Archive for September, 2009
What is a Tax?
Posted by: | CommentsP class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptWhat is a tax?SPAN style=mso-spacerun: yesnbsp; /SPANYou would think a senior economist at the ?xml:namespace prefix = st1 ns = urn:schemas-microsoft-com:office:smarttags /st1:place w:st=onst1:PlaceName w:st=onTax/st1:PlaceName st1:PlaceName w:st=onPolicy/st1:PlaceName st1:PlaceType w:st=onCenter/st1:PlaceType/st1:place would have no trouble answering that question. But it is not so simple./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptThis question has come up in the debate over the proposal to require all Americans to have medical insurance—a provision in all of the major congressional health reform bills. If you must buy insurance, is the payment you make a tax or just a premium for insurance coverage?SPAN style=mso-spacerun: yesnbsp; /SPANIs the penalty imposed on those who don’t buy insurance a tax or a fine for failing to comply with the law?/SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptOf course, we know taxes are what we pay to fund the general activities of the government. And for most taxes, including the individual income tax, what we pay bears little relationship to how much we benefit from government services.SPAN style=mso-spacerun: yesnbsp; /SPANBut not all payments to governments are for broad public services and some levies, such as airline ticket taxes, are associated with direct consumption of a service by the payer. SPAN style=mso-spacerun: yesnbsp;nbsp;/SPAN/SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptPayments to governments that are analogous to commercial transactions are counted as user fees, not taxes, and reduce measured spending on the public activity. Examples include the fees I pay when I visit a National Park or for getting my car emissions tested. Getting the emission test gives me a lot less pleasure than hiking in st1:place w:st=onst1:PlaceName w:st=onShenandoah/st1:PlaceName st1:PlaceType w:st=onPark/st1:PlaceType/st1:place, but it is a requirement I must meet for the privilege of driving. And since I am the potential polluter, the state requires me to bear the cost./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptSo when is a payment to government by users of a service a tax and when is it a fee?SPAN style=mso-spacerun: yesnbsp; /SPANA 1993 A href=http://www.cbo.gov/ftpdocs/104xx/doc10417/1993_08_growthofuserchargesa)taxes.pdfFONT color=#800080CBO report/FONT/A cited Malcolm Baldrige, a Commerce Secretary during the Reagan Administration. “I think it is simple,” Baldrige commented.SPAN style=mso-spacerun: yesnbsp; /SPAN“If it is a Democratic proposal, it is a tax; if it is Republican, it is a user fee.”SPAN style=mso-spacerun: yesnbsp; /SPANOf course, Baldrige was joking, but nonetheless user-related taxes are often hard to distinguish from user fees.SPAN style=mso-spacerun: yesnbsp; /SPANIf my local community funds trash collection out of property tax revenues, total tax collections look higher than if they charge me a separate fee for trash collection (even if the fee is collected when I pay my property tax).SPAN style=mso-spacerun: yesnbsp; /SPANUsing federal gasoline taxes to finance interstate highways makes the tax burden look higher than if those roads, like some older state highways, were paid for by tolls./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptThe 1993 CBO report cites four categories of user-related charges:SPAN style=mso-spacerun: yesnbsp; /SPANuser fees, regulatory fees, beneficiary-based taxes, and liability-based taxes. SPAN style=mso-spacerun: yesnbsp;/SPANIn general, fees are distinguished from taxes by the degree of connection between the payment and the service received or social cost imposed by the payer. Thus, payments to the black lung fund are considered a liability-based tax because, although payments to miners result from past activities of the coal industry, they are not closely linked to the current actions of any firm on which the impost is based. In contrast, charges for food safety inspections are a regulatory fee, because (assuming the cost is passed forward) food consumers who are the beneficiaries of the inspection activities are paying for it. Often, however, a particular levy can be classified on either side of the tax/fee line./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptSo what are payments for mandatory health insurance?SPAN style=mso-spacerun: yesnbsp; /SPANThey are involuntary and not based on something the person chooses to do, which makes them look like a tax.SPAN style=mso-spacerun: yesnbsp; /SPANHowever, the individual gets a benefit –insurance coverage – in exchange for the payment, which sounds like a fee. Because of subsidies, some individuals will pay more than others for the same coverage (tax).SPAN style=mso-spacerun: yesnbsp; /SPANAnd if the individual fails to buy insurance, she must make a payment to the IRS, for which she will get nothing directly in exchange (tax). But the payment can be viewed as a regulatory fine for failing to meet a public responsibility (fee).SPAN style=mso-spacerun: yesnbsp; /SPANFinally, because the IRS is administering these payments, it looks very much like (and will likely be scored as) a tax./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptAs a tax economist, parsing these questions is fascinating. But I’m not sure it is very important to the health debate. Instead, we’d be better off asking a different set of questions: Who would bear the net costs of this mandate by paying more than the value of insurance they receive?SPAN style=mso-spacerun: yesnbsp; /SPANWho would benefit by receiving insurance in excess of the amount they pay?SPAN style=mso-spacerun: yesnbsp; /SPANIs this income redistribution desirable?SPAN style=mso-spacerun: yesnbsp; /SPANIs it the best way to pay for (near) universal coverage?SPAN style=mso-spacerun: yesnbsp; /SPANAnd is that goal worth the cost?SPAN style=mso-spacerun: yesnbsp; /SPANIf we like the answers, we should support reform and if we don’t we should oppose it, regardless of whether we label the payments “tax” or “fee”./SPAN/P
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Why Are Republicans Opposing Medicare Cost Controls?
Posted by: | CommentsPDemocrats are proposing to control future Medicare costs, and Republicans are trying to stop them. Who knew?/P
PThis could have been the perfect “Nixon in China” moment. Democrats—who created Medicare and for decades resisted GOP moves to curb the program—control Congress and the White House. A Democratic President has embraced modest efforts to slow the program’s unsustainable rate of growth. Drug makers, doctors, and hospitals all swallow hard and buy into the idea. It could be the perfect moment for a bit of desperately needed fiscal responsibility./P
PAnd what happens? Republicans, who only months ago tried to turn Medicare from an entitlement into a voucher, are lined up against slowing the program’s growth. They offer amendments in the Senate Finance Committee to “protect our seniors.” GOP Party Chairman Michael Steele writes a A href=http://www.washingtonpost.com/wp-dyn/content/article/2009/08/23/AR2009082302036.htmlmanifesto/A acknowledging that the long-term growth rate of Medicare is a problem, but insisting that Republicans will go to the barricades to save the elderly from the ravages of Obama-care./P
PAs this depressingly familiar graph shows, the current pace ofnbsp;Medicare spending is not only unsustainable in the long-run, it is politically impossible. /P
Pnbsp;nbsp;nbsp;nbsp; IMG height=147 src=http://taxvox.taxpolicycenter.org/CBO%20healrth%20table.gif width=308/P
PBy mid-century, Washington will be spending nearly 10 percent of Gross Domestic Product on Medicare but, without major policy changes, collecting only about 20 percent of GDP in revenues. That leaves only 10 percent of GDP for Social Security, Medicaid, interest on the debt, national defense, and everything else government does. And lawmakers will face two equally unpalatable choices: Slash all that other spending by more than half, or raise taxes to dangerously high levels.nbsp;nbsp;nbsp;nbsp; /P
PWhat looks increasingly like a missed opportunity to address this looming disaster is no surprise, given the toxic political climate here in Washington. And not too many years ago, Democrats did the same thing to George Bush, who tried to get a handle on Social Security. Dems were happily wringing their hands over massive Bush-era deficits but, given an opportunity to do something about it, chose the partisan low road.nbsp; /P
PNow, the Republicans are taking their turn at irresponsibility. Having lost control of the purse strings, they are howling about the debt we will leave our grandchildren. Yet, given the chance to make the smallest dent in Medicare’s growth rate, they suddenly have become the protectors of seniors. I half expect them to propose naming the Capitol after Claude Pepper.nbsp; /P
PImagine for just a moment an alternate universe: Democrats and Republicans set aside their squabbling and agree to eliminate wasteful or even dangerous Medicare spending. This, however, would require lawmakers to act like adults andnbsp;explain that more health care is not the same as better care, and that Medicare growth could be slowed without jeopardizing the health of seniors.nbsp; /P
PBut that isn’t likely to happen. Democrats and Republicans can agree to hand outnbsp; Medicare dollars they don’t have, as they did with the Part D drug benefit. But when it comes to controlling costs, partisan name calling is so much more fun/P
Big Government and Housing
Posted by: | CommentsPWe’ve been hearing an awful lot lately about big government taking over the health insurance business.nbsp;But there may be no commercial transaction in the country more heavily subsidized than housing. And now, many of the very people who are in a panic over government interference in medical care want to increase Washington’s role in home ownership.nbsp; /P
PAt issue: a plan being pushed by the real estate industry to raise and extend the $8,000 homebuyer tax credit that was part of this year’s stimulus bill. That measure is due to expire in November and, predictably, homebuilders and real estate firms would have Congress double down on the subsidy. They’d raise the credit to $15,000, and make it available to any homebuyer through 2010. But make no mistake, come the end of next year, this goodie will end up on the ever-growing wishlist of tax extenders—allegedly temporary tax breaks that become as much a part of the Washington landscape as the Lincoln Memorial. /P
PBefore we talk about the new credit, let’s look at where we stand. Today, home owners enjoy about $200 billion a year in tax breaks: Among other benefits, they can deduct mortgage interest and state and local property taxes, and they get to exclude up to $500,000 innbsp;capital gainsnbsp;from the sale of their home. Plus, first time buyers get the stimulus credit./P
PIMG src=http://taxvox.taxpolicycenter.org/table5-5.gif/P
PBut that is just the beginning. Taxpayers are also heavily subsidizing mortgage rates. Fannie Mae and Freddie Mac (now effectively owned by the government) along with the Department of Housing and Urban Development are guaranteeing as much as 85 percent of all new mortgages, and the Federal Reserve is buying 80 percent of the mortgage-backed securities into which these loans are packaged. As Peter Eavis of EMThe Wall Street Journal/EM wrote last week, “housing remains on government life support.” /P
PWhile keeping the battered housing market from completely falling off a cliff is a good idea, the medium and long-term benefits of all this money flying around are not entirely clear. /P
PTake the mortgage interest deduction, the most generous of the tax benefits. It is both costly and upside down, in that the biggest benefits go to the highest-income homeowners. A recent A href=http://www.taxpolicycenter.org/UploadedPDF/411922_expenditures.pdfpaper/A by TPC’s Eric Toder, Ben Harris, and Katherine Lim estimates the deduction will cost Treasury nearly $100 billion in lost revenue by 2012. The top 20 percent of taxpayers (those making more than $98,000) will get 80 percent of the benefit, and the highest-earning 10 percentnbsp;will get more than half./P
PThere is little evidence that this tax break increases home ownership. And at least some of the subsidy is sharednbsp;by sellers in the form of higher prices–not a greatnbsp;long-term use of taxpayer dollars.nbsp;nbsp;/P
PA refundable credit could at least fix the distribution problem. You could, indeed, replace the mortgage deduction with a fairly generous credit. President Bush’ tax reform panel A href=http://www.taxpolicycenter.org/taxtopics/upload/Tax-Panel-2.pdfproposed/A one versionnbsp;equal to 15 percent of interest payments. /P
PSo maybe the homebuyer credit people are on to something after all. Do you think they’d be willing to tinker with the design a bit and swap it for the mortgage interest deduction?nbsp; BRnbsp;/P