UN Security Council.

We sometimes joke that the worst ideas in Washington are bipartisan. Here’s another data point to support that thesis.

Update: Commentary magazine’s Gordon G. Chang is now calling for President Bush to make clear, publicly, to Prime Minister Putin that the United States “is prepared to cut off diplomatic relations, end trade, and use military force to protect this young democracy.”

Inflate Your Tires; Save 100% of Your Gasoline

Here’s how.

Get your favorite politician. Democrat, Republican, or whatever; it doesn’t matter.

Connect mouth to valve.

Ask, “What’s your energy policy.” Hot air will inflate tire.

“What about the environment?” More inflation.

“Should wind be subsidized?” And so forth, until tire blows.

Flat tire! Now you aren’t going anywhere.

And — voila! — gas consumption now zero.

You’ve saved 100 percent of your gas.

… Only problem – you’ll need a new tire, which is mainly petroleum.