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How to Get Health Reform Done–Even If After Summer Vacation

July 24th, 2009 . by economistmom

The Wall Street Journal has two articles today that help explain how the Obama Administration and Congress can come up with a health care reform plan that I think would even satisfy the “can’t we do better” Blue Dog Democrats–who have just this afternoon pulled out of negotiations with their House colleagues, fed up with the lack of tough choices in the current version of the House proposal.

First, the WSJ’s Laura Meckler says that Obama Administration budget director Peter Orszag really does know what kinds of tough choices are necessary–it’s just not so easy convincing politicians to follow through with them:

President Barack Obama’s health-care plan is in jeopardy because of serious concerns that costs will spin out of control. As much as anyone, it’s White House budget director Peter Orszag’s job to save it.

Mr. Orszag is the administration’s point man for controlling health-care spending. So when the director of the Congressional Budget Office, which Mr. Orszag used to run, testified eight days ago that none of the health plans pending on Capitol Hill would control long-term spending, Mr. Orszag knew that meant trouble.

The wonkish economist likes to say he doesn’t have a “license to practice politics.” But with problems brewing, the technocrat sprang into the thick of the political haggling.

The next day, a Friday, he sent a letter to Capitol Hill detailing a proposal he had been more quietly pitching for weeks — creating a new agency with power to cut spending and implement changes in Medicare, the giant health program for the elderly. He also attached proposed legislative language. It was the most specific that the White House, which has tried to articulate principles and leave details to lawmakers, has been on any aspect of the legislation.

Mr. Orszag then visited rebellious conservative Democrats to try to persuade them the Medicare proposal would address their concerns over spiraling health-care spending…

Mr. Orszag believes that the idea he pitched in his letter to House Speaker Nancy Pelosi last Friday — a new agency with power to cut spending and implement changes in Medicare — is the single-most important thing Congress can do to control health-care spending.

The Medicare Payment Advisory Commission, created by Congress in 1997, has recommended more than $200 billion in cost cuts in the last year alone that lawmakers have ignored. Mr. Orszag wants to reconstitute the commission as an independent agency whose recommendations would automatically take effect — unless Congress expressly stops them…

Mr. Orszag’s ambitions extend beyond “scorable” spending cuts — reductions in federal spending that can offset the cost of expanding health-care coverage. The administration, he says, also is looking for ways to curb costs borne directly by individuals and businesses. To that end, Mr. Orszag wants to change the way medicine is delivered.

One idea is to change incentives so doctors focus more on delivering better care, not more treatments. The administration has proposed financial penalties for hospitals that frequently readmit patients, a sign they weren’t properly treated in the first place. Mr. Orszag calls such ideas game-changers.

“If all you did was the game-changing transformational stuff, you would be taking a risk that it wouldn’t pay off,” he says. “And if all you did was the blunter ’scorable’ savings, it won’t be sustainable, and you’re not getting at the inefficiencies. So it makes sense to do both.”

…and the WSJ’s “Capital Journal” columnist Gerald Seib explains that tax reform needs to be part of the “health reform” effort.  Without a more careful rethinking of the federal revenue system, we won’t be able to come up with a popular and economically sustainable way to pay for health care reform:

In an interview a few weeks ago, I asked President Barack Obama what he thought the top tax rate for the wealthiest Americans should be in the long run. He paused and gave a carefully calibrated answer: “I think instinctively that the tax rates that existed for the very wealthiest Americans under Bill Clinton struck the right balance.”

That’s a politically shrewd response. The top tax rate of 39.6% that prevailed in Mr. Clinton’s time was well below the suffocating 70% top tax rates that prevailed in the 1960s and 1970s, but just a notch above the 35% top rate created by George W. Bush’s tax cuts.

The problem is that, in just the few short weeks since, events may have begun shredding Mr. Obama’s position. And that, in turn, is a signal that the whole question of who pays what in taxes in America is going to have to be reconsidered.

Today’s health-care debate is only the latest signal. Mr. Obama insists he won’t sign a health-system overhaul that adds to the deficit; it will have to pay for itself. Democrats on the House Ways and Means Committee, desperate to comply, decided two weeks ago to adopt the simplest possible solution: They voted to simply add a surtax on Americans with family incomes above $350,000.

That surtax, however, would push the top tax rate above the Clinton line for some, which led to sticker shock among some wealthier Americans who broke away from the Republican Party to back Mr. Obama in last year’s election. It also sent a shock wave through many in the small-business community, who pay taxes at the top personal rate.

Within a few days, House Speaker Nancy Pelosi began to edge away from the surtax plan, saying that she wanted it to apply only to families that make $1 million or more annually. In a news conference Wednesday night, Mr. Obama embraced the same position.

But even a narrower surtax on the wealthy comes with a significant downside: It makes it harder in the long run for Washington to escape the corner it has backed itself into.

…and an even narrower surtax on the (even) wealthier would make the required top marginal tax rate even higherUgly.  Note that the Tax Policy Center’s estimates show that current law, where the Bush tax cuts expire as scheduled at the end of 2010, would automatically achieve that very “right balance” that President Obama talks about–those “tax rates that existed for the very wealthiest Americans under Bill Clinton”–with a top marginal rate of 40 percent.  In contrast, President Obama’s proposed tax policies (where most of the Bush tax cuts are extended) coupled with the House-proposed surtax, would cause the top marginal rate to rise to nearly 45 percent.

Then what can be done to raise the necessary amounts of revenue for health reform (and fiscal sustainability more generally) while sticking to the Clinton standard for tax policy?  President Obama himself seems to recognize that it’s time for a major change in tax policy, too:

The money to climb out of that [fiscal] hole is going to have to come from somewhere.

Ask administration officials how they plan to get out of that bind, and they often will say: The tax system will have to be reformed to come up with a better way to pay the bills. Mr. Obama noted in the Journal interview that an overhaul could “end up generating the revenues that we need to run the basics of our government” in a fairer way.

And that’s yet another reason why President Obama shouldn’t be so quick to offer up the Bush tax cuts as the major component of his proposed budget–certainly not if he wants to do Obama health policy, in a fiscally-responsible manner, right away.

3 Responses to “How to Get Health Reform Done–Even If After Summer Vacation”

  1. comment number 1 by: Jim Glass

    If we are considering only optimal tax policy to fund the cost of the Obama health care program (assuming it is a good program to enact, and ignoring the political and ‘public choice economics’ implications of the financing method) then it is not at all self-evident in my humble opinion that repealing the Bush tax cuts is the best option.

    But ignore my own confused opinion, consider more expert ones from non-right wing analysts:

    Leonard Burman, director of the Urban-Brookings Tax Policy Center … in congressional testimony, endorsed a plan advanced by Ezekiel Emanuel of the National Institutes of Health and Victor Fuchs of Stanford University that would yoke universal healthcare to a dedicated 12 to 15 percent VAT. Because a large share of the looming fiscal crisis can be chalked up to soaring health costs, revenue from a VAT would substantially brighten the gloomy fiscal future.

    Ultimately, progressive healthcare reform is about curtailing costs, as well as expanding coverage. And as Burman, Emanuel, and Fuchs all point out, a VAT would help stem the tide of rising costs by making them more visible.

    “Since everyone would pay the VAT, the higher rate could build widespread support for effective measures to control healthcare costs,” Burman told lawmakers.

    “Moreover, the lowest-income 40 percent of households [currently exempt from the income tax] would have a stake in controlling government spending, addressing one of the conservatives’ major complaints about the current system.” … [ Tax Analysts,]

    Burman et al point out that the VAT by covering Medicare and Medicaid costs would have the benefit of significantly further reducing income tax rates to below today’s post-Bush tax cut levels.

    As tax policy this is beneficial via slashing the deadweight cost of taxes, by having two low-rate taxes instead of only one high-rate tax — an income tax with rates that pile way up high beyond the OECD average for top rates (with the inevitable adverse consequences of resurrecting the tax shelter industry of pre-1986, growing inequities from growth in legal loopholes and preference items, the deterrence of economic activity, etc., as the deadweight cost increases by the square of the increase in the top rate).

    It also provides governance benefits of the sort that FDR insisted on for Social Security when he explicitly rejected “rich pay for everyone else” income tax funding of it. Since when the beneficiaries of the program are the ones who pay for it: (1) they will “own” it politically, so it won’t be vulnerable to future cuts as a “rich pay for poor welfare program” would be; and (2) it won’t be subject to gross expansion into a political Christmas tree by politicians, as the average people who pay the cost of it will oppose larding that cost up to please special interests. Hey, is FDR such a bad example for Democrats to follow?

    That looks two ways better than repealing the Bush cuts to me. But there are the practical political and public choice snags…

    Politically, the VAT today is rejected by liberals because it is regressive, and by conservatives because it is a money-machine for government (though as Summers reportedly quipped, this could quickly reverse when liberals realize it is a money-machine for government and conservatives realize it is regressive).

    Public choice-wise, there’s the problem that once a VAT comes in politicians have every incentive to spend both all the revenue it produces *and* all the revenue the income tax produces at rates the citizenry has proven already willing to pay (what happened to all that extra new revenue from the carbon tax permits and the Social Security surplus?). So they may not cut income taxes as promised but just ramp up spending, consuming the potential of both taxes now, and leaving us really without any happy revenue-raising option 15 years from now when we’ll really need it.

    So there are some practical issues with the VAT.

    But if we are going just by principle, then it’s in no way obvious that repealing the Bush cuts is the better option, in principle.

    And IF, all lessons from practical experience aside, we are willing to rush to embrace the principle that the very same politicians who …

    [1] Refuse to do anything to eliminate the 30% over-spending they acknowledge in Medicare, unless able to deliver a payoff of expanded benefits to AARP (as per Orszag to Postrel) … AND refuse (the correct word!) to even lift their little finger to end known deca-billion dollar fraud (not waste, fraud) in Medicaid …

    Over half of states now spend less than one-tenth of 1 percent of their Medicaid budgets to fight fraud …. New York cut the number of health-department staffers combating Medicaid scams from 200 to 50 [as] expenditures have grown by $30 billion …

    Federal supervision of these fraud-fighting efforts is almost nonexistent. The GAO report disclosed that the federal agency responsible for overseeing Medicaid employs just eight people, wielding a minuscule budget of $26,000 annually … [CJ]

    …since cutting anyone’s benefits for any reason costs votes …. will suddenly, by this August, next month(!), become not only fraud busters but inventors of perpetually ever more expenditure-saving, cost-cutting efficiencies!

    And also embrace the principle that …

    [2] The same politicians who over the last 60 years have profited by themselves creating the worst malformations of today’s health system — e.g: by tying health benefits to jobs … creating inefficient and inequitable tax subsidies for them … creating Medicare’s “pay for technology not results” billing that now dominates the entire industry … having Medicare provide first-dollar coverage for routine health services while leaving calamities like nursing home care for long-term disability uncovered (destroying the market for health services while leaving family-home-losing disaster losses unsocialized) … and underfinancing it by, oh, $40 trillion or so — will by next month redesign it all to work smoothly and efficiently*.

    THEN I see no problem at all in embracing the principle that a VAT dedicated to funding health care, accompanied by a significant income tax cut, is a much better option than a repeal-of-the-Bush-tax-cuts income tax increase.

    Because we’re just not putting much weight on the lessons of practical experience, compared to our belief in the promises of the principles we embrace, are we?

    (* If they can really do this we ought to have them redesign GM’s product line by October. What’s re-engineering a few car models compared to re-engineering 15% of the economy?)

  2. comment number 2 by: economistmom

    Jim: I agree that the idea of having an add-on VAT fund health care reform is even better than limiting ourselves to working with the existing income tax system and merely incremental changes to it. But I don’t think the VAT has much traction right now. Even if it did, it would be just an add-on, not a replacement, so we shouldn’t use it as an excuse to not try to improve the main income tax system. Finally, I’m not calling for “repeal” of the Bush tax cuts, because we don’t need to repeal them. They go away (back to Clinton-era tax policy) at the end of 2010 under current law. In my mind that makes it a lot easier policy to get through Congress than something they’d actually have to legislate and pass.

  3. comment number 3 by: Frank the sales forecaster

    Given the fact that HCE’s now garner more than 30% of all income, don’t you think that a higher top tax bracket is appropriate. The failure in 2000’s of the normal relationship between median Income and productivity growth implies that the greedy have gotten too greedy. Lets make them more indifferent about claiming that next incremental dollar of income for themselves.

    As to health care, our system is a hold-over from FDR’s wage and price control days. It was a loop hole designed to favor big employers. The top tax bracket was 90% in those days, I think. Too high for today?