Topic: Tax and Budget Policy

$1.4 Trillion and Counting

Last October we estimated that unfunded costs for state and local government health care plans were about $1.4 trillion nationwide. That is the amount that taxpayers will be hit unless governments cut excessive benefits for teachers, firemen, and other workers.

Some new estimates have been released since our report, and it appears that we were conservative.

  • Credit Suisse has put nationwide unfunded costs at $1.5 trillion.
  • We estimated New Jersey at $20 billion, but the NYT reports today that unfunded costs for the state are now estimated to be $58 billion.
  • San Francisco has reported a $4.9 billion cost, Los Angeles County $16 billion, and the LA School District $10 billion
  • In December, Pennsylvania reported a $34 billion cost, which is one of the highest figures we’ve seen for the states.

MediKid

That was the name I gave the State Children’s Health Insurance Program (SCHIP), before it even had a name, 10 years ago this month.

It appeared in a paper I wrote for Citizens for a Sound Economy Foundation titled “MediKid: Whose Idea Was This, Anyway?” At the time, I foolishly hoped the paper would head off this Orrin Hatch/Ted Kennedy love-fest. CSEF issued the paper just as the House and Senate were about to go to conference on different versions of the program.

Ten years later, MediKid is about to expire. As Congress and the president are trying to figure out just how much more to spend on this ill-advised program, I thought it would be fun to share a few gems from my 1997 paper:

Congress is about to cast one of its most damaging votes ever against children’s health. Taking a page from the Clinton administration’s playbook, Congress will soon vote to expand government-run health care for children and continue the slow march toward imposing government-run health care on everyone. Instead of wasting over $8 billion on “MediKid” proposals, Congress should help parents protect their children’s health by providing additional tax relief to families…

Congress has debated the issue of uninsured children under the premise that 10 million American children are unable to obtain health coverage — a premise that is utterly false. In fact, fewer than two million children in the U.S. are chronically uninsured.

Acting on this false premise, Congress has designed new government programs to give health coverage to low-income children. Over five years, these programs will waste more than $8 billion duplicating services already provided by the private sector. Worse, MediKid will actually harm children’s health by making parents less able to meet their children’s basic health needs.

In 1993, the Clinton administration’s Health Care Interdepartmental Working Group conceived of a strategy to nationalize health insurance by providing government coverage to children first and later phasing in the adult population. Ironically, a Republican Congress’ MediKid proposals are now implementing that strategy.

About the number of uninsured children:

This poor understanding of the dynamics of the health coverage market has led to inane solutions. The Senate MediKid proposal targets children too affluent to be eligible for Medicaid yet below 200 percent of the poverty level. The [Census Bureau’s Survey of Income and Program Participation] reveals there are only 1.4 million chronically uninsured children in this income category. Nevertheless, the Senate designed a program to cover 2.8 million such children.

About the slow march toward government-run health care:

Congress’ MediKid proposals are a step toward nationalized health coverage. In 1993, the White House Health Care Interdepartmental Working Group devised a number of strategies for nationalizing health insurance. What the task force called “Option 3: Kids First Coverage” was a plan to move children out of the private health insurance market into government-run coverage as “a precursor to the new system” of national health insurance. The task force wrote:

This proposal is designed in two parts which will be implemented simultaneously: 1) The quick coverage of children — “Kids First”; and 2) the development of structures for transitioning to the new system and the phasing in of certain population groups.

Does anyone actually doubt that that’s the whole point?

The Laffer Curve: Separating Fact from Fiction

Critics of pro-growth tax policy are perpetually vigilant for opportunities to condemn the Laffer Curve as a free-lunch scheme pushed by political hacks who want to claim that all tax cuts pay for themselves. And while it is true that some tax-cut advocates are too aggressive in their assertions, the critics often are guilty of knocking down straw men (while dodging the real issue, which is whether the right kind of tax rate reductions lead to growth and the degree to which that higher growth leads to revenue feedback).

The latest skirmish in this long-running battle revolves around a Wall Street Journal editorial on corporate tax rates. The WSJ’s editorial included a graph showing corporate tax rates and corporate tax revenue and included a line purporting to show that the revenue-maximizing corporate tax rate is somewhere between 25 percent and 30 percent, a bit of artwork that has been criticized by Brad DeLong and Mark Thoma.

But if the Laffer Curve is an absurd notion, why did the World Bank (hardly a bastion of supply-side thinking) report that “high tax rates do not always lead to high tax revenues. Between 1982 and 1999 the average corporate income tax rate worldwide fell from 46% to 33%, while corporate income tax collection rose from 2.1% to 2.4% of national income. … A better way to meet revenue targets is to encourage tax compliance by keeping rates moderate.” And if the Laffer Curve is discredited, someone needs to tell the European Commission (a bureaucracy infamous for trying to harmonize corporate rates at high levels), which recently admitted that “it is quite striking that the decline in the corporate income tax rates has not resulted, so far, in marked reductions in tax revenue, both the euro area and the EU-25 average actually increasing slightly from the 1995 level.”

Or, shifting from corporate taxes to broader measures, how about new research from two German economists (neither of whom are known as supply-siders), which reported that, “We find that for the US model of a labor tax cut and of a capital tax cut are self-financing in the steady state. In the EU-15 economy of a labor tax cut and 85% of a capital tax cut are self-financing.”

Or what about the experience of Ireland? Would critics deny that that there has been a Laffer Curve effect in Ireland, where corporate tax revenues have jumped from less than 2 percent of GDP to more than 3 percent of GDP (a result that is all the more impressive considering the rapid growth of GDP in the Emerald Isle)? And are they really willing to categorically deny any supply-side response following the Reagan tax rate reductions? The 1997 capital gains tax cut? The 2003 tax rate reductions?

Tax-cut advocates should be careful not to over-state the revenue feedback caused by tax cuts – especially for tax cuts that are poorly designed (such as the Keynesian rebates and credits adopted in 2001). But opponents of lower tax rates are equally misguided (or disingenuous) if they blindly assert that changes in tax policy never impact economic performance, and thus never cause revenues to rise or fall compared to static estimates.

Unfortunately, revenue estimating today is based on the absurd notion that tax policy does not affect macroeconomic performance. During 12 years of GOP rule in Congress, Republicans failed to modernize the revenue-estimating process at the Joint Committee on Taxation. No wonder they deserved to lose.

The Media’s Snapshot View

An AP story on the minimum wage begins, all too typically:

The nation’s lowest-paid workers will soon find extra money in their pockets as the minimum wage rises 70 cents to $5.85 an hour today, the first increase in a decade.

Some versions of the AP story, though not the ones that ran in the Washington Post and the New York Times, did acknowledge the possibility that some low-paid jobs might disappear. But most of the news stories this week focus more on criticism of the increase for being too low than on the consensus of economists that minimum wage laws reduce employment for low-skilled workers. It’s enough to make you think Bryan Caplan’s right about the irrationality of the political process. But it’s really just an example of the tendency to look at market processes with a “snapshot view” rather than a dynamic understanding of costs and consequences.

On an unrelated note, unions are outsourcing the arduous job of picket lines to non-union workers. Apparently the carpenters and construction workers are too busy working in our booming economy to have time to picket non-union contractors. The picketers aren’t paid union wages, but they are paid above the minimum wage.

Politicians Seeking Pro-Growth Tax Cuts to Lure Successful People Back to France

The International Herald Tribune reports on the tax-cut battle in France. The President and his Finance Minister are seeking to cut taxes and change the French attitude about wealth creation. In another sign that tax competition is a valuable tool for better policy, the articles explains that a key selling point is the need to make the country attractive once again to the numerous French tax exiles living and working in nations with lower tax rates:

In proposing a tax-cut law last week, Finance Minister Christine Lagarde bluntly advised the French people to abandon their “old national habit.” …Citing Alexis de Tocqueville’s “Democracy in America,” she said the French should work harder, earn more and be rewarded with lower taxes if they get rich. …The government’s call to work is key to its ambitious campaign to revitalize the French economy by increasing both employment and consumer buying power. Somehow it hopes to persuade the French that it is in their interest to abandon what some commentators call a nationwide “laziness” and to work longer and harder, and maybe even get rich.
France’s legally mandated 35-hour workweek gives workers a lot of leisure time but not necessarily the means to enjoy it. Taxes on high-wage earners are so burdensome that hordes have fled abroad. (Sarkozy cites the case of one of his stepdaughters, who works in an investment banking firm in
London.) In her National Assembly speech, Lagarde said that there should be no shame in personal wealth and that the country needed tax breaks to lure back the rich. “All these French bankers” working in London and “all these fiscal exiles” taking refuge from French taxes in Belgium “want one thing: to come back to France,” she said. “To them, as well as to all our compatriots who are looking for the keys to fiscal paradise, we open our doors.”

Finally Legal!

I can finally report that I am driving a legal automobile.

As readers will recall, this was my third trip (see here and here for previous installments in the saga). Actually, it was my third and fourth trip. When I got to the DMV this morning, happily clutching the Fairfax County tax receipt to my chest, I was told that I also needed an emissions test. It would have been nice of the bureaucrats to tell me that on my first trip, but why expect miracles.

So I had to exit the line, go back out to my car, and drive (illegally, once again) to a nearby service station. This interaction with the private sector was predicatably brief, so I was back at the DMV in less than 30 minutes. Unfortunately, Dan Griswold must have been hard at work in the interim since there was now a long line of people, none of whom appeared to be native-born Americans.

But after a 90-minute wait, I got up to the counter, and was able to get registered - but only after dealing with a libertarian quandary. While twiddling my thumbs, I noticed that I could request a vanity plate. Wouldn’t it be nice, I thought, to have a license plate reading “anti gov.” But getting a special plate also involved paying more money - funds that presumably would help finance the sloth-like bureaucracy that I despise. After wrestling with my conscience (which usually comes out on the short end), I decided that the cause of freedom would be best served by having the vanity plate.

I feel guilty about giving government more money, but I somewhat compensated by paying for my registration and vanity plate with a credit card, which means at least some small slice of the $103 gets diverted to the financial services industry. It ain’t easy being libertarian, but I somehow muddled through.

Great Moments in Local Government, Part II

I am moving ever closer to being a compliant citizen of Fairfax County and the State of Virginia. As I noted in an earlier post, I am seeking to renew the registration on my car, but I failed miserably in my first trip to the Department of Motor Vehicles.

The trip to the Fairfax County tax office was rather successful, albeit a bit puzzling. The ostensible purpose of the trip was to pay a mysterious overdue tax and then a $20 fee to remove a “hold” on my registration. But the County bureaucrat said there was no overdue tax. This made sense because I hadn’t received any notices in the mail, but I can only imagine why the automated system was trying to get me to cough up $174 (I’m now thankful my efforts to comply were unsuccessful).

Yet even though there was no unpaid tax, the County still insisted on getting $20 to remove the hold. In an ideal world, I would have loudly protested this ridiculous demand. In the spirit of the Founding Fathers, I would have pointed out the absurdity of being forced to pay the remove a hold for a tax liability that did not exist. In reality, the County got its money and I’m just happy that I have (at least in theory) just one final visit to the DMV.

I never did ask, by the way, why the County thinks I have four cars. While I am a tad bit curious, discretion is the better part of valor when dealing with bureaucracy. Stay tuned.