Topic: Government and Politics

Health Care Reform: WWJD?

Today’s post comes from my theologian father:

There was a man (M) going down from Jerusalem to Jericho who needed health care (Luke 10:25-37).  All bypassers were free to provide for him or keep walking.  The Priest (P) and the Levite (L) used their freedom in one way and the Samaritan (S) used his the another way.

WWJD?  He said do what S did.  (M’s quality of care was outstanding.)

WWJND?  He did not say that S, P, and L should agree on the level of care and funding for M and chip in.  Maybe He realized that P and L had a bullet-proof majority.  Maybe He realized the time, attention, care, funding, and personal touch of S were very important.  Maybe He realized that even if M got to an inn, the innkeeper would be at risk for exceeding guidelines and would have to wait longer to be reimbursed.  Maybe He realized the devil was in the details and could complicate or possibly compromise M’s care: the timely availability of government run donkeys (ambulances); inns (hospitals); professionals at every point in the chain and in between; plus, auditors to prevent fraud and abuse.  The moral lesson Jesus drew was: use your freedom to care for your neighbor and do not hand it over to P and L if you want your neighbor and yourself to get to Jericho.

Today, millions of Ms are by the side of the road in nursing homes, and the Ps and Ls have already said they want to shrink their funding so they can fund care for the rest of us.  Sympathy and sentiment are wonderful but do not always work well as criteria for good policy.

Jesus was a magnificent policy wonk.

For more on how the Parable of the Good Samaritan applies to health policy, click here and here.

The Price We All Pay for High Tax Rates

Politicians tend to like high tax rates because they believe it yields more revenue for them to redistribute.  Yet the perverse incentive effects of high rates tend to limit the increase in revenue, since the higher the rates, the more worthwhile are tax avoidance activities.  At some point it becomes better to consume than invest and play than work, since the rate of return is so low.

Reports Robert Carroll for the Tax Foundation:

Economic Effects of High Tax Rates
High tax rates discourage work, saving and entrepreneurship. They also encourage taxpayers to rearrange their tax affairs to receive more of their compensation in less heavily taxed forms and to take greater advantage of the myriad tax preferences in today’s tax code. For example, taxpayers can reduce their tax bill by financing more of a home purchase, receiving more of their compensation as tax-free fringe benefits, or rebalancing their investment portfolios towards tax-exempt state and local government bonds.

It’s important to remember that every time a taxpayer makes a decision based on tax considerations rather than economic merit, we all lose. It wastes resources by redirecting them to less productive uses. The cost of high tax rates is not trivial. Research on the major changes in tax rates over the last several decades—the lower tax rates enacted in 1981, 1986 and 2001 or the higher tax rates enacted in 1993—finds that the behavioral responses can be large. This research generally finds that for every 1 percent decrease in the after-tax reward from earning income, taxpayers reduce their reported income by about 0.4 percent.

This does not mean that tax cuts pay for themselves. Rather, tax rate changes can have a profound effect on the size of the tax base, with lower tax rates increasing the size of the tax base and higher tax rates, such as those proposed by President Obama, shrinking the tax base. A shrinking tax base is not only suggestive of the economic costs of high tax rates, but also means that the government will take in less revenue than the casual observer might assume.

High Tax Rates Will Shrink the Federal Income Tax Base
Consider the combined effect of President Obama’s proposal to raise the top tax rate from 35 percent to 39.6 percent and the new surtax. This means high-income households will receive 54 cents rather than 65 cents from every dollar they earn; that is, the after-tax reward from earning income falls by 17 percent. Based on the research mentioned above, with such large increases in tax rates, we can expect taxpayers facing the top tax rates to reduce their reported incomes by nearly 7 percent.

What is critically important from the government’s perspective is that while it collects an extra 10 cents for every dollar subject to the higher rates, it loses over 45 cents for every dollar by which reported income falls due to taxpayers working less or otherwise reporting less income.

Overall, simulating the effect of the higher tax rates in 2011 shows that the federal government can expect to raise at most only 60 cents on the dollar. While “large” is always in the eye of the beholder, losing 40 cents on a dollar should cause us all to question this policy. Moreover, this is a cautious estimate. It is based on the behavioral response estimated for the overall taxpaying population, even though high-income households are likely to be much more responsive. Thus, we might expect an even faster shrinkage of the federal tax base from these tax increases.

President Barack Obama wants Americans to believe that they can enjoy all of his proposed programs without paying for them because “the rich” will cover the cost.  Alas, this is a dangerous political fantasy.  Taxing “the rich” will only be the start.  To get real money, the big spenders are going to have to tax the middle class as well.  There ain’t no such thing as a free lunch–or a free government program!

Measuring Policy Success

NPR reported this morning that “Cash for Clunkers” style programs in Germany and France are “popular and successful.” Successful by what standard? I see that the Wall Street Journal has reported that in Europe “’cash for clunker’ programs have breathed fresh life into a battered auto industry.”

Yes, by that standard, no doubt subsidies for buying cars are successful in encouraging the sale of cars. Certainly subsidies to homebuying encouraged the buying of homes. A “Cash for Computers” program would “breathe fresh life” into computer sales. Make it “Cash for Compaq” or “Cash for Windows,” and you could direct purchasers to particular companies.

But to declare a policy successful, shouldn’t you mean that it makes the country better off? And that means that the subsidies produced more economic growth or more overall consumer satisfaction than a policy of nonintervention would have. That’s a much harder standard to meet. Subsidies by definition divert consumer choices from their natural outcome. Economists generally agree that subsidies create deadweight losses for society. And sometimes, by distorting consumer decisions and encouraging decisions that don’t make real economic sense – as in the long effort to channel consumer resources into housing – subsidies eventually prove unsustainable and unstable.

Indeed, it seems likely that another part of the Wall Street Journal was correct when it described “Cash for Clunkers” as “crackpot economics.”

Time for a Change in Sugar Policy

Washington’s dysfunctional agricultural policy is costing consumers again.  Limits on sugar imports, designed to protect a few large sugar producers, are driving up prices in a tight market.  Reports the Wall Street Journal:

Some of America’s biggest food companies say the U.S. could ‘virtually run out of sugar’ if the Obama administration doesn’t ease import restrictions amid soaring prices for the key commodity.

In a letter to Agriculture Secretary Thomas Vilsack, the big brands – including Kraft Foods Inc., General Mills Inc., Hershey Co. and Mars Inc. – bluntly raised the prospect of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies, chewing gum and thousands of other products.

The companies threatened to jack up consumer prices and lay off workers if the Agriculture Department doesn’t allow them to import more tariff-free sugar. Current import quotas limit the amount of tariff-free sugar the food companies can import in a given year, except from Mexico, suppressing supplies from major producers such as Brazil.

While agricultural economists scoff at the notion of an America bereft of sugar, the food companies warn in their letter to Mr. Vilsack that, without freer access to cheaper imported sugar, ‘consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted.’

Officials of many food companies – several of which are enjoying rising profits this year despite the recession – declined to comment on how much they might raise prices if they don’t get their way in Washington.

The letter is the latest salvo fired in a long-simmering dispute between U.S. food companies and the sugar industry over federal policy that artificially inflates the domestic price of U.S.-produced sugar in order to support the incomes of politically savvy sugar-beet farmers on the Northern Plains and cane-sugar farmers in the South. Most years, the price food companies pay for U.S. sugar is twice the world level.

President Barack Obama ran on the platform of change.  How about changing agricultural policies which enrich the farm lobby at consumer and taxpayer expense?

The Government Habit

Someone once observed that the problem with conservatives is that they want to ban anything that they don’t like and the problem with liberals is that they think anything good ought to be subsidized by taxpayer dollars.  And so it goes with needle exchanges.  Too many jurisdictions ban needles from stores.  And then the liberals who fight the bans want to leap over to government funding for needle exchanges.  It is as if no one has considered the idea that the government should just stay out of it altogether.