Topic: Tax and Budget Policy

Holt & HSAs: Perhaps Fruitful after All

Matthew Holt writes:

The argument I want to have is a theoretical one about what would happen if we had essentially a completely personalized account-based system, as he advocates in his Large HSA proposal.

Holt raises important questions about what would happen under a system of large HSAs, where workers would get a large but limited tax break for cash that they (and/or their employer) deposit in an HSA – tax-free cash that workers could use for health savings, spending, or insurance as they wish.

Holt’s first concern is that “a significant number of people would take the money and buy no or minimal insurance coverage.” That some would choose to drop health insurance is certainly a possibility. I have two responses. First, that is already an option. People can and do choose to “go bare” and use their money for savings or other spending. The large HSA approach could marginally increase the number of people who do that, but only if the newly “bare” actually put money aside for future medical expenses. (Actually, large HSAs could even encourage today’s non-saving uninsured to start saving for their health expenses.) That brings me to my second response. If large HSAs do increase the number of people who “go bare,” the only people they would add to the ranks of the uninsured would be savers. As those “health savers” build up large balances in their large HSAs, it will occur to them, “Gee, one serious illness could wipe out all the money I’ve got stashed in my HSA.” How do people typically protect their assets from such unforseen losses? Insurance. So there’s a built-in incentive for health savers to purchase insurance.

Holt’s second concern goes like this: Were we to allow people to take all of their health benefits in the form of a cash contribution into a large HSA, and let them choose how to allocate those funds (among savings, spending, and insurance), that would begin a process known as “risk segmentation.” As I describe in my paper, some people would “go bare,” many would purchase less comprehensive health coverage, and many would migrate to the individual insurance market, where their premiums (typically) would be based on their individual health risk. What concerns Holt is that sicker people would have to pay more for health insurance, to the point where many sick people could not afford it.

My response is not that sick people should not be subsidized.  (I would prefer that they not be subsidized by government, but let’s assume that all options are open.) It is that sick people should not be subsidized through the vehicle of “insurance.” Attempting to deliver such subsidies through “insurance” destroys much of the good that insurance markets accomplish. Insurance premiums cease to deliver price signals about the costs of bad behaviors (e.g., smoking, obesity, waiting until you’re sick before you buy insurance). Many consumers drop insurance rather than pay the higher-than-necessary premiums, which increases the number of uninsured and tempts government to force people to buy insurance. Most importantly, when patients are spending someone else’s money, we lose a very important ally in the fight to curb wasteful medical expenditures: the patient. Instead of nagging providers about delivering value for the dollar, patients – especially the high-cost ones – line up with providers on the side of more spending. 

My preference is to let insurance markets do all they can do to improve efficiency, particularly by encouraging patients to pay directly more often. Some people will still require assistance, though with a more efficient health care sector their numbers should be smaller. We should subsidize those who remain directly, with cash.

I’m not sure how much of this Holt will find persuasive. Given that we agree that providers are riding the gravy train, I would think that having millions of patients nagging providers about value would hold some appeal.

He and I agree on something else. HSA supporters too often ignore these issues.

Death and Taxes: The Revenue Is Uncertain

The Senate votes on estate tax repeal tomorrow. Nothing gets the political emotions flowing more than “tax cuts for the rich.” The Washington Post’s Harold Meyerson recently called repeal “estate tax lunacy,” for example. But let’s look at a few points made by the Washington Post in an editorial yesterday, which opposed repeal.

1) The Post says that the revenue loss from repeal would be too large—$776 billion over 10 years starting in 2012. But that’s less than two percent of expected revenues during those years. Besides the Congressional Budget Office says that under current law the estate tax will raise $45 billion in 2012 rising to $67 billion in 2016. Thus, the Post’s figure looks exaggerated. The source appears to be the left-wing Center on Budget and Policy Priorities. Harvard’s Greg Mankiw looks at the revenue impact of estate tax repeal in his blog.

2) Under estate tax repeal, the current tax exclusion of unrealized capital gains at death would be partly ended. Thus, the government’s revenue loss under repeal would be partly offset by rising capital gains tax revenue, as I discuss in my new bulletin.

The Post says that “Congress’s Joint Committee on Taxation has analyzed this claim [about the capital gains offset] and found it empty.” Actually, it’s a huge mystery what the JCT includes in its estate tax estimates, or any of its estimates. JCT’s official estimates have a huge impact on the debate over tax policy, yet its methods and assumptions are highly secret. The public cannot find out how the JCT is dealing with capital gains in its estimates. Even members of Congress usually can’t find out how the JCT comes to its sometimes suspicious-looking numbers.

As Mankiw and other experts have noted, estate tax repeal might not lose the government any money at all, but the JCT says repeal would lose the government $290 billion over 10 years (2006-2015). It’s absurd that Congress is making a crucial decision on tax policy tomorrow, yet we cannot have an open discussion regarding the budget impact with the taxpayer-funded experts employed by Congress.

Note that the Heritage Foundation recently published an excellent book on the issue of JCT secrecy

Spending Your Tax Dollars to Advocate for Even Higher Taxes

In 2003, Congress created a “Citizens’ Health Care Working Group” to gather from the citizenry ideas on how to fix America’s health care sector. This past Friday, the group released interim recommendations worthy of the Clinton Health Care Task Force:

It should be public policy that all Americans have affordable health care

This and other of the recommendations contained here call for actions that will require new revenues… We recommend adopting financing strategies…such as enrollee contributions, income taxes or surcharges, “sin taxes”, business or payroll taxes, or value-added taxes that are targeted at supporting these new health care initiatives.

One need not be an advocate of socialized medicine to see that America wastes gobs and gobs of money on health care, which is one of the reasons that health care is so unaffordable. And these people think we should spend more? The group does recite the usual incantations about how the government should use electronic medical records, evidence-based medicine, et cetera to improve efficiency. But it does not pretend that such efforts would obviate the need for new taxes to achieve its goals. Nor does it consider that such a tax burden would hamper the economy’s ability to deliver on the group’s promises. Nor does the group seem to have any comprehension of the enormity of the task of making “affordable health care” actually happen. (For more on that point, see the introduction to Healthy Competition.) The public can read the group’s interim recommendations here and comment on them until August 31.

Kudos to the Left. They seem to have successfully hijacked this panel – despite the group having a chairman from the business community and one member who is a cabinet official in the Bush Administration.

Go figure.

Advice for Conservatives Wrestling with Medicaid

John Hood of North Carolina’s John Locke Foundation today pens important advice to conservatives who are trying to improve Medicaid, the joint federal-state health care program (ostensibly) for the poor:

Too many conservative advocates of Medicaid reform couch their advocacy in terms such as “enrolling in private health plans will remove the stigma from patients on Medicaid” and “choice is better than cutting Medicaid reimbursements to providers, which limit recipients’ access to the best doctors.” These may be effects of a reform, but they shouldn’t be thought of as goals or even as necessarily positive.

Repeat after me: Medicaid is welfare. Medicaid is welfare. Medicaid is welfare. It is a forced redistribution of resources from those who earned them to those who did not. There may be good reasons to defend Medicaid as a concept, or to imagine some kind of more-limited program to replace it, but they must recognize that Medicaid is an arm of the welfare state. As such, no one should consider it a “right” for Medicaid recipients to have access to the very same doctors, devices, and treatments as those who pay their own way.

Full disclosure: He then goes on to quote me favorably, which may be clouding my judgment.

Saving Trees, Wasting Brain Power

For the first time, General Electric has filed its corporate tax return electronically.

GE’s return consumed 237 megabytes of computer storage space, but apparently saved a small forest from being clear-cut to print an eight-foot high, 24,000-page stack of tax forms. That’s progress I suppose, but we’re still waiting for those dim bulbs in Congress to recognize that major tax reforms are needed so that American businesses can focus on ”bringing good things to life” rather than slaving over endless government “paperwork.”   

Sloan’s Cash Cow

Columnists often have cash cows–storylines that they milk over and over. Allan Sloan writes the “Deals” column in the Washington Post, and his cash cow is outrage over corporate mergers and acquisitions that avoid taxes.

In dozens of columns, Sloan has complained about corporations that (legally) minimize their taxes when doing M&As. Typically, he implies that we would be better off if every M&A on Wall Street got hit with a hefty tax of 30 percent or so. In today’s column, Sloan complains that a proposed transfer of the Atlanta Braves from Time Warner to Liberty Media would avoid $700 million in taxes, and that average taxpayers would be ”shut out.”

Here are some issues that I’ve never seen Sloan address:

1) Does it make sense to tax M&As at all? Why should Uncle Sam get a pound of flesh every time American businesses do some restructuring? M&As often have capital-gains-tax implications. But capital gains taxes can represent a double-taxation on business earnings. Under a more efficient tax system, capital gains would not be taxed at all.

2) Two items that make the tax effects of M&As complex are capital gains and depreciation. These items are unique to income taxes. Under a consumption-based tax system, such as the Steve Forbes Flat Tax, they would be eliminated and M&As vastly simplified. Why not focus on tax reform as a systematic fix to the problems of M&As, rather than complaining about each individual deal?

3) Better yet, why not eliminate the corporate income tax altogether, as many eminent conservative and liberal economists have advocated over the decades? Corporate taxes are ultimately paid for by workers, consumers, and individual shareholders. The former group probably bears most of the burden in the modern globalized economy. If $700 million of taxes were avoided on the Atlanta Braves’ deal, the biggest winners are likely to be American workers.

Whining about the particular effects of our complex tax code is easy. I’d rather see columnists like Sloan tell us how to simplify the code so that corporations aren’t encouraged to pursue the fancy tax sheltering that he chronicles in the first place.  

Minn. Taxpayers Make Gophers Golden

If you’re a fan, like I am, of a small college that tries to play big time sports, you know how tough it is for your school to compete against gargantuan state universities that have tens of thousands of students, hundreds of thousands of alums, and a seemingly endless supply of professional quality facilities.

 Well, things just got a bit tougher: On Wednesday, Minnesota governor Tim Pawlenty signed legislation authorizing the construction of a new, $248 million, on-campus football stadium for the University of Minnesota. Of course, one more academically essential football stadium at a state mega-versity only marginally hurts most smaller institutions (except for Northwestern). The people it’s really throwing for a loss are Minnesota taxpayers, who are being forced to pick up 55 percent of the tab—or more than $136 million—for the Golden Gophers’ new gridiron.

Not only do big state schools have an unfair advantage over small private colleges, it seems they have one over state taxpayers as well.