Topic: Tax and Budget Policy

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.

How Much to Trust the Medicare Trustees’ Projections?

The recently released Medicare Trustees Annual Report [pdf] contains a stark reminder of the Alice in Wonderland nature of Medicare’s financial projections and policy-making. Page 219 of the report carries the chief actuary’s “Statement of Actuarial Opinion.” Its contents should be mandatory reading for those worried about the program’s future. The statement’s second paragraph is reproduced here:

…the Board of Trustees has emphasized the strong likelihood that actual Part B expenditures will exceed the projections under current law, due to further legislative action [emphasis added] to avoid substantial reductions in the Medicare physician fee schedule. While the Part B projections in this report are reasonable in their portrayal of future costs under current law, they are not reasonable as an indication of actual future costs. Current law would require physician fee reductions totaling an estimated 37 percent over the next 9 years—an implausible result.

In other words: Despite Medicare being in a deep financial hole, don’t expect policymakers to stop digging for a while yet.

The funny part is that the actuarial method used in making projections is perfectly legitimate; it makes projections by completely ignoring future policy changes—no matter how likely they are. But the chief actuary is also correct to point out that certain aspects of current Medicare law are ridiculously out of touch with political reality.
Most official budget analysts have thrown a fit whenever I’ve used the words “debt” or “liabilities” to describe current-law Medicare obligations to future retirees. “We don’t ‘owe’ anyone anything because Congress can change current laws!” they’ve protested.

The chief actuary’s statement exposes the hypocrisy: His statement means that we are also obligated to pay future medical providers MORE than current laws stipulate. And, oh, by the way, don’t call that “debt” either because, in this case, Congress can choose NOT to change the laws!

Bureaucrats Strike Back

My new bulletin [.pdf] regarding federal vs. private pay has set off lots of rowdy discussion at a popular website for federal workers.

An article on my piece is here, and about 80 responses are here.  Federal workers are against me, but a few brave souls ask their comrades essentially, “If all you federal workers get paid so poorly, then how come so few of you ever leave?”  One worker with the Social Security Administration notes, “I am a libertarian, and working for 35 years within the government to witness its dysfunction first hand has made me so.”

Still, critics of my piece had at least one good point. I noted that the average federal pay advantage over the private sector has risen sharply in recent years. Folks pointed out that is because many low-skill federal jobs have been contracted out. I think that is part of the explanation, but some workers agreed with me that other factors are in play, such as ”inflation” in setting job classifications. And certainly, federal pay increases are consistent and generous, while private wages occasionally stagnate during economic slowdowns. And then there are those gold-plated government benefits….    

Punting on Medicare Reform

I just returned from lunch with Mark McClellan, MD/PhD (economics) and administrator of the Centers for Medicare & Medicaid Servicesa very smart guy. The lunch was hosted by Grace-Marie Turner of the Galen Institute and Merrill Matthews of CAHI. (Thanks for lunch, guys.) 

Dr. McClellan told the group of the success of Medicare Part D, including the fact that it has (so far) cost less than projected. 

When recognized for a question, I made the following points:

  1. Part D has contributed to a rift in the president’s base, as evidenced by an editorial in this morning’s Wall Street Journal.
  2. Though there is disagreement over the significance of Part D’s lower-than-expected spending projections, there is no question that Part D made it more difficult to meet Medicare’s already unsustainable promises. 
  3. One result of Part D is that people who would otherwise be talking about Medicare reform are talking only about whether Part D is a success. 

I asked Dr. McClellan when the president might begin pushing Medicare reform, in particular the kind of reforms discussed by the National Bipartisan Commission on the Future of Medicare in 1999. 

McClellan answered that the president’s budget proposes (a) slowing the growth of Medicare spending on hospital care, (b) requiring wealthier seniors to pay more for their Medicare benefits, and (c) having Congress create another Medicare commission to tackle the problem.

The first two proposals are both potentially helpful and woefully inadequate. The third is a punt. 

Today’s Wall Street Journal also reports that yesterday Alan Greenspan “repeated a warning to lawmakers, saying Medicare spending is unsustainable and could one day drive government debt and interest rates substantially higher.” The president has acknowledged his duty to address those unfunded liabilities. 

An anxious nation waits … and waits … and waits … .

Driven to Distraction

Not 24 hours after President Bush signed into law the latest round of tax cuts (which have no effect on the size of government), Republicans from around town gathered to gush about their Medicare prescription drug program (which increases the size of government).

I’ll not name names, but there were a few faces at the GOP love-fest who, in their hearts, truly want to reform Medicare.  The greatest tragedy of Part D might be the way it has distracted those Republicans from that purpose.

(Erratum: On a previous occasion, I accused the GOP of throwing your tax dollars off the back of a truck.  It appears Republicans have been using a bus rather than a truck.  I apologize for the error.)