Topic: Tax and Budget Policy

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.)

GOP Proposes $1.7b More for Medicare Rx

A couple of days ago, I blogged that Republicans are thinking about eliminating the late enrollment penalty for Medicare Part D. Reneging on that penalty would (1) defeat the only sensible aspect of Part D, (2) increase the tax burden of Part D by $1.7 billion over five years, and (3) ruin the credibility of future cost-containment efforts that hinge on changing seniors’ behavior.

Lo and behold, the drive to eliminate the late enrollment penalty has begun. Front and center is the Republican chairman of the Senate Finance Committee—Chuck Grassley of Iowa. Co-sponsors of Grassley’s bill include such conservatives as Jon Kyl (R-AZ) and Rick Santorum (R-PA).

And the Republican campaign to expand the federal government marches on…

Missing the Point

The Bush administration’s self-delusion about the state of the federal budget continues. At a speech at AEI yesterday, Karl Rove claimed that the growth rate in the nondefense, non-security portion of the budget had fallen. Fiscal conservatives who complain about spending are “missing the facts” Rove says. 

Yes “growth rates” are down in this small portion of the budget from the massive growth rates of earlier in the decade. But here, from the most recent federal budget, are the more important facts on Bush’s first five years. Data for fiscal 2006 are Bush estimates (actual 2006 spending is likely to be higher) in billions of dollars. 

2001 federal outlays 

Total: $1,863 

Department of Defense: $290 

Department of Homeland Security: $15 

Total outlays less defense and homeland security: $1,558 

2006 federal outlays

Total: $2,709 

Department of Defense: $512 

Department of Homeland Security: $44**

Total outlays less defense and homeland security: $2,153 

(**Homeland Security spending spikes in fiscal 2006 due to Katrina. To roughly take out this effect, I used the 2007 figure of $44 billion). 

What we have then over Bush’s 5 years is a 45 percent increase in federal spending and a 38 percent increase in spending excluding defense and homeland security. 

Of course, the Bush administration shouldn’t get a free ride for its massive increase in defense and security spending. Pentagon spending is notoriously wasteful, and much “homeland security” spending is either wasteful or properly the responsibility of state governments or the private sector. All added spending sucks more resources out the private economy and the average American’s wallet. 

Why Massive Tax Increases Are Not Inevitable

Optimistic economist (no, that’s not an oxymoron) David Henderson provides some food for thought on the question of whether the explosion in government spending – current and future – will inevitably lead to a tax increase. Henderson argues in this very compelling essay from the Hoover Institution’s journal Policy Review that the prospects for entitlement reform and spending restraint are not as grim as some conservatives and libertarians think they are.

Government revenue has never exceeded 21 percent of GDP in the past half-century. And as Brink Lindsey pointed out on this blog last week, government spending has been stable for at least a generation. These conditions persist for a variety of reasons, but Henderson suggests the primary influence is a “political equilibrium” we have reached in the U.S. That equilibrium is likely to tip in favor of entitlement reform as the Social Security and Medicare systems become more costly per worker than they are now.

Thus, the odds are that when it finally becomes politically necessary to do something about the entitlements problem, reform is likely to be the more politically preferred avenue than massive tax hikes. Just because something is not yet politically feasible, argues Henderson, does not mean it never will be.

Money quote:

“The budget numbers are such that various market-based reforms will be looked at seriously – soon and for a long time. We must not give up on these reforms because they are not politically popular today. What reformers should do, instead, is keep honing their proposals for reining in government spending and keep their powder dry.”

Tax Cut Facts

Congress has just passed a $70 billion tax cut, which extends the Bush dividend and capital gains reductions until 2010. The legislation also provides many taxpayers a further year of relief from the dreaded Alternative Minimum Tax.

Another huge tax cut, right? The Washington Post on May 11 editorialized that the bill would blow “a hole in the federal budget.”

Actually, this tax cut just extends prior cuts and has only a tiny impact on the budget. This bill: 

  • reduces federal revenues over the next five years by just 0.5 percent.
  • represents a small fraction of the budget impact of recent spending increases. This tax cut bill is $70 billion over five years, or just $14 billion per year. Compare that to the increase in total federal spending this year of about $240 billion or more.

Note that the $70 billion estimate is an official ”static” score. In reality, investor tax cuts don’t lose the government that much money because of dynamic feedback effects. As an illustration, consider the capital gains tax cuts of 2003. In 2002, the government received $58 billion in capital gains tax receipts. Congress then cut the capital gains tax rate from 20% to 15%. The result? Annual capital gains realizations have almost doubled and capital gains tax receipts have increased substantially—to about $81 billion by 2006. (See Congressional Budget Office, Budget Outlook, January 2006, p. 92).