Our fiscal policy goal should be smaller government, but here’s a video for folks who think that balancing the budget should be the main objective.
The main message is that restraining the growth of government is the right way to get rid of red ink, so there is no conflict between advocates of limited government and serious supporters of fiscal balance.
More specifically, the video shows that it is possible to quickly balance the budget while also making all the 2001 and 2003 tax cuts permanent and protecting taxpayers from the alternative minimum tax. All these good things can happen if politicians simply limit annual spending growth to 2 percent each year. And they’ll happen even faster if spending grows at an even slower rate.
This debunks the statist argument that there is no choice but to raise taxes.
The biggest long-term threat to fiscal responsibility is a value-added tax, as I’ve explained here, here, here, here, and here. So I’m delighted to see a growing amount of research showing that a VAT is bad news. Jim Powell has an excellent column at Investor’s Business Daily that makes a rather obvious point about the wisdom (or lack thereof) of copying the tax policy of nations that are teetering on the edge of fiscal collapse (this cartoon has the same message in a more amusing fashion).
Drums are beating in Washington for a value-added tax in addition to the “stimulus” taxes, health care taxes, energy taxes and other taxes President Obama has imposed and wants to impose on hard-pressed taxpayers. Supposedly a value-added tax is a magic elixir for curing budget deficits and excessive debt. Quack remedy would be more like it. If it worked, you’d observe that countries with a VAT had budget surpluses and no debt problems. But almost every country that has a VAT is plagued with budget deficits and excessive debt. … No surprise that the worst financial basket cases all have a VAT. Iceland has the highest VAT rates, but this didn’t prevent its financial crisis and the near bankruptcy of its government. Italy’s VAT rates are almost as high, and its debt exceeds its GDP. Financial crises are looming in Spain and Portugal, and of course they have a VAT. Greece has a VAT, too, and when politicians ran out of money to pay government employees for more than a year’s worth of work every year, they rioted in the streets. Great Britain has a VAT, and its government finances are in the worst shape since World War II — its budget deficit is expected to be bigger than that of Greece. Moreover, the OECD has acknowledged that “(VAT) tax and transfer wedges have discouraged firms from offering employment and individuals from taking it, reduced employment and increased inequality.”
And a new study by Douglas Holtz-Eakin and Cameron Smith finds evidence that a VAT would lead to bigger government.
VATs provide a significant amount of revenue. …But do these significant revenues cause government spending to grow larger? Or is it the case that adoption of a VAT is evidence of the desire for a larger government so that the causal arrow runs from a taste for Leviathan to a VAT, and not the reverse? …we find a statistically significant dynamic relationship between the rate of VAT taxation and the size of government. Although no single study is definitive, this is the first rigorous evidence that a VAT causes government to grow larger. …countries that adopted a VAT did in fact experience, on average, a 29 percent increase in the size of government. …The estimated coefficient of 0.262 indicates that adopting a VAT is associated with larger government. This estimate is statistically significant. …our results shift the burden of proof to those who deny that VATs fuel increases in the size of the public sector.
This study jumps into a long-running chicken-or-egg debate in the academic literature about whether higher taxes lead to higher spending or whether higher spending leads to higher taxes. This causality debate is interesting, but I’m not sure it really matters. A VAT is a terrible idea if it triggers bigger government, and a VAT is a bad idea if it merely finances bigger government. But I suspect this study is correct. The key thing to remember is that Milton Friedman was right when he warned that “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” This means that a VAT will allow more government spending and no reduction in deficits and debt, which is exactly what we see in Europe (and as Jim Powell noted in his column). Last but not least, this video summarizes the best arguments against a VAT.
In this week’s New England Journal of Medicine, MIT health economist and Obama administration consultant Jonathan Gruber responds to claims that ObamaCare will increase health care costs. Gruber acknowledges the Obama administration’s estimates that ObamaCare will increase health care spending, but compares that to the administration’s estimate that 34 million otherwise uninsured U.S. residents will obtain coverage under the law:
[B]y 2019, the United States will be spending $46 billion more on medical care than we do today. In 2010 dollars, this amounts to only $800 per newly insured person — quite a low cost as compared (for example) with the $5,000 average single premium for employer-sponsored insurance.
What a bargain! Of course, Gruber is being sneaky. The cost per newly insured person is not $800. It will be higher than $5,000. But only $800 of that cost will appear as new health care spending. The rest of that cost will be borne largely by people who already had coverage, but find their access to care reduced. These include Medicare enrollees who will receive fewer benefits through (or who will be ousted from) their private Medicare plans; Medicare enrollees who will have a harder time accessing care because some hospitals, skilled nursing facilities, home health agencies and other providers “might end their participation in the program,” according to the Obama administration; and maybe even some (currently) privately insured people who find themselves in Medicaid. (The administration itself says it is “probable” that ObamaCare “could result…in some of this demand being unsatisfied.”) Other costs include the economic growth and opportunity that is destroyed by ObamaCare’s tax increases, and the costs associated with trapping workers in low-wage jobs.
And that’s if everything goes as planned. Gruber remains convinced that future Congresses will not undo ObamaCare’s tax increases or downward adjustments to Medicare’s price controls, as Congress has consistently undone scheduled reductions in the prices that Medicare pays physicians. Gruber’s sometime employer – the Obama administration – itself contradicts his argument when it writes that the bulk of those reductions in Medicare spending are “doubtful” and “unrealistic.” Gruber inadvertently shows why critics are right to be skeptical about the tax increases and spending reductions when he writes:
The cuts in spending and increases in taxes are actually “back-loaded,” with the revenue increases rising faster over time than the spending increases, so that this legislation improves our nation’s fiscal health more and more over time.
The fact that the austerity measures had to be backloaded is a sign of their implausibility. If they were popular, they could take full effect tomorrow. But their implementation had to be delayed to head off significant political resistance – resistance that will express itself between now and when those austerity measures take effect.
On the broader issue of reducing the growth of health care spending, Gruber claims that ObamaCare “cautiously pursue[s] many different approaches toward cost control and stud[ies] them to see which ones work best.” Yet each approach is all but guaranteed to fail. The tax on high-cost health plans? Unlikely to survive. (But at least Gruber now admits it is a tax.) The rationing board designed to curtail each congresscritter’s ability to keep the money flowing to health care providers in their districts? Also unlikely to survive, for obvious reasons. Pilot programs experimenting with different government price and exchange controls? Even successful pilot programs get nixed. Comparative-effectiveness research? A pipe dream that fails every time the government tries it.
To the extent that these spending cuts fail to materialize, health care spending will rise, and deficits will deepen. Congress will need to impose additional tax increases, and/or find sneakier ways to
ration medical care curb health care spending. Gruber’s Massachusetts enacted ObamaCare four years ago, and that’s exactly what state officials are doing.
Since President Obama signed this law, the Congressional Budget Office has announced that its cost, including the so-called “doc fix” and spending subject to appropriations, is already about $200 billion higher than previously believed. As I’ve written elsewhere:
ObamaCare would create new constituencies for government spending, hook existing constituencies on even more government spending, and promise implausible cuts in existing subsidies to constituencies that are highly organized and vocal.
Gruber gets chutzpah points for arguing that the same law would actually contain health care costs.
A correspondent for The Economist, whose initials are M.S., posts this on the Democracy in America blog:
[T]he new health-care-reform law passed in March is an entirely private-insurer, free-market-based reform. If someone were to refer to it as a “government takeover of the health-care sector”, that person would hold a factually incorrect ideological belief.
I wonder what convinced M.S. that the new health care law is an entirely free-market-based reform. Was it the expansion of the government’s Medicaid program to another 16 million Americans? Was it the 19-million-plus other Americans who will receive government subsidies to purchase private health insurance? Was it the new price controls that the law imposes on health insurance? Or the price and exchange controls that it will extend to even more of the market? Was it the dynamics those regulations set in motion, which will reduce variety and innovation in health insurance? Was it the mandates that require private actors to spend their resources according to the wishes of the state? Or the new federal regulations that will shape every health insurance plan in the United States, whether purchased through the employer-based market, the individual market, or the new health insurance “exchanges”? Was it the half-trillion dollars of (explicit) tax increases over the next 10 years?
I wonder what it is about this law that M.S. thinks is consonant with the principles of a free market. Perhaps we have a different idea of what “free” means.
M.S. lists other “factually incorrect beliefs,” including:
that the Clinton plan would deny patients their choice of doctor, and that the health-care-reform bills in Congress at the time involved government “death panels” that could decide to withhold care from elderly patients on a cost-benefit basis.
I won’t dredge up the Clinton health plan. But I have previously demonstrated that, when Sarah Palin claimed that President Obama wanted to give a government panel the power to deny medical care to the elderly and disabled based on cost-effectiveness criteria, the president had in fact proposed a panel with the power to do exactly that.
I agree with M.S. about this much: “once people are exposed to false information, it’s extremely difficult to convince them it’s false.”
Senate Budget Committee chairman Kent Conrad has released his budget plan for the next five years. The following are some thoughts on the proposal:
In sum, there’s not much difference between Conrad’s proposal and the President’s. Both would continue the massive spending, deficits, and debt that are bankrupting the country.
David Goldhill has done it again.
You may recall his article, “How American Health Care Killed My Father,” from the September 2009 issue of The Atlantic.
Now, at HuffingtonPost, he comments on the health care legislation that may soon face a final vote (of some sort) in the House:
[C]ontinuing our Party’s almost unquestioned conflation of health insurance with health care, the central feature of the proposed “reform” is further extension of our flawed insurance-based system…[D]espite the Administration’s recent heated rhetoric, most of the entrenched health industry interests are quietly or openly in favor of this bill. Should the bill become law, I suspect we will look back at it as an industry bailout…
How…can Democrats in the depths of a recession support a massive tax increase on middle-class job creation…? How…could we justify diverting even more of middle class income to support our broken system of care, further starving families of funds for all their other needs? Most uninsured Americans lack insurance only temporarily; how many of them would trade lesser lifetime job prospects and lower disposable income for the short-term retention of health insurance?…
If the legislation had any real prospect of controlling health care spending, would the pharmaceutical industry be funding the “yes” campaign?
As a former Democrat who hung door knockers for Michael Dukakis in 1988, I know the heavy heart with which he writes. Read the whole thing.
Watch the video to hear Goldhill’s story:
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