Bush’s Standard Health Insurance Deduction: Tax Hike or No?

National Review’s Ramesh Ponnuru takes the Bush administration’s economist Kate Baicker and spokesman Tony Snow to task for what he suggests is a misleading representation of the President’s proposed “standard health insurance deduction.”

Briefly, under that proposal, most people who purchase health insurance would receive a substantial tax cut.  However, some workers would no longer be able to exempt from taxation the full amount of their health benefits.  Individuals who now receive more than $7,500 in health benefits, and families that receive more than $15,000 worth, would have to pay taxes on the difference. 

Ponnuru writes:

Snow and Baicker are right to say that if the proposal becomes law, compensation packages will adjust, with expensive plans being scaled back and the savings passed on in higher wages. But those higher wages will be taxed. No matter how the compensation package is rearranged, the percentage of compensation that is taxed will go up for these people.

My Cato colleague Arnold Kling concurs.  I disagree.

I think there are ways to avoid a tax increase, though I agree with Ramesh that this New York Times article didn’t do enough to explain how. 

In today’s New York Sun, I discuss the prospect of tax increases on workers with expensive health benefits:

Though that’s troubling, it is by no means certain. In fact, those workers may not face a net tax increase at all, because the President’s proposal would reduce other costs on those same workers. One such “tax” is the higher health care costs that result from the current employer-sponsored system. The President’s proposal would reduce that tax. Another is the current penalty imposed on workers who do not buy coverage through an employer. The President’s proposal would eliminate that tax.

Finally, when premiums exceed the proposed deductions, employers could reduce health benefits and shift the difference to other untaxed compensation, such as contributions to health savings accounts, life insurance, or 401(k)s. That would leave those workers with zero additional taxes. Or they could shift that difference to wages, in which case the workers would pay taxes on it, but their take-home pay would rise.

Of course, it would become more difficult to avoid a tax increase over time.  The deduction amounts would rise with overall inflation, while health insurance premiums traditionally have risen much faster.

I’ll be discussing these issues with Kate Baicker and the Urban Institute’s Len Burman at a Capitol Hill briefing tomorrow.

Hurray for Profits

Good news from the oil industry: ExxonMobil announced a record after-tax profit of $39.5 billion for 2006.


That is great news because it means the company will have more funds to reinvest in exploration, refinery expansion, drilling platforms, chemical plants, and all those other brilliant machines that American families benefit from every day.

The firm invested $20 billion in exploration, structures, and equipment in 2006 and $18 billion in 2005. See here and here.

High profits are a signal to ExxonMobil management, other energy companies, and Wall Street to feed this industry more capital and to continue increasing energy production. That’s good news for U.S. energy security and U.S. consumers.

The bad news with high corporate profits is that governments confiscate so much of them. In 2005, the firm paid current income taxes of $23 billion on pre-tax profits of $59 billion, for an effective income tax rate of 39%. (The firm also paid $31 billion in excise taxes to governments). Of course, Exxon simply collects these taxes on behalf of governments–the ultimate burden falls on individuals.

(In 2006, income taxes were $28 billion on pre-tax earnings of $67 billion, but I couldn’t find the breakdown of current vs. deferred tax)

Anyway, kudos to Exxon for their fine performance!

President Bush Answers Critics on Trade

President Bush has gone on the offensive this week, touting the generally solid performance of the U.S. economy and the danger posed to our market-driven prosperity by rising protectionist sentiments in Congress.

In a speech yesterday in the historic Federal Hall in New York City, the President sounded a clear trumpet in defense of free trade. In a rarity for politicians of any stripe, he not only extolled the virtues of exports but also of imports, and bluntly warned against “walling off America from world trade.”

Here are a few highlights from the speech:

“As we improve free trade, consumers get lower prices.” 

“Since World War II, the opening of global trade and investment has resulted in income gains of about $9,000 a year for the average American household.” 

“The Doha Round … is a great opportunity to lift millions of people out of poverty around the world.” 

“I know there’s going to be a vigorous debate on trade, and bashing trade can make for good sound bites on the evening news. But walling off America from world trade would be a disaster for our economy. Congress needs to reject protectionism, and to keep this economy open to the tremendous opportunities that the world has to offer.” 

Of course, the President will need to work with skeptical Democrats in Congress to pass pro-trade legislation and stop any anti-trade measures.

In the meantime, the President can put his pro-trade words into action unilaterally. A recent article in The Weekly Standard cites several good ideas from your favorite libertarian think tank on actions President Bush could take independently of Congress to expand the freedom of Americans to trade in the global economy.

Cavalcade of Risk #18 Is Up

Joe Paduda hosts a rather comprehensive edition of the Cavalcade of Risk over at his Managed Care Matters blog. Paduda takes issue with two of my recent blog posts. 

1. The first is a post where I argued that an individual mandate will not solve the free-rider problem. One reason is that people with health insurance account for about one-third of the free-rider problem

Paduda suggests that this portion of the free-rider problem could come from providers who claim that they were uncompensated because the insurance companies or the patients did not pay as much as the provider billed. That’s a recurring problem with many estimates of uncompensated care. (Providers charge everyone the “list price” even though they don’t expect to receive it. Then they claim that the difference between the list price and the actual price was uncompensated care. By that rationale, car dealers lose millions every year to “uncompensated automobiles.”) 

The study I cited, however, based its measure of uncompensated care on the question, “How much would providers have been paid if the uninsured had been covered by private insurance?” That takes list prices out of the equation.

2. The second is a post where I argue that insurance markets do not naturally succumb to adverse selection. Rather, adverse selection only becomes a problem when insurers do not adjust premiums according to risk. Therefore, those who would prohibit risk-based premiums are largely responsible if insurers respond by trying to avoid sick people. 

Paduda responds that “the end result of Mr. Cannon’s prescription is full self-insurance for all health care costs.” I don’t know how that conclusion follows. As I understand it, the end result of risk-based premiums is that people keep purchasing (third-party) insurance until the costs of moral hazard and loading costs exceed the benefits of risk protection.

Taking on Leviathan

I attended the Conservative Summit sponsored by National Review this past weekend.  There was a strong grassroots hankering for smaller government. Ironically, the event showcased a number of leaders and ideologies that Michael Tanner shows in Leviathan of the Right to be the source of the problem with the conservative movement.

In part as a reaction to this Summit, I came up with a Request for Ideological Comment.   It starts to articulate a strong, positive vision for limited government.

1. We weave a thread of self-reliance into a sturdy fabric of interdependence. By respecting the law, we reinforce impersonal justice. By competing intensely and fairly in an impersonal global market, we raise our standard of living through specialization and innovation. By upholding Constitutional principles for limited government, we sustain our individual freedom…

A total of ten principles are stated.  I would love to have other Cato bloggers give their comments on what I call the IATF RFC.


BBC Story Highlights Moral Bankruptcy of Europe’s High-Tax Politicians

As noted previously, high-tax European governments are upset that taxpayers are fleeing to Switzerland. The economic aspects of this issue are important, but a BBC story raises two interesting philosophical questions. First, the socialist candidate for the French presidency accuses Switzerland of “looting” its neighbor. But this implies that individuals belong to the government and that they do not have the individual freedom and sovereignty to choose where they want to live. Second, the European Union’s Ambassador to Switzerland argues that low tax rates are a subsidy. This argument implies that income belongs to government and it creates a moral equivalence between an interest group that seeks to seize other people’s wealth through the political process and taxpayers who merely want to keep more of their own money. Sounds absurd, but read the BBC report:

Switzerland’s decentralised taxation system is causing irritation among its European Union neighbours. The row was triggered by the decision, late last year, of the French rock star Johnny Hallyday to leave France and take up residence in the Swiss Alpine resort of Gstaad. …In France, where Hallyday is a national icon, there is anger. Advisers to the French presidential candidate Segolene Royal have accused Switzerland of “looting” its neighbours. …Swiss cantons are allowed to set their own taxes and many are now engaging in an internal corporate tax-cutting competition. Canton Obwalden, in central Switzerland, slashed its corporate tax rate to just 6.6% at the start of 2006; it attracted 376 new companies in just 11 months. The European Commission has warned that this may constitute an unfair subsidy under the European Free Trade Agreement. “Talk to any tax expert,” said Michael Reiterer, the commission’s new ambassador to Switzerland. “This is recognised as a subsidy. And there we think Switzerland should think a bit whether behaviour which is clearly outlawed in the EU is the best policy to follow in such a close relationship between two partners.” …Stefan Kux, head of economic development for Zurich, is not the least bit worried by the complaints from Brussels, in fact he sees them as quite positive. “We are profiting from the mistakes of our neighbours,” he explained. “They are making economic promotion for us for free, everyone now knows that Switzerland has an excellent tax system, so I’m very grateful.” …within the Swiss government there is little patience with Europe’s objections over tax. “The Swiss position is on very safe ground,” insisted Adrian Sollberger, spokesman for Switzerland’s office of European policy. “We do not have an agreement to harmonise taxes, none whatsoever, so by definition there cannot be any infringement of any agreement between Switzerland and the EU.” …the Swiss government will not budge; ministers say they view an attack on the tax system as an attack on Swiss sovereignty. The row is sure to simmer on. Meanwhile the businesses and the celebrities just keep on coming.

John McCain’s Empty Threat

The NYT has a front-pager this morning on the fact that “In Senate, Allies of Bush Attempt to Halt Iraq Vote.” It describes a resolution offered by John McCain, Joe Lieberman, and Lindsey Graham that seeks to “set benchmarks for the Iraqi government and describe the troop increase as a final chance for the United States to restore security in Baghdad.”

“Final chance?” Sounds serious. But is it? Consider McCain and Lieberman were at AEI earlier this month, warning, in the case of Senator McCain, that if we were to leave, it would be “the beginning of the end, in some respects” of Western civilization.

But say you’re an adviser to Maliki, and you see these two offering a resolution that says this is your last chance, this is it, we’ll pull the plug if you can’t get it together. (Put aside the fact that there’s no chance either of them would ever vote to actually cut off funding for the war, the only practical tool Congress has to stop it.) Then your researchers bring you their AEI presentation in which McCain says it’s the beginning of the end of Western civilization if we leave.

Would you be worried? Would you think “Uh oh, if we don’t meet all of the American objectives, John McCain and Joe Lieberman are going to stop supporting the war. Of course, in their own minds, leaving on those terms would mean the beginning of the end of Western civilization, but they still might do it!” Doubtful.

If John McCain and Joe Lieberman think the stakes are as high as they implied at AEI, then they should just say flat-out: We can’t leave, no matter what, unless we achieve our goals. That’s an honest position, although one I think profoundly misguided.

Of course, the American people wouldn’t be too hot on such a proclamation. They certainly wouldn’t be inclined to, say, elect someone who said that to be president. But consistency’s never been McCain’s strong point.

It’s almost like the guy’s running for president or something.