…because I’m an economist and a mom–that’s why!

Why the “Doc Fix” Doesn’t Fix Health Care

October 19th, 2009 . by economistmom

As we explained in a Concord Coalition press release today:

The Senate is expected to consider a bill this week that would permanently increase physician reimbursement rates relative to the current Medicare “sustainable growth rate” (SGR) formula and exempt this “doc fix” from pay-as-you-go budget rules (PAYGO). This exemption would increase federal deficits by roughly $250 billion over 10 years.

Concord said that changes in the payment formula should be included and paid for as part of comprehensive health care reform. The issue of how Medicare reimburses physicians is central to the broader effort to get Medicare and health spending in general onto a more sustainable path…

“…If policymakers believe that the current SGR formula is unrealistic, they should replace it with a more appropriate policy and pay for the change in keeping with their pledge to reform health care in a deficit-neutral way. If paying for this SGR change means there would be fewer offsets on the table to pay for expanded coverage, then policymakers would be forced to appropriately weigh their priorities and make the necessary tough choices–either scale back other costs in the health reform package or find more ways to pay for the larger bill,” said Concord Coalition Executive Director Robert L Bixby.

If it seems odd to you that this “doc fix” is not being considered as part of the “health care reform” bills in Congress, well, you’re right.  It’s actually ironic and clever at the same time.  The irony is that the doc fix represents one big way in which federal policymakers want to “bend the health cost curve” in the wrong (upward) direction.  (See Figure 2 in this CBO issue brief that although a few years old still well explains the SGR situation today; what Congress wants to do is follow the curve shown as “Option 3″–without offsetting the cost relative to the current-law baseline.)  The cleverness is that Congress wants to keep this “fix” separate from the rest of health care reform to make it easier to keep the combination of policies that do fall under the official “health care reform bill” deficit neutral, and they know that a deficit-financed “doc fix” in a stand-alone bill will be easier to pass than a paid-for “fix” in any other bill.

This does not bode well for our ability to bend the health cost curve in the right (downward) direction in the future, especially when so much of the longer-term “bending” seems to rely on the idea of a commission forcing Congress to actually make the as-yet-unspecified, put-off-to-the-future tough choices.  As my boss, Bob Bixby, puts it:

“The current SGR payment formula was originally enacted as part of the 1997 balanced budget agreement to slow the growth of physician payments. Exempting a change in that formula from PAYGO would undermine the credibility of promises now being made to restrict provider payments in the future. Why should anyone believe that Congress will enforce future promises to limit provider payments when it cannot summon the political will to enforce the limits it has already enacted?” Bixby said.

I keep wondering if some day maybe 10 to 20 years from now we’ll be dealing with the “health care reform commission fix” and still searching in vain for the external mechanism or rule that would bring us effective fiscal discipline–when the only thing that would really work is a lot more personal courage from our politicians, and a lot more encouragement and praise and votes for courageous politicians from the public.

UPDATE/Addendum:  Forgot to point out that Monday’s lead editorial in the Washington Post echoes Concord’s sentiment (or we echoed theirs).  I especially like their emphasis on the many “fiscal time bombs that will need defusing soon… [most significantly,] the Bush tax cuts…[which involve] huge costs…that the administration would, for the most part, prefer to assume away.”

On Pandering to Seniors Over Pandering to Other Groups

October 18th, 2009 . by economistmom

I’ve got a contribution to the “Topic A” opinion feature in today’s Washington Post; the question: Should Congress fulfill President Obama’s request for a one-time $250 payment to Social Security recipients to offset the absence of a cost-of-living adjustment this year? I wrote about this here a couple days ago along with my observation about another odd display of not-quite fiscal responsibility.  I basically repeated the same for today’s Post, but my response isn’t anything that hadn’t been pointed out earlier in the Post–for example in Neil Irwin’s article and in the Post’s own editorial a couple days ago.  (This online version is slightly longer than the one that appears in print today.)


Chief economist at the Concord Coalition and blogger at

Congress and the administration are calling for a $250 payment to seniors to make up for the lack of a cost-of-living adjustment (COLA) to Social Security benefits in the coming year. But the purpose of a COLA is to help incomes keep pace with inflation, which means when there’s no inflation, there’s no adjustment in benefits needed. President Obama claims that this “emergency” aid is justified because seniors’ wealth has declined in this recession. But, of course, all kinds of Americans have suffered.

This is not about making seniors “whole.” Because seniors are guaranteed to receive Social Security benefits regardless of the strength or weakness of the economy, they more than others have had a significant part of their income protected in this recession, and they received special aid in the last stimulus package, too. This is about taking from one generation and giving to another. By choosing to finance the provision by borrowing, our politicians hope the beneficiaries (seniors) will notice — while those most heavily penalized (our kids and grandkids) are thankfully not old enough to vote. This seems to be a purely political strategy to pander to seniors (once again) over other groups.

I do recognize the extra stimulus argument that’s being made, but that’s a totally different policy question that shouldn’t have to refer to the absence of a Social Security COLA as justification for any answer to it.  But on this issue one of my economist friends pointed out to me that if we’re going to hand out more checks as stimulus, handing them to seniors is probably pretty effective because seniors have a higher “marginal propensity to consume” (”MPC”) than the average household–that is, they tend to spend larger fractions of their income because they are retired and thus have low income relative to their spending needs.  (They also have shorter time horizons and so don’t have to plan and save for as long of a future–sorry to rub it in…)  I quipped back to my friend that (Hah!) this proposal isn’t about maximizing the “MPC” out of stimulus dollars, because if it were, they should be giving checks to families with teenage daughters.  And those that have THREE teenage daughters, as I do, should get three times the amount.  It would all be spent, because teenage daughters are very helpful advisers when it comes to the family budget and ways to spend new-found money.  He said that was a very “EconomistMom” thing to say, so I’m saying it here.  ;)

Record Deficit May Dash Obama’s Big Plans…Unless He Dashes Bush’s Big Plans First?

October 17th, 2009 . by economistmom


Today’s headline in the Washington Post:  “Record-High Deficit May Dash Big Plans”–refers primarily to President Obama’s “big plans” for further deficit-financed stimulus spending.  But realistically, the large (though still smaller-than-expected) $1.4 trillion deficit is a threat to all of the Administration’s fiscal policy agenda, including their health care reform initiative which they believe will eventually reduce and not just not increase the deficit.  Revenues (whether newly proposed or already in place) that the government chooses to use to fund new programs are revenues that are unavailable for deficit reduction.  And revenues given away through deficit-financed tax cuts are revenues that are no longer available for, well, either new initiatives or deficit reduction.

I’ve harped about the deficit-financed extension of the Bush tax cuts over and over here–far more than I’ve “harped” or “carped” about deficits in general (what a nag I’ve been!)–but for today let’s just consider this simple math:  the large portion of the Bush tax cuts that President Obama has proposed to extend cost about $2 trillion over ten years (fiscal years 2010-19, see Table 1-4 in this CBO analysis)–without counting the additional costs of extended alternative minimum tax (AMT) relief and without counting interest costs.  The cost of expanding health care coverage to achieve nearly universal care is now commonly known to be about $1 trillion over ten years.  Thus, if we chose to let the Bush tax cuts expire as scheduled at the end of 2010–a policy choice that would require no legislative action on the part of Congress or President Obama and which Obama Administration budget director Peter Orszag has previously urged as the “right” choice–we would be able to pay for expanded health coverage without any “new” tax increases and still have (over) $1 trillion left over for deficit reduction.

I’m not saying that letting the Bush tax cuts expire is the best way to pay for health care reform (I actually prefer raising taxes tied directly to health care spending so that revenue would keep pace with health costs), but I’m saying that that’s a lot of revenue to give away and not have available for all these other things (health care, deficit reduction) we say are really important to us.  And I continue to be puzzled as to why the deficit-financed extension of the Bush tax cuts is the single largest (most expensive) item in President Obama’s proposed budget, especially in light of these record deficits and how the Obama Administration reminds us, constantly, that these deficits are not their fault.  From the Administration’s press release on the final FY2009 budget deficit (released Friday afternoon–the best time for bad news), emphasis added:

The FY2009 deficit was largely the product of the spending and tax policies inherited from the previous Administration, exacerbated by a severe recession and financial crisis that were underway as the current Administration took office.

Well, these record deficits might not be the Obama Administration’s “fault,” but they are now their “problem.”  Choosing to extend the Bush tax cuts basically amounts to the Obama Administration saying they prefer Bush Administration tax policy over Clinton Administration tax policy.  (If the Bush tax cuts expire at the end of 2010, we will go back to pre-2001 tax policy and the marginal tax rates we had at the end of the Clinton Administration.)  I don’t believe that they actually feel that way.  I think Bill Gale (Peter Orszag’s coauthor on those many “Bush tax cuts are bad” papers that were written during the Bush Administration) says it well at the end of today’s Washington Post story:

Economists universally agree that the nation cannot run such massive deficits indefinitely. The question now facing Obama, budget experts said, is how to bring spending and revenue more closely into balance in the years ahead, after the economy fully recovers.

“[T]he significance of the number is not what happened to cause it to be so large. The question is what happens next,” said William Gale, a senior fellow at the Brookings Institution.

If, as the Post story quotes Peter Orszag saying, the President is truly “considering proposals to put our country back on firm fiscal footing,” then a reconsideration of the extension vs. expiration of the Bush tax cuts ought to be at the top of the list–even before other good ideas such as an add-on value-added tax and reducing costly and inefficient tax expenditures such as the exclusion for employer-provided health care.  For as good as those other ideas for “revenue enhancement” are, getting those ideas passed will be a lot more work and would take us to a tax system we’ve never experienced before.  In contrast, Congress and the Obama Administration don’t have to lift a finger to get the $2 trillion to $3 trillion in revenue they’d get (just over the first ten years) by just not extending the Bush tax cuts and going back to Clinton-era tax policy.  President Obama could always choose to reform the tax system from that starting point, to craft “Obama Administration tax policy” as something truly of his own.

Two Illustrations of How Bad We Are at Fiscal Responsibility

October 15th, 2009 . by economistmom


Exhibit A:  Congress and the Administration Call for a $250 Payment to Seniors…for What?!!

Well, for non-inflation and hence the non-COLA they are getting in their Social Security payments in the coming year.  The purpose of a Cost of Living Adjustment is to help incomes keep pace with inflation, by the way.  Which means when there’s no inflation, there’s no adjustment in benefits needed to keep up with inflation.  So why the need to “make up” for anything?  Many of the headlines today say something like “Obama Endorses Effort to Provide Seniors a $250 Boost” or “Obama Endorses $250 Emergency Payments” (as in the subtitle of this story in the Washington Post).  But a truer headline would say “Obama Endorses Pandering to Seniors Over Pandering to Other Groups” –and I would subtitle it “Again.”

From the Washington Post story, we read that once again, House Majority Leader Steny Hoyer is the rare Democrat exhibiting fiscal courage (emphasis added):

In recent weeks, several members of Congress have proposed legislation that would, in varying ways, compensate Social Security beneficiaries and veterans for the lack of a built-in increase. Until Wednesday, those bills had attracted little notice. Their prospects have been uncertain at a time when deficits are rising, lawmakers are working on expensive changes to the health-care system and Congress has already enacted a stimulus package that included a similar $250 payment to retirees and others who depend on Social Security, veterans’ benefits and federal pensions.

Obama’s announcement, however, focused new attention on the prospect of further help to some of the nation’s most economically vulnerable people. Senate Majority Leader Harry M. Reid (D-Nev.) said for the first time Wednesday that he, too, thought that “providing another economic recovery payment is the right thing to do.” In the House, Speaker Nancy Pelosi (D-Calif.) urged lawmakers to support the idea, saying the original $250 payments in the stimulus package “proved an effective way to offer stability and security to millions of Americans and a boost to our economy.”

House Majority Leader Steny H. Hoyer (D-Md.), however, has resisted the proposal, saying recently that, in light of the emergency payments for older Americans in the stimulus package, “it’s not as if the Congress has forgotten seniors.”

The new payments would cost an estimated $14 billion, according to legislative sources, although the White House said the price tag would be $1 billion less than that.

In urging lawmakers to provide a second round of payments to older Americans, the president said the extra help would “not only make a difference for them, but for our economy as a whole,” adding that it would “be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis.”

But President Obama, many of those “others” who have similarly seen their incomes fall don’t receive the benefit of a stable, inflation-protected Social Security payment.  This is not making seniors “whole”; this is taking from one generation (our kids and grandkids) and giving to another.  By deficit financing the provision, policymakers hope the beneficiaries (seniors) will notice and the penalized (younger generations) will not.  (Or if they do, they certainly can’t do much about it because most of them are not old enough to vote.)  Of course, that’s how it always works when politicians decide to whom they should pander.

Exhibit B:  Senators Want to Create a “Debt Commission” As They Vote to Raise the Debt Limit

CQ’s David Clarke reports:

Ten moderate senators on Wednesday urged Majority Leader Harry Reid to allow the Senate to vote on creating a commission or special process to tackle the amount of debt being run up by the government.

In a letter to the Nevada Democrat, the senators — nine Democrats and one independent — said they believe the creation of such a commission should be linked to the vote the Senate will take this year to raise the limit on the amount the government can borrow.

Budget Chairman Kent Conrad, D-N.D., and ranking Republican Judd Gregg of New Hampshire have proposed creating a task force of lawmakers and administration officials that would draw up policy prescriptions for the government’s long-term debt problems that Congress would have to vote on…

That pairing up of a debt “commission” with the lifting of the debt ceiling is pretty odd. It strikes me that it’s like signing up for Alcoholics Anonymous at the very same time one starts a bar tab (at the bar).  Like the Senators are saying “See? We’re sick and can’t control ourselves and need help!” And the commission thing again!  It’s not that I don’t like the idea of what the commission is supposed to accomplish.  It’s that I dread hearing yet another putting off of the problem (shoving the burden onto yet another idea for another commission or task force who will vaguely yet effectively make the tough choices) and the message that we will gorge ourselves today and somehow get disciplined on the diet and exercise tomorrow.

Spam Comments Problem Again - All Comments Will Be Moderated

October 15th, 2009 . by economistmom


My spam blocker isn’t working right again (Wed. 10/14), so all comments will be queued up for moderation again until I figure out it’s back to normal. Bear with me. The last time this happened it didn’t last too long. I will try to check every few hours except for overnight.

Go, Brucie!

October 13th, 2009 . by economistmom

Bruce Bartlett did a nice job arguing against stuck-in-the-70s Larry Kudlow on CNBC today, in discussing his new book, The New American Economy. (Bruce blogged about the book’s “RIP Supply Side” message, here.)  I was looking for the right adjective to describe Kudlow’s and his CNBC co-anchor’s reactions: confused, incredulous, insulted, panic-stricken, desperate, outraged, apoplectic?… Then I figured out that Kudlow and other stuck-in-the-70s supply-side tax cutters must feel like a teenage boy whose girlfriend has just dumped him for his rival. I mean why else would Kudlow be looking so flustered over “Brucie’s” new book?

More on Bruce’s book later this week.  And more catching up, too.  (I’m so behind keeping up with the discussions on my own blog, it’s not funny!)

UPDATE Thursday, 10/15:  David Frum does a very nice video interview with Bruce on, here.

What Makes for a Tough Choice

October 13th, 2009 . by economistmom


Last Wednesday at the World Business Forum (where I was a “featured blogger” and where I “tweeted” for the first time) President Bill Clinton was asked during his post-speech conversation a very interesting question, which went something like this: “What was one of your toughest decisions as President–i.e., as the chief decision-maker for the country?”  His answer:  Unpopular decisions are hard, but the very hardest decisions are those which have a sense of urgency and yet where the right answer isn’t obvious–and during his presidency, one of his toughest decisions was to raise taxes in 1993 for the purpose of deficit reduction.  As he put it, it was hard for him to know how much he “needed” to bring the deficit down–and by that I take it that it was hard for him to know if the longer-term economic gain would be worth the shorter-term political pain.  It was probably also the case that the uncertainty surrounding the potential economic gains from deficit reduction was greater than the uncertainty about the political cost of advocating tax increases.  At the same time, President Clinton understood at that time that the potential economic payoff to politically-difficult fiscal discipline could be monumental.  As I “tweeted” from the Forum:

One of Clinton’s hardest decisions: 1993 budget deal- how much would he need to bring deficit down for good of economy?…

Clinton: Was hard decision because he couldn’t be SURE it would work out well (deficit reduction)… But it DID!

It indeed worked out “well” because it was no coincidence that the deficit was eliminated and economic growth was so strong (see pages 79-92 in President Clinton’s final economic report, which I drafted as his Senior Economist for tax and budget policy in 2000-01), and it was indeed “monumental” because little did we know at the time how rare balancing the budget (or running surpluses) would turn out to be despite at the time running surpluses “as far as the eye could see.”

I think what makes for a “tough choice” are characteristics such as these:

  • obvious losers, not-so-obvious winners;
  • losers are those who aren’t used to losing (and are able to put up a fight, i.e., “lobby”);
  • winners are broad and diffuse (citizenry as a whole) or otherwise lack political influence (such as younger generations who can’t yet vote);
  • a choice that would represent a big change from the status quo;
  • a choice with highly uncertain (and hence un-scorable?) but potentially large and profound and sustainable benefits, and more certain (and hence scorable) but smaller, more superficial and largely temporary/transitory costs.

And along these lines, the choices policymakers will have to soon make about health care reform are “tough choices,” too.  Concord Coalition board members Bob Kerrey, Pete Peterson, and Warren Rudman, in an open letter to Senate Majority Leader Harry Reid last Friday, wrote (emphasis added):

In the coming days, you have the unenviable task of combining the Senate Finance Committee’s health care reform bill with the bill that emerged from the Health, Education, Labor and Pensions Committee. Aware of the difficulty and the competing pressures you face, we have identified in the attached memorandum key areas where we believe the potential of the legislation to produce fiscal gains can be strengthened. We hope our views will help guide your work — consistent with fiscal responsibility and sustainability.

In making these suggestions, we are reminded of the words of the late Paul Tsongas, a former Senate colleague from Massachusetts who inspired the founding of The Concord Coalition. In 1992, Senator Tsongas warned:

America faces great economic peril as our standard of living is threatened by current economic policies. Once the world’s greatest economic power, we are selling off our national patrimony as we sink ever deeper into national debt….This nation’s will is not being called upon on the home front because of a fear that our people are not ready for an honest and forceful response to these threats. I strongly disagree….The purposeful avoidance of difficult issues caused serious erosion to our society. The icon of indulgence that we worshiped during the past decade has proven to be a false god.

Those same words could be spoken today. The only difference between then and now is that 17 years have elapsed and the circumstances we face are worse — particularly with regard to health care costs...

The choice to get health care spending on a more sustainable track is a tough choice, for all of the reasons in my list above.  It’s tough because it requires far more than cutting out the “waste, fraud and abuse” that no one would oppose cutting.  It’s tough because getting a more efficient marketplace requires that what politicians refer to as the “affordability” of health care (in terms of out-of-pocket household expenses) goes down instead of up–at least in the short term–so that the prices that consumers face more accurately reflect the true “affordability” of that care.  It’s tough because many of the well-defined “losers” are the most well-known and successful lobbyists.  And it’s tough because this would represent a huge change to the way our country purchases health care.

But it’s still a real choice, not an illusion.  And although not easy or without political cost, the potential payoff to making the tough, fiscally-responsible choice could be huge–just as it worked out for President Clinton, according to President Clinton himself, looking back with the benefit of hindsight…and no regrets.

Not Just Smoke and Mirrors

October 11th, 2009 . by economistmom


Saturday’s Washington Post contained this editorial on the false notion that Congress has come up with any plan for health care reform that is truly deficit neutral.  The basic charge:  neither either house of Congress, nor the Administration, has both (i) admitted that they have repeatedly rejected the current-law Medicare savings mechanism known as the “sustainable growth rate” (SGR) provision and that they will very likely continue to reject it; and (ii) come up with a credible way to make up for that lost savings through other specific policies or otherwise demonstrated that they can, from here forward, somehow find the courage to achieve fiscal discipline in health care spending through other-than-SGR-type means.  The Post editorial characterizes it this way (emphasis added):

THE SENATE Finance Committee’s health-reform bill is fully paid for, according to the Congressional Budget Office; in fact, the CBO says, it would save $81 billion in the first 10 years. The House version of health reform, by contrast, would add $239 billion to the deficit over that period. So the Senate bill is more fiscally responsible, right? Not exactly.

The cost difference stems from the fact that the House measure is honest enough to include the full 10-year cost of the so-called “doc fix” — $245 billion to reverse scheduled cuts in Medicare payments to physicians — although not fiscally responsible enough to pay for it. The Senate just patches the problem for one year and pretends that doctors take a 25 percent cut in reimbursements the following year and then stay at that low level forever. No one believes that will happen, so the money is going to have to be scrounged up later or else add more to the deficit. At least the House makes that unpleasant fact clear, rather than sweeping it under the rug…

[T]here is widespread agreement that the original spending formula turned out to be unreasonable. Congress wasn’t wrong to override it. What is wrong is to pretend the cost doesn’t exist — and to overhaul the health-care system without dealing with this quarter-trillion-dollar expense…

The administration claims credit for honesty in budgeting because it included the cost of the fix in its projections. But it then gives itself an easy out — declaring that this cost should not be subject to pay-as-you go budgeting rules that would require that the fix not add to the deficit. The House has agreed, decreeing that the SGR fix should be exempted from pay-as-you-go…

the cost to federal taxpayers remains — no matter how much budgetary smoke and mirrors are used to make it seem to disappear, or to postpone the check-writing.

But “smoke and mirrors” suggests this issue of the Medicare SGR is just an “illusion”–and it’s not.  Whether policymakers will be able to stick to their current-law commitment about SGR cost savings represents a real policy choice that makes a real and substantial difference.  (CBO wouldn’t score the Senate proposal as “deficit neutral” were it not for the real potential for these real cost savings, and their estimates merely assume that Congress actually sticks to the “plan” as now written.)  The House proposal’s (virtuous-sounding) “honesty” could easily be labeled a “cop-out” or “wimpiness” instead.  The Senate proposal’s (malicious-sounding) “pretending” that the SGR will later be honored could easily be recharacterized as “wishful thinking” or “naivety”–or as just another form of “wimpiness” in kicking the fiscal responsibility can down the road.  The honest and courageous thing for the Administration and Congress to do with this issue would be to start demonstrating that they can save money in the Medicare system by actually complying with the current-law SGR so that the claims that they will stick to the SGR in the future would actually be credible.

But this real issue of real and large policy choices goes way beyond the Medicare SGR.  The SGR is a relatively small part of the broad issue of what it means to be fiscally responsible going forward and whether the “PAYGO” standard that the Administration and Congress have advocated actually encourages (enough) fiscal responsibility.  At $245 billion over ten years, the SGR “doc fix” is less than one tenth the cost of extending the 2001 and 2003 Bush tax cuts and relief from the alternative minimum tax, both of which are exempted from the PAYGO rules and which CBO estimates will cost over $3 trillion over the next ten years.  As I’ve said before, the difference between what is merely “plausible” for the fiscal outlook going forward and what is “probable” or “likely” for the fiscal outlook depends on the courage that politicians can muster when making these huge and real policy choices–and the real range of possibilities spans trillions of dollars and is not just “smoke and mirrors.”

How True Fiscal Conservatives Talk About Tax Policy

October 9th, 2009 . by economistmom


Bruce Bartlett’s new book, The New American Economy: The Failure of Reaganomics and a New Way Forward, comes out next week.  The New York Times’ David Leonhardt wrote a really nice story about Bruce’s current perspective on supply-side economics and tax policy and how the Republican Party has lost its fiscally-conservative way (emphasis added):

[P]erhaps the most persistent — and thought-provoking — conservative critic of the party has been Bruce Bartlett. Mr. Bartlett has worked for Jack Kemp and Presidents Reagan and George H. W. Bush. He has been a fellow at the Cato Institute and the Heritage Foundation. He wants the estate tax to be reduced, and he thinks that President Obama should not have taken on health reform or climate change this year.

Above all, however, he thinks that the Republican Party no longer has a credible economic policy. It continues to advocate tax cuts even though the recent Bush tax cuts led to only mediocre economic growth and huge deficits…

On the spending side, Republican leaders criticize Mr. Obama, yet offer no serious spending cuts of their own…

How, Mr. Bartlett asks, is this conservative? How is it in keeping with a party that once prided itself on fiscal responsibility — the party of President Dwight Eisenhower (who refused to cut taxes because the budget wasn’t balanced) or of the first President Bush (whose tax increase helped create the 1990s surpluses)?

“So much of what passes for conservatism today is just pure partisan opposition,” Mr. Bartlett says. “It’s not conservative at all.”…

True fiscal conservatives should be advocating a more balanced budget, certainly after we’ve recovered from the aftermath of this recession.  (Bill Clinton made this his final point in his prepared remarks to the World Business Forum in New York City on Wednesday.)  True fiscal conservatives understand that while the benefit of low tax rates is improved economic incentives for private-sector work and saving, the cost of low tax rates is the reduced public saving that arises from a larger budget deficit (or smaller surplus).  The benefits were more likely to outweigh costs back in the days when marginal tax rates were very high.  But now it’s a totally different story:

[Bruce's] conservatism starts with the idea that high taxes are no longer the problem, even if complaining about them still makes for good politics. This year, federal taxes are on pace to equal just 15 percent of gross domestic product. It is the lowest share since 1950.

As the economy recovers, taxes will naturally return to about 18 percent of G.D.P., and Mr. Obama’s proposed rate increase on the affluent would take the level closer to 20 percent. But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.

For one thing, past tax increases have not choked off economic growth. The 1980s boom didn’t immediately follow the 1981 Reagan tax cut; it followed his 1982 tax increase to reduce the deficit. The 1990s boom followed the 1993 Clinton tax increase. Tax rates matter, but they’re nowhere near the main force affecting growth.

And taxes are supposed to rise as a country grows richer…

Bruce argues that while the first goal of modern conservatism should be to keep government from getting too big, the second:

should be to keep taxes from being increased in the wrong ways. Supply-side economics is based on the idea that higher tax rates discourage work and investment, two crucial ingredients for economic growth. But higher taxes on consumption don’t have nearly the same effect as taxes on incomes or companies. If anything, consumption taxes encourage savings, which lifts investment.

So Mr. Bartlett advocates a value-added tax — a federal sales tax — which most other rich countries have

Even worse though, is to cut taxes in the wrong ways–such that even as public saving is harmed via deficit financing, private incentives to save and invest and work are harmed as well.  Or such that most of the tax cutting agenda consists of a prior Administration’s tax policy that a new Administration understands has been proven to not pass the cost-benefit test.

Bruce Bartlett is a true fiscal conservative who’s telling us taxes have to rise.  Concord Coalition Executive Director  Bob Bixby is another one.  From a CNN-Money story by Jeanne Sahadi:

It’s no surprise to Robert Bixby, executive director of the Concord Coalition, that the projections for tax revenue in fiscal year 2010 are fairly anemic.

“I think 2010 is already baked into the cake as a bad year,” Bixby said. “Part of the recovery will be continued high deficit spending because the economy will continue to need stimulus.”

But what he hopes to see in 2010 is at least a move toward revenue growth that picks up steam in subsequent years.

Based on current estimates, however, he’s not optimistic that will happen unless lawmakers take action…

“It’s important that there be a deficit reduction plan in Obama’s 2011 budget,” Bixby added.

He noted that having a plan doesn’t necessarily mean having to enact it right away if economic conditions aren’t right. But, he said, “We’re going to have to face tax increases eventually.”

Sorry, Congress. There’s (Still) No Way to Raise Revenue Without Taxing (Real) People.

October 7th, 2009 . by economistmom

Well, it took a couple months, but those with a stake in health care reform have finally figured out that the idea of an excise tax on insurance companies instead of an any alternative tax on “real people” was no magic cure for the want-more-revenue-but-don’t-want-higher-taxes blues.  From a story by Ben Smith and Patrick O’Connor in today’s Politico (emphasis added):

More than half of the Democrats in the House have signed on to a letter denouncing a key element of the Senate Finance Committee’s health care legislation as labor unions draw a line in the sand on paying for reform.

The Democrats are attacking a plan to finance expanded health care by taxing expensive health insurance plans. The plan, sometimes cast as a tax on “Cadillac” plans, would in fact include the health care plans of many public employees and union members and has triggered a revolt from Obama’s labor supporters and their many allies on the Hill.

The letter from 154 House Democrats to Speaker Nancy Pelosi urges her “to reject proposals to enact an excise tax on high-cost insurance plans that could be potentially passed on to middle-class families.”

“We oppose the excise tax because it will be passed on to our people,” [Teamsters president James] Hoffa told POLITICO. “We will oppose it in the Senate. We will oppose it in the House. We will oppose it in conference.”

But guess what?  The economic burden of all types of taxes–or “fees” or “factors” or “things”–no matter who is actually targeted statutorily (no matter what the legislation actually says), ultimately must fall on real people.  Yes, actual real, living, breathing people!  Some of those people may be richer than others.  Some may be older than others.  Some may be healthier than others or have more kids or consume more energy.  But in all cases to exclude from the tax burden a class of people as large as the “middle class” (defined, say, as those with incomes below $250,000) is to guarantee that policymakers will not be able to raise enough revenue to pay for all the things they agree they want to buy.  (And we know that politicians are always able to “compromise” and work in a “bipartisan” manner as long as each side gets what they want in terms of more spending and more tax cuts.)

I continue to believe that it would be better for our politicians to level with the American people and tell them that we need to raise more than the revenue we can possibly extract from only those people that don’t seem to count as “real people”–the really, really rich people, the corrupt CEOs, the (foolish?) people who are obese yet keep drinking soda pop?–and that an economically smart and socially fair way to pay for expanded health care coverage would be to more directly (at least partially) tax employer-provided health benefits at the household level (through the individual income tax).  Taxing households more directly would allow policymakers to tailor the tax to those (yes, real) people who they’re most comfortable raising taxes on, and would be more transparent to the people–in fact, with the health exclusion, that’s part of the wisdom of it.  But while we’re talking about honesty and courage, Congress and the Obama Administration need to face up to the fact that those real people who will face tax increases will have to include at least some of that vast “middle class”–or Congress and the Administration will have to start giving up some of those policy ideas that they think they’ve already agreed on.  Will they really find it worth giving up expanded and more “affordable” (to real people) health care coverage just to keep the President’s campaign promises about taxes?

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