Topic: Tax and Budget Policy

Taxes in 2009

All the Democratic presidential candidates appear to agree that taxes must go up.

We have been here before. Bill Clinton promised tax cuts in 1992 and then supported increases. Democrats in Congress supported Clinton’s tax hikes just as they had voted for the 1990 tax increases.

The result? Democrats lost almost one-quarter (63 seats) of their House caucus in the elections for the 103rd and 104th Congress. The Republican president that proposed the 1990 increases lost two years later.

The current group of Democratic presidential contenders may have forgotten this history lesson. I suspect congressional Democrats running next year will remember it.

The High Price of Too-Low Administrative Costs

Supporters of “Medicare-for-All” (and other reforms that would give the U.S. government primary responsibility for purchasing everyone’s medical care) boast that Medicare demonstrates that government can reduce administrative costs below those in America’s bloated, inefficient private sector.  They’re wrong, as Ben Zycher ably demonstrates.

But even if Medicare’s administrative costs are lower, that’s not a virtue

Why?  As David Hyman wryly argues in Medicare Meets Mephistopheles, Medicare keeps administrative costs down by shoveling money out the door with very little oversight.  Similarly, Tyler Cowen argues that administrative costs are efficient if they pay for themselves by reducing unnecessary spending.

Today’s New York Times offers an illustration of how Medicare’s too-low administrative costs leads to waste:

Medicare spends billions of dollars each year on products and services that are available at far lower prices from retail pharmacies and online stores, according to an analysis of federal data by The New York Times. The government agency has paid above-market costs for dozens of items, a comparison of Medicare figures with retail catalogs finds.

For example, last year Medicare spent more than $21 million on pumps to help older and disabled men attain erections, paying about $450 for the same device that is available online for as little as $108. Even for a simple walking cane, which can be purchased online for about $11, the government pays $20, according to government data.

These widespread price discrepancies, including those for oxygen services, have been noted in dozens of regulatory reports.

Private insurers incur administrative costs to make sure they (and their customers) aren’t getting ripped off.  Medicare doesn’t.  The Times article also illustrates why Medicare usually can’t:

[W]hen officials and politicians have tried to cut these costs, they have often encountered a powerful foe: the companies that sell these devices, who ask their elderly customers to serve, in effect, as unpaid lobbyists, calling and writing to their representatives in Congress, protesting at rallies, and even participating in political attacks against individual lawmakers who take on the issue.

“These industries rely on a basic threat: If you mess with us, we can turn the seniors against you,” said former Senator Alan K. Simpson, Republican of Wyoming, who tried cutting Medicare payments while he was in Congress…

Many of those battles focus on the $427 billion Medicare program. Because of fierce patient and corporate lobbying, for instance, Medicare still pays prices for many items that are based on rates established in the early 1980s, when devices were often much more expensive than they are now.

Even as the actual cost of many machines and services has fallen, Medicare has only occasionally lowered what it pays.

To argue for single-payer on the basis of Medicare’s administrative costs is the equivalent of arguing that, because I can set fire to a pallet of $100 bills with a cigarette lighter and a can of gasoline, I should be entrusted with even more pallets of cash because my administrative costs are such a small share of the money involved.

So staggeringly efficient, this Medicare.

Why Do European Politicians Want Tax Harmonization?

While it is possible that European politicians have a genetic predisposition for statist policies, I’ve never thought this is why they support tax harmonization. Self interest is a far more reasonable answer. More specifically, European nations generally have high fiscal burdens. For instance, government spending consumes nearly half of economic output in EU countries, compared to one-third of GDP in the United States.

Not surprisingly, this translates into a higher tax burden, which means jobs and investment generally flee Europe. Tax harmonization is an attempt to stop labor and capital from escaping by creating, for all intents and purposes, a “fiscal fence.” But European politicians also want to undermine tax competition because they know the situation is going to get worse. According to a new report, demographic changes almost certainly are going to result in an even bigger welfare state in the future. This means increasingly harsh tax rates on the remaining productive people - which means politicians will try even harder to prevent taxpayers from escaping. The EU Observer reports on the key statistic that is causing angst for Europe’s political class:

According to demographic predictions, the EU’s population will not only shrink by almost 20 million people by 2050, but its make-up will also change dramatically. While there are currently about four working people of working age for each person of pension age in the EU’s 27 member states, there will be fewer than two people to support every elderly person by 2050, with the population gradually ageing.

Should the Government Have a Monopoly on Money?

Writing for the New Republic, Alvaro Vargas Llosa asks the fundamental question of whether the Federal Reserve has been a net plus or a net minus for the American economy. Looking at the Fed’s track record, which includes disasters like the Great Depression and serious mistakes like the more recent high-tech and housing bubbles, Llosa astutely wonders whether money is too important to be left in the control of government:

Some of the country’s greatest economists, including Nobel Prize winners, have been saying for years that the Federal Reserve has probably caused more problems than it has solved since its creation in 1913. Its role in the last century’s boom and bust cycles is a matter of record; it looks as though it played a similar role in the current housing market crisis too. While the creation of the Federal Reserve was essentially a response to a series of bank runs, those crises were mild compared to the ones that were to follow. … All in all, financial instability has been far greater since the creation of the Federal Reserve. What did the Great Depression teach us? Essentially that even with the best of intentions, it is impossible for the authorities to manage the supply of money in accordance with the exact needs of the economy. A country’s economy is the sum of millions of people making decisions that no single individual is in a position to anticipate. … The current housing market and debt market crises are in good part the children of the Federal Reserve. By cutting rates 13 times between 2001 and 2003, and then keeping them very low for years, monetary policy contributed to the housing bubble. …once again, the Fed has turned out to be a factor of financial instability.

Edwards vs. Edwards on Hunger

My prior post on hunger in the United States attracted some comments in the blogosphere regarding what presidential candidate John Edwards has been saying about the issue.

Candidate Edwards has been claiming that 35 million Americans are going hungry. For example, in recent Thanksgiving comments he said: “More than 35 million Americans went hungry last year.”

That is not true. The U.S. Department of Agriculture is the official source for such statistics. Here is what the agency says:

“USDA does not have a measure of hunger or the number of hungry people. Prior to 2006, USDA described households with very low food security as ‘food insecure with hunger,’ and characterized them as households in which one or more people were hungry at times during the year because they could not afford enough food … In 2006, USDA introduced the new description “very low food security” to replace “food insecurity with hunger.”

O.K., well how big is the group called “very low food security?” If you look at the chart here, you see it is at most about 3% of the population (about 9 million people), or those with an episode of “very low food security” even a single time during a year.

In sum, this appears to be a good topic for a Washington Post’s Pinocchio analysis.

Two Tax Rates Catching On

A few years ago, I proposed a major overhaul of federal taxation with a plan I called the dual-rate income tax. (See here and here). The plan would get rid of virtually all credits and deductions, be favorable to savings and investment, and compress the current six-rate system down to two lower rates.

I proposed the idea to the president’s tax reform panel in 2005, but the panel didn’t bite. Panel co-chair, former Senator John Breaux, said: “Chris, I looked at your plan; I don’t like it.”

But this year, the two-rate idea is catching on. House Republicans led by Paul Ryan have proposed a two-rate plan called a Simplified Tax. (Please join us to hear Mr. Ryan speak about his plan on December 6). And yesterday, presidential candidate Fred Thompson included a two-rate plan in his platform.

In the long-run, Americans should follow the lead of more than 20 countries that have enacted flat taxes. Meanwhile, the two-rate plan would represent a huge step toward that ultimate goal.

Are 35 Million Americans Going Hungry?

A news story and op-ed in the Washington Post recently noted that about 35 million Americans, or more than 10% of the population, are “food insecure.” It sounds like there is a massive underclass of people in the nation who are so poor that they can’t get enough to eat and are going hungry. No doubt that is the idea that many articles want to put across on the reader.

But is the hunger problem really that big? Let’s go to the official definitions and data at the Department of Agriculture:

Definitions: http://www.ers.usda.gov/Briefing/FoodSecurity/measurement.htm 

Data: http://www.ers.usda.gov/Briefing/FoodSecurity/howoften.htm 

It seems to me that it’s only the “very food insecure” folks who might be sometimes going hungry. Less than 3% of the population is very food insecure at any time during a given month, and that drops to less than 1% on any given day.

Douglas Besharov has argued that the main food-related health problem today is obesity, not hunger. Poor Americans are generally suffering not from too little food, but from too much of the wrong kinds of food. 

According to federal data, about two-thirds of American adults are “overweight” and about half of those are “obese.” Those rates are actually higher for adults below the poverty level. Similarly, children below the poverty line are more likely to be overweight than other children.

Despite these modern realities, food subsidy programs continue to support an out-of-date model of increasing the caloric intake of low-income Americans. It’s time to cut them. See further discussion here.