Author Archive
Congress, the Bush Tax Cuts, and the Perils of Pauline
Posted by: | CommentsIf you think this year’s battles over health care, stimulus, climate change, and financial regulation have been nasty, just wait ‘til Washington tackles the Bush tax cuts.
Democratic leaders on Capitol Hill say they will consider the fate of those tax cuts--due to expire at year's end-- just before the congressional elections. That will set up a high-stakes brawl on a political and economic high-wire.
Washington often gets bogged down in symbolism. And there will be plenty of that in this donnybrook. But this argument is also about real money. Huge piles of it. At issue: $3.5 trillion in tax revenues over the next decade, $200 billion in 2011 alone.
There are two very different ways to think about all that cash. On one hand, nearly three-quarters of households will pay more in taxes in 2011 than they will this year if the Bush tax cuts expire and the Alternative Minimum Tax (AMT) is allowed to bite millions of middle-income households.
On the other, if the tax cuts are extended, the overall average tax rate would fall from 23.5 percent to 20.7 percent by 2012 (relative to current law).
Then there is the economic environment. With the economy still on uncertain footing, do we want to raise anyone’s taxes next year? And what would be the short-term impact if Congress does what President Obama wants and extends the tax cuts only for those making $250,000 or less? Would the economy suffer if high-earners had to pay pre-Bush rates? Few economists think so.
Finally, there is the politics. Nearly every congressional Republican will oppose allowing any of the tax cuts to expire, even for high-earners. “No new taxes” is a no-brainer for most Rs. By contrast, Democrats are torn. Lawmakers such as Senate Budget Committee Chairman Kent Conrad (D-ND), usually a fiscal hawk, are also against ending any of the tax breaks, given the fragile economy. But most Democrats prefer to restore the top rates of 36 percent and 39.6 percent. And polls suggest many voters agree with them.
Unlike most recent congressional debates, the Democrats may have the procedural upper hand this time. With health care, for instance, Republicans would have “won” by blocking congressional action. Gridlock would have preserved the status quo, an outcome favored by about half of voters--and overwhelmingly supported by the GOP base.
But this time, stalemate means the Bush tax cuts expire for everyone. For most households, that will feel like a tax increase—an outcome favored by a handful of budget wonks but very few real people. Democrats believe this will give them the leverage they need to force the GOP to deal. Republicans, by contrast, feel they’d be able to blame the ruling Democrats for failing to tackle the pending tax hike.
My best guess is that, in the end, Congress will extend the Bush tax cuts for all but the highest earners. And it will probably do so for a year or two. But after watching Congress fail to address the expiring estate tax last year, no outcome would shock me.
Why The Heritage Foundation is Wrong About the CLASS Act
Posted by: | CommentsIn a Washington Times column today, two Heritage Foundation researchers argue that the Community Living Assistance Services and Supports (CLASS) Act is a trillion dollar government bailout waiting to happen. The CLASS Act is a national voluntary long-term care insurance program that was included in the new health care law. And to listen to the authors, you’d think CLASS will make Fannie Mae look like a Salvation Army Christmas kettle.
They are dead wrong. While the law is flawed, it need not be the boondoggle that James Capretta and Brian Riedl fear. In fact, with some adjustments, CLASS could be a step toward responsible reform in the way we pay for long-term care in the United States. It could provide 10 million frail elderly and younger people with disabilities with flexible personal care and, at the same time, save states and the federal government billions of dollars. That’s right. Despite Heritage’s fears, CLASS has the potential to cost taxpayers less money than today’s dysfunctional system of long-term care services.
Here’s how CLASS would operate: Starting in about 2013, anyone working at least a part-time job will be allowed to purchase government long-term care insurance. After paying premiums for at least five years, participants would receive a daily cash benefit for as long as they need personal care. This would give consumers broad choice in how they’d receive assistance with activities such as bathing, eating, or moving from a bed to a chair. They could use the funds to pay for home care, adult day programs, assisted living, or nursing home care. Both benefits and premiums will be set by the Secretary of Health and Human Services over the next couple of years, but the minimum average daily benefit would be $50. The Congressional Budget Office and Avalere Health, a national consulting firm, figure premiums will average about $120-a-month.
Capretta and Riedl are correct that CLASS has problems. Because it is voluntary and open to all regardless of health status, many buyers will be more likely than average to receive benefits. That will drive up premiums, making healthy people even less interested in buying.
I share the authors’ concern about this flaw. But it can be fixed, either with modest changes or in one big way. And CLASS can be a lot better than what we have now.
Today, taxpayer-funded Medicaid, (that’s Medicaid, NOT Medicare) pays for half of all long-term care in the U.S., at a cost to taxpayers of more than $100 billion-a-year. Medicaid is already busting state budgets and, by mid-century, will absorb more than one of every six federal tax dollars. Worse, Medicaid often provides poor and inappropriate care to beneficiaries, often once-middle-class seniors who have exhausted their financial assets.
CLASS has the potential to turn long-term care from a welfare program to self-funded insurance—a change conservatives should support. The program can be improved and premiums reduced by stiffening the work requirement for buyers and making some other technical changes. Or, Congress could make CLASS participation mandatory, just as it has done with health insurance. Heritage argues this would force people to buy “expensive” insurance. But Avalere estimates premiums for a mandatory program would average only about $40-a-month.
And one analysis suggests that mandatory CLASS-like insurance could cut Medicaid long-term care costs in half. Because people will be insured, they will be less likely to turn to Medicaid. Even after providing a premium subsidy for those with low incomes, government would be way ahead.
Fiscal conservatives such as Capretta and Riedl ought to be looking for ways to improve CLASS, rather than demanding its repeal. The millions of Americans who will need personal assistance, their families, and taxpayers would all be better off for it.
Starving the Beast or Free Lunch?
Posted by: | CommentsSenator John Kyl’s (R-AZ) recent insistance that tax cuts should “never” be offset with tax increases got me thinking about the governing philosophy behind this argument. In part, it is based on the idea that tax cuts are always good for the economy while tax increases are always bad. I’ll leave that one for another day, and instead focus on a second premise: The best way to cut government spending is to cut revenues.
This idea, colloquially known since the days of Ronald Reagan as “starve the beast,” seems at first glance to make perfect sense. After all, if you want to stop someone from spending, take away their checkbook. It worked great. Until the invention of credit cards.
Unfortunately, those who bought this theory never counted on a Congress whose insatiable desire to spend was encouraged, not curbed, by tax cuts. It hardly mattered whether Democrats or Republicans were in charge. In fact, for much of the past 30 years it turned out that Republicans were more enthusiastic about spending than Democrats. And delinking spending from taxes made all those new programs appear free, thus encouraging more of them.
Bill Niskanen, president of the libertarian Cato Institute and former economic adviser to President Reagan, figured this out years ago. Bill concluded that if 20 percent of spending is financed by deficits, people will perceive that government programs cost only 80 percent of their real price. And, not surprisingly, they will be more popular at the perceived discount than at their full cost.
In congressional testimony on July 14, Tax Policy Center’s Len Burman took this criticism another step. He argued that Niskanen understated the effect of deficits on spending. Len said, “The message during the last decade seems to have been not that spending and taxes cuts were available at a discount, but that they were free….Citizens could be forgiven for forgetting that there is any connection between spending and taxes.”
As you can see from the chart, there is absolutely no evidence that tax cuts have constrained spending over the past three decades. In the early 1980s, taxes fell but spending rose. The same thing happened for much of the decade 2001-2010. In fact, the only consistent decline in spending was during the Clinton Administration, a time when tax revenues were rising, not falling.
Of course, this pattern was driven by more than just government policy. Recessions slowed revenues. Robust expansions increased them. But policy mattered. During the Reagan Administration, Congress cut taxes but increased military spending. During the George W. Bush Administration, Congress passed a massive tax cut, but fought two wars and vastly expanded Medicare (75 percent of the Medicare drug benefit is funded by general revenues, not premiums). And during the Obama Administration, Congress again cut taxes while spending tens of billions bailing out banks and auto companies (an initiative begun under Bush) and hundreds of billions trying to stimulate a sagging economy.
Whatever you think of the merits of these spending initiatives, the public was never forced to consider the consequences of paying for them. Would we have fought the Iraq War if it was accompanied by a tax hike? Would we have created the Medicare drug benefit if we had to pay for it? We’ll never know because Washington never bothered to ask the question. Instead, it spent more even as it cut taxes. No beast was starving. Instead, we were gorging on a free lunch.
Starve the beast has received a real-world 30-year test. As economic theory, it deserves a place on the ash heap of history. If Senator Kyl wants to cut spending, he’s not going to get there by cutting taxes. He’s just going to have to, well, cut spending.