Topic: Tax and Budget Policy

NYT Feigns Concern over Cost Overruns in Massachusetts Health Plan

Today’s New York Times ran my response to the Grey Lady’s recent editorial on the Massachusetts health plan:

Your editorial lauds the Massachusetts health care reforms as “off to a good start” and “heartening.” The editorial addresses the reforms’ higher-than-projected costs thus:

“The shortfall occurred mostly because the state underestimated the number of uninsured residents and how fast low-income people would sign up for subsidized coverage. It is a warning to other states to keep projections realistic.”

I’m sorry, but if states can low-ball the cost of reforms to get them enacted, and still get praised by the paper of record, that’s exactly what they’ll do. Some “warning.”

Who Is This Crazy Supply-Sider?

“Supply-side” economics is the simple notion that tax rates affect growth. One of the key observations made by supply-siders is that policy makers should pay close attention to the relationship between tax rates, taxable income, and tax revenue - particularly since higher tax rates can reduce incentives to earn and report taxable income, which therefore means there is not a linear relationship between tax rates and tax revenue. There is even a “Laffer Curve” which shows that excessive tax rates can lead to less revenue, though the main use of the Curve is to show that higher tax rates will collect more money, but not as much as predicted by the simplistic models used by revenue estimators.

The beltway establishment routinely sneers at supply-side analysis, in part because some Republicans overstate the argument by claiming that every tax cut (even useless gimmicks such as rebates and credits) will generate more revenue. Properly understood, however, the Laffer Curve is a very useful tool for steering tax policy in the right direction - i.e., lower tax rates and reductions in the tax bias against saving and investment. Interestingly, there was a prominent Democrat who understood the Laffer Curve, and he gave a speech about it years before Art Laffer came on the scene and popularized the concept. Can you imagine Senator Obama giving this speech?

To be sure, based on a scientific poll of my children, President Kennedy clearly does not have the charisma and charm of the person in this video, but he clearly understands that there is a relationship between tax rates, taxable income, and tax revenue. And while a bit of Keynesianism is detectable (the discredited notion that tax cuts boost the economy by putting money in people’s pockets, which somehow overlooks the fact that government only gets the money to put in people’s pockets by first taking it out of their pockets), it is worth noting that Kennedy’s proposal was a pure supply-side mix of permanent tax-rate reductions.

Obama Tax Proposals

Candidate Obama has introduced an array of tax proposals, which he discusses in various places on his campaign website. There are four overlapping themes in the Obama tax proposals the way I see it:

  1. Social engineering.
  2. Discrimination.
  3. Economic micromanagement.
  4. Empty populism.

Under social engineering, I would put Obama’s plan to greatly increase the dependent care tax credit. That would further encourage parents to find institutional day care for their children, rather than providing care themselves.

Under discrimination, I would put Obama’s proposed special tax break for the elderly. The federal fiscal system is already heavily tilted in favor of the elderly, thus it is unclear why Obama would want to further discriminate against the young. 

Obama’s “American Opportunity Tax Credit” also creates unfair discrimination. This new tax break for college essentially increases subsidizes for future lawyers, accountants, and other professionals. Why subsidize these folks who will likely have much higher earnings than factory workers, retail clerks, and others who don’t go to college?

Under economic micromanagement, I would put Obama’s Patriot Employer Act, which provides tax breaks to certain businesses that jump through hoops related to hiring, wages, and other items.  Obama wants to cut capital gains taxes on certain investments and increase capital gains taxes on others, and he is proposing various narrow energy tax breaks. 

Under empty populism, I would put Obama’s railings against “tax haven abuse” and “corporate loopholes.” If Mr. Obama really wanted to reduce corporate tax avoidance–rather than just using it as a campaign prop–he would join with John McCain and call for an across-the-board corporate rate cut.

A final category might be “innocuous tax cuts that do nothing for economic growth.” Here I would put Obama’s $500 payroll tax credit called “making work pay.” If Obama had wanted to spur employment, he should have proposed a cut in the payroll tax rate, which would change the marginal incentive to work, unlike the proposed credit.

In sum, Obama’s tax proposals are pretty awful. It is true that many Republicans and Democrats have proposed similarly bad tax ideas over the years. But Obama can be contrasted with candidate McCain, who thus far has avoided narrow favoritism in his tax proposals, and favors broad-based tax reductions designed to spur economic growth.  

The Amazing Story of Medicare’s Low Administrative Costs

How is it that a government bureaucracy like Medicare can keep it’s administrative costs so much lower* than private health insurance? 

Today’s Washington Post may have the answer: “Medicare Pays Most Claims Without Review.”  That was the sub-head of an article on today’s front page.  The headline was, “Medical Fraud a Growing Problem.”

So, what kind of fraud are we talking about here?

All it took to bilk the federal government out of $105 million was a laptop computer.

From her Mediterranean-style townhouse, a high school dropout named Rita Campos Ramirez orchestrated what prosecutors call the largest health-care fraud by one person. Over nearly four years, she electronically submitted more than 140,000 Medicare claims for unnecessary equipment and services. She used the proceeds to finance big-ticket purchases, including two condominiums and a Mercedes-Benz

Law enforcement authorities estimate that health-care fraud costs taxpayers more than $60 billion each year.

Woah!  That’s a lotta coin!  How can it be so easy to bilk Medicare??

Health-care experts say the simplicity of Campos Ramirez’s scheme underscores the scope of the growing fraud problem and the need to devote more resources to theft prevention…

What’s that you say?  Not enough administrative resources dedicated to preventing fraud?

A critical aspect of the problem is that Medicare, the health program for the elderly and the disabled, automatically pays the vast majority of the bills it receives from companies that possess federally issued supplier numbers.

So Medicare’s approach to paying claims is not unlike, say, shoveling money out the door?

Officials who oversee the Medicare program say they are vigilant despite time pressure and limited resources. Employees review fewer than 5 percent of the nearly 1 billion claims filed each year…This year, CMS is working to finalize a rule that would prevent convicted felons from obtaining Medicare billing numbers.

But the important thing here is that Medicare is keeping administrative costs down, and passing the savings on to you, the taxpayer.

*Claim not valid in your state.  Or any state.

A Stagflation Sideshow: The Wall Street Journal’s Flawed Theory of Oil Prices

Yesterday’s Wall Street Journal editorial “The Stagflation Show” (June 9) has a graph showing the price of oil generally rising while the fed funds rate was falling (if you don’t look too closely at flat or falling oil prices from November through February).

The conclusion is that if the Fed had not cut interest rates since last September the oil price would not have go up. Perhaps so, but the most obvious reason for any link between Fed easing and oil prices is not mentioned at all. And the stated reason (a “dollar rout and commodity boom”) is at odds with the facts. The timing is way off.

The most obvious connection between oil prices and Fed policy is cyclical.

There have been nine big spikes in oil prices since the 1950s and every one of them was followed by a U.S./world recession within a year.

Every recession, in turn, was followed by a huge drop in the price of crude oil. West Texas crude fell by 44-71% in the wake of the last three recessions.

If the Fed had left the interest rates on bank reserves at 5 ¼% – the U.S. would very likely have led the world into a significant recession long before now. And a U.S./world recession would indeed have pushed the oil price down. But that is not what the Journal editorial page seems to be suggesting. Instead, they blame the Fed for a “dollar rout and commodity boom.”

The big spike in oil prices since early March happened when the dollar was not falling and also when prices of many non-energy commodity prices were falling. There has been no dollar rout and a no generalized commodity boom since February (when oil fell as low as $87 even as food prices soared).

The Fed’s trade-weighted index of the dollar’s value against 26 currencies was 95.77 in March and 95.83 in May. The narrower index of 7 major currencies was 70.32 in March and 70.75 in May.

From March 4 to June 3 The Economist index of 25 commodity prices – excluding oil –fell by 7.8% in dollars (from 271.9 to 250.6) but by only 5.7% in British pounds. The dollar price of wheat fell by 40%, cotton by 26%, and prices have also fallen sharply for livestock, lumber and most industrial metals. This is a “commodity boom”?

It is true that lower short-term interest rates have made it cheaper for producers and “speculators” to hold crude oil off the market (e.g., in tankers or in the ground) if they expect a higher price in the near future. But speculation in the futures market can’t keep prices in the cash (spot) market higher than the market will bear. And the world does not have an unlimited budget to pay more and more for petrochemicals and fuel. As firms cut back or shut down production in energy-intensive industries worldwide (U.S. airlines are just the most obvious example) the demand for oil can drop quickly.

Oil above $130 involves a massive transfer of income away from oil-importing countries, raising their cost of living and cost of production. That greatly increases the likelihood of a significant economic slowdown or contraction in most oil-importing countries, even India and China. And that, in turn, always causes the price of oil to collapse.

What Use are Campaign Economists?

An irony of modern presidential campaigns is that they bring on board top tier economic advisors, but that doesn’t stop them from injecting economic nonsense into candidate speeches.  

Candidate Obama just added some skilled economists, but that didn’t prevent him from making ridiculous claims about recent economic policies in a speech yesterday. Take one Obama statement: “our president sacrificed investments in health care, and education, and energy and infrastructure on the altar of tax breaks for big corporations and wealthy CEOs.” Obama is wrong on every point in this remark.

Here are the facts from the federal budget looking at Bush’s first 7 years in office (FY2001 to FY2008):

  • Department of Health and Human Services spending up 67 percent in 7 years of Bush.
  • Department of Education spending up 92 percent in 7 years of Bush.
  • Department of Energy spending up 42 percent in 7 years of Bush.
  • Federal capital investment outlays up 35 percent for nondefense and 131 percent for defense in 7 years of Bush.
  • Federal corporate tax revenues up a stunning 128 percent in 7 years of Bush.

All these figures are available to the Obama campaign in the Federal Budget—Historical Tables. There is no reason for Obama and his advisors to make up nonsense statements about supposed spending cuts, when there are plenty actual failed economic policies that Bush could be criticized for.

A Flat Tax in New Brunswick?

Canada’s Atlantic provinces historically have been statist, but decades of big government have not worked and now policy makers are looking to adopt a growth-friendly 10 percent flat tax to boost the economy.

Alberta already has a flat tax, which has worked well, so tax competition is having a positive impact on Canadian fiscal policy. The Telegraph Journal has more details:

The New Brunswick government is considering a fundamental rebalancing of the tax system tilting towards consumption taxes and relieving citizens and businesses from the burden of hefty income taxes with a flat tax by 2012. Finance Minister Victor Boudreau released the government’s discussion document on tax reform on Wednesday that proposes replacing the system of four different tax brackets with a single rate of 10 per cent, which would tie the province with Alberta for the lowest tax rate. Large businesses also stand to gain under the various proposals that could see their corporate taxes fall from 13 per cent as far as five per cent, giving it the lowest rate in Canada. …To pay for the deep tax cuts, the document is suggesting the Harmonized Sales Tax be raised by two per cent, essentially moving into the tax room vacated by the federal government. …Niels Veldhuis, a senior economist at the Fraser Institute, insisted the 10 per cent single rate would act as an incentive to keep young New Brunswickers home and attract new immigrants to the province. “I would label this as a revolutionary document because it doesn’t focus on one aspect of the tax system. It goes through and delineates what are the major problems with New Brunswick’s taxes, from personal income tax, corporate income tax, to capital taxes to property taxes,” Veldhuis said. “I think this is a model for the other provinces because these are very important topics; the province should be commended for putting this out there and the aggressiveness.” Finn Poschmann, the director of research for the C.D. Howe Institute, said a flat tax will also be a benefit for families. “Flat rate tax makes life a little bit simpler, that is worth something,” Poshmann said. “For flattening the tax system is good for rewarding investment, rewarding work so when you take on an extra shift or get some overtime pay, you don’t blast up through the bracket schedule.” …Tom Bateman, a political scientist at St. Thomas University, said…the Liberals appear to be outflanking [the Tories] on the taxation issue. “It is consistent with the government’s general view that it needs to market to play a greater role in economic development,” Bateman said. “In that respect that would put the Liberal Shawn Graham government firmly on the right of the political spectrum. This should make every Progressive Conservative blush I would think.”