Brad DeLong's Semi-Daily Journal: A Weblog

My guess is that elimination of the tax subsidy for employer sponsored health insurance is intended to be an incentive to move people into health savings accounts. Currently, there is a lot of “under the radar” excitement about these plans in health insurance companies. They are attractive to these firms because they shift risk to consumers and generate fees at the same time. Sort of sounds like the proposed Social Security reforms doesn’t it?

Also note the Loser tax aspect (MY as well). Blue states with higher taxes would be hit much harder by this loss of deductions. It appears that Federalism is no longer a conservative argument when the conservatives have the central government.
I am feeling a bit of a federalist myself these days. Starve the beast and let me send my tax money to the commonwealth of Mass or the great state of California.

"Far better [for the Democrats] to devise a progressive, revenue-neutral, tax reform counterproposal..."

Yes, by all means. Let's have a Democratic proposal. And if we don't get one, then what are we to think of the national Democratic Party re their capability to govern? They didn't deliver a national health plan in '93 when they held both ends of Pennsylvania Ave. So let's just see what they have to offer now.

Inquiring minds want to know!

Thanks (see comment posted to previous thread about starting a thread on tax reform!).

Two thoughts: 1) State tax deductibility. Removing its deductibility creates much stronger pressure for state tax cuts. It's not just about punishing blue-state residents, it's about moving blue states from the "state-taxes and high services/social investment" model (for which my model will always be the [old, tuition-free] University of California), to the red-state model of minimal public services, grudgingly offered (cf. Mississippi's tax debacle last year).

In short, it's Federal tax policy intended to reproduce the social model of the governing party, which I suppose is legitimate at one level, but disturbing if you look around the world.

2) Ending tax deductibility to employers of health care. Since good health care has been a job recruitment tool for a long time, why shouldn't it be deductible. If a company can deduct as a cost of business the fitness center and the President's limo, why not health care that it pays, in order to recruit desirable employees?

But leave that aside: Matt Y. is obviously right that this is meant to dovetail with "Health Savings Accounts". And lurking deeper back is the idea ((which clearly has some empirical foundation, but neglects "race-to-the bottom" issues)) that companies with good benefits (and especially with legacies for retirees) are obviously at a competitive disadvantage to new companies that do not offer pension plans, health care, etc. So, this is a gift to big-corporate America, giving them an excuse to end health-insurance coverage for their (rank-and-file) employees. (If anyone cares to make a bet about how many companies will drop health-insurance for top executives, I'll be glad to wager!)

As Matt suggests, this will most likely result in single-payer eventually, but getting there could be very ugly indeed.

Also: what analysis can economists provide on health care at the micro-economic level. If companies end company-paid health care, claiming that the loss of the deduction means that "Wall Street" is making them do it, how much of the lost benefit will come back as increased salaries? After all, for many employees, health care benefits account for 20+% of their total compensation (I'm guessing that number, admittedly). Since earned income and salaries are going to have to be taxed more heavily to pay for the cuts in investment income taxation, it's a triple whammy:

a. pressure on companies to end the benefit
b. return of less than the value of the benefit in increased salaries
c. incremental taxation of that salary

You've got to hand it to the Bushies: they have targeted this precisely and accurately at the middle class at all levels! Wonder if they will be able to continue dodging the backlash, and for how long?

There's a legitimate argument against the current tax treatment of employer-provided health insurance--employer deduction but no employee income inclusion--but the theoretically correct fix would be treating health insurance as just another form of taxable compensation, not taking away the employer's deduction. But I suppose that wouldn't poll well. I'm sympathetic to the idea that it's dumb to provide health insurance through employment, but creating incentives for employers to stop providing health insurance without offering an alternative is just ugly.

I'm sure our fine "lib'rul" media will get right on that. They really enjoy making sense of economic proposals. Cough cough cough.

The Dems do need to develop a counter proposal to this Republican chicanery. Dems need to hammer home, again and again, how these "tax relief" initiatives put more of the burden on working folks.

This is scary.

I agree that the blue states should mount a tax offense. As a New york resident, I want to pay my state and local taxes which result in services for me, but not my federal taxes, which go entirely to the military that still hasn't caught Osama bin Forgotten and to boondoggles to red states.

As for health insurance, eliminating all incentives for employer-sponsored health insurance *really* hurts the middle class. A unemployed friend of mine in a rent-stabilized apartment recently had to spend two months+ in a hospital. Because he has no assets he qualifies for medicaid, but if he didn't have a below-market rental apartment he'd be homeless now -- if he owned his apartment, he wouldn't qualify for medicaid and he'd probably would have had to sell it just to pay $200,000+ in medical bills. He'd been hoping to buy an apartment once he got his career back on track, but he's giving up on that now.

This is the upshot of Bush's ownership society: If you don't have health insurance, you will lose the ownership of all your middle-class assets if you needed to be hospitalized for any length of time, or if you acquire a chronic illness, or if you get seriously injured.

This is scary.

I agree that the blue states should mount a tax offense. As a New york resident, I want to pay my state and local taxes which result in services for me, but not my federal taxes, which go entirely to the military that still hasn't caught Osama bin Forgotten and to boondoggles to red states.

As for health insurance, eliminating all incentives for employer-sponsored health insurance *really* hurts the middle class. A unemployed friend of mine in a rent-stabilized apartment recently had to spend two months+ in a hospital. Because he has no assets he qualifies for medicaid, but if he didn't have a below-market rental apartment he'd be homeless now -- if he owned his apartment, he wouldn't qualify for medicaid and he'd probably would have had to sell it just to pay $200,000+ in medical bills. He'd been hoping to buy an apartment once he got his career back on track, but he's giving up on that now.

This is the upshot of Bush's ownership society: If you don't have health insurance, you will lose the ownership of all your middle-class assets if you needed to be hospitalized for any length of time, or if you acquire a chronic illness, or if you get seriously injured.

I'm assuming that "state and local taxes" means property tax as well. That's going to kill people in high property tax areas, mostly urban homeowners.

In California, because of Prop 13, new homeowners will feel the effect of this most of all.

It seems like the best counter to this would be to emphasize this aspect, being that homeownership = middle class = American Dream.

I just can't believe the Bush admin would be that stupid. I mean, the backlash would be huge. They must really believe they can act with impunity at this point.

Eliminate state/local tax exemption? Yikes. That should crater the blue-state real estate market.

I don't think that banks and Fannie Mae et al will be too happy with scrapping deductibility for property taxes, and the entire medical/pharma/insurance industry will scream blue bloody murder before the Bushies get their way on non-dedcutibility of employee health insurance.

I think all of the above are reliable GOP contributors.

Further, the effect of the Bush tax cuts has been to reduce taxes on capital which has meant a relative increase in taxes on labor. By altering the cost relationship of labor and capital it encourages companies to employ more capital and less labor, which may well be one reason that employment growth has been sluggish in this recovery. The new plan will exacerbate this trend.

No Altenative Minimum Tax ! Damn that's Great News for those of us on the right side of the pond !

Suggestion:

Blue states -- which will need to replace federal service as Bush cuts them -- should revise their taxes to precisely reverse the impact of Federal tax cuts, shifting any Federal revenue loss to state coffers.

More on this at
http://urbanist.typepad.com/jarrett_walker_home/2004/11/a_bluestate_fed.html

Peace, Jarrett

LarryB, I think the medical providers and health insurance companies are likely to support this proposal. One of my students, who works for a health insurance plan, recently told me that they were gearing up their efforts to market health savings account based plans in a big way.

No one in the health care industry (except maybe the pharmaceutical firms) really likes the current structure. The providers hate dealing with the insurance firms, and the insurance firms don’t like health insurance because it really isn’t insurance. A health savings account wrapped around a catastrophic health plan is much closer to “real” insurance.

It would also get rid of a lot of the managed care structure that everyone hates. The providers would like this. But, it may be one of those be-careful-what-you wish-for things because high physician incomes, to an extent that they don’t seem to realize, are tied to the existing structure. Get rid of it, and things may come tumbling down.

Bush likes to tax money earned by working. He hates to tax wealth. I think that the Dems could make great hay over the wealthy inheritor who never has to pay any income tax.

The health-insurance part of the plan if mind-numbingly stupid. It isn't just class war--it pits the healthy against everybody else.

Got diabetes? You get no insurance--unless you pay through the nose.

Asthma? Ditto.

Ditto for many, many other conditions.

What member of Congress would be willing to stand up to a parade of diabetes and asthma sufferers descending on his/her office as the TV cameras roll?

http://www.nytimes.com/2004/11/18/business/18scene.html?pagewanted=all&position=

Controlling Health Care Costs
By HAL R. VARIAN

HEALTH care just keeps getting more expensive. According to the Stanford economist Victor R. Fuchs, health care expenditures by the elderly are growing 2 to 3 percent more rapidly than their spending on other goods. If this trend continues, by 2020 health spending by or on behalf of the elderly will exceed their spending on all other goods and services.

As the economist Herbert Stein cogently put it, "If something cannot go on forever, it will stop." What can be done to stop, or at least slow, the rapid growth in health care spending?

It has been argued, with considerable justification, that a significant part of the increase in health care expense is a result of improved quality. The real issue is not simply reducing spending on health care, but reducing it while still maintaining an appropriate quality.

Economists have two magic potions to control prices and improve quality: competition and incentives. How can these elixirs be best administered to the health care industry?

This question has preoccupied the Stanford economist Alain C. Enthoven for decades. In a recent book that he edited with Laura A. Tollen, "Toward a 21st Century Health System" (Jossey-Bass, 2004), he provides an outline of an answer.

Start with competition. For better or worse, most Americans receive health care benefits through their employers. The problem is that employers do not have much incentive to offer their employees choice in health care plans.

Offering three or four health care plans imposes administrative burdens on employers. A large employer might be able to handle these extra administrative costs, but small employers find it more economical to offer a single plan. In 1997, only 23 percent of insured employees were offered a choice of plans.

But competition cannot be effective unless there is choice of competing providers. What policies could be used to offer more choice?

What is needed is experimentation with, and competition among, different ways of delivering health care: prepaid group practices, health maintenance organizations, traditional preferred providers, and other ways not yet thought of. The key is to give consumers a choice among different delivery systems, not just minor variations on a single theme.

Mr. Enthoven argues that the most promising solution is a health care "exchange" like the California Public Employees' Retirement System, or Calpers. Calpers arranges coverage for over 1.3 million public employees, retirees and dependents for 2,400 different employers in California.

Such exchanges standardize business rules, facilitate comparisons among plans, and expedite enrollment decisions, billings and payments. BENU Washington is a new exchange aimed at companies with 100 to 1,000 employees, allowing these relatively small companies to offer a much wider range of plans.

Such exchanges could help businesses control the administrative costs of offering a number of health care plans. But there is still the issue of providing appropriate incentives to the individuals who must choose the plan most suited to their needs.

I am starting to think Bush's tax plans are never going to amount to much more than talk. It's easy to cut taxes without offsetting the revenue loss elsewhere. But once you require that tax cuts have to be revenue neutral, it will be nearly impossible for their tax-cuts-for-the-wealthy plans to go anywhere, since there will be outrage if it means new taxes on the middle class. As clueless as the public can be, I don't think the average American would mistake a change in the deductibility of state/local taxes or employer health care premiums as anything other than a tax hike.

The main raison d'etre of the Bush Administration is to get large piles of money to their cronies. They will make sure that the tax cut part passes, and if they get to screw the blue states by increasing their taxes it's just a bonus. If it doesn't pass the deficit increase will be the liberals' fault.

The Democratic party structure is rotten to the core if it can't bring itself to fight with everything it's got against this vile, immoral tax increase on working Americans. I'm tired of compromises and I'm tired of milquetoast Democratic 'leaders' who refuse to lead anyone anywhere. Put a fighter in charge, not some Red Stater who can barely hang onto his own seat.

The Republicans have been waging class warfare for a long time. The problem is that the Democratic leadership is mostly part of the same class and is reluctant to fight back. We need to start, and if our leaders refuse to do so, we need to evict them and get new leaders who will. Find the most egregious cases possible. How much does Paris Hilton earn? How much does she pay in taxes? The Walton heirs are pretty worthless too - how much are they paying in taxes? I'll bet you could find some Wal-Mart employees without health care who pay a higher percentage of taxes than the Walton spawn do. I want so many commercials about this that the American people can't think of anything else. Forget whether or not it's an election. Flood the airwaves. The Republicans are venal, wicked, immoral, and evil and they must be stopped at any cost.

They're going to eliminate the deductibility of state income taxes?

Gee, when they were talking about cutting divdend taxes all we heard about was the evils of double taxation. I guess that doesn't matter when it's wage income, which will now be triple-taxed if you include payroll taxes.

Sounds to me like a hand-out to the Wal-Marts of the world. If you do not currently provide health insurance, and your competitors do, this change would tip the scales in your direction.

To take just one point, Yglesias is absolutely right about the estate tax. Out of all the specific things the Republicans harp about, this has to be the most fustrating. Next to nobody is affected by this. The few who are affected are usually so wealthy that paying it means little to them.

What about all of those family farms that were going out of business? They have searched high and low, yet they have not, to my knowledge, been able to find a single farm that went under because of the estate tax. Not one. Farms that have failed because of the estate tax? They don't exist, at least in the reality-based community. (Side note: where the fuck were the Democrats during all of this? This is an undisputed fact, yet did Gore, Lieberman, Edwards, or Kerry mention it? If so, I don't remember.)

I can't say that I know for sure the same applies to small businesses, but knowing how often the Republicans lie about things when it comes to them, I wouldn't be surprised.

Along the same lines, if the AMT is going to screw a lot of people whom it was never meant to affect, why not change it so that it doesn't do that? That would be the simple solution, of course.

And has there ever been a lot of discussion of Health Savings Accounts? The idea is interesting, to be sure, and on some levels, it makes sense. But at the same time, isn't it creating an adverse retention-like problem (I'm stealing this phrase from David Cutler, I think)? Isn't the whole idea of insurance to share the risk, something which HSAs don't offer the opporunity for?

Yglesias is also right about not simply being stubborn and obstructionist in his advice for the Democrats. If one of the biggest problems for the Democrat is an alleged lack of a coherent message, then offering a different (and better)plan would in fact kill two birds with one stone.

WhoTF put this agenda together? Grover Norquist? Prbably not Mankiw who is rumored to be replaced by Kevin Hassett in February. John (talk down the dollar) Snow? Karl Rove?

A lot of GOP in Congress will go with the flow. When people complain about these policies, Democrats should plead helpless and let people know that supporting GOP partisans has real consequences. Many in the US still think the Democrats controll Congress.

Remove deductability of state income taxes? And also property taxes?

Sounds like a good time for Dems. to grill blue-state Senators and Reps. before the filibuster rule goes.

Esp. the Maine twins (Collins and Snowe) and their state's 8.5% (Yikes!) top rate income tax.

Okay, same drill as every time. This is a test balloon, leaked intentionally. The actual plan will depend in part on the reaction. It almost certainly won't be as severe as this one, since part of the purpose of the test balloon is to "shock" people with an outrageous plan, thus making the actual one more reasonable.

My guess? First, they probably won't fix AMT, or won't fix it very much. They'll probably exclude non-wages from AMT and that will solve the problems for the rich. The, as AMT hits more people over the next couple years they'll use the outcry over that to justify their next pro-rich tax cut package. With a real media they would take the blame for not fixing AMT, but ....

Second, I suspect they probably won't cut the corporate deduction for health care. I don't think that proposal is serious .. rather, it is designed as a negotiation chip to attract the majority of the opposition. It will later be taken off the table so that the other stuff will pass.

I suspect they'll keep part of the elimination of state/local taxes, possibly in a phase-out approach (maybe eliminate state taxes but leave the deduction for property taxes, which of course is something the rich still have to pay, even in Texas).

The health savings accounts are an obvious keeper. They don't do a damn thing to address the health care problem but allow the Republicans to act as though they did ... and of course those accounts will benefit the investment industry.

But all that is a trojan horse (to use David Stockman's term) for the REAL purpose of this tax change: the elimination of taxes on investments and inheritance. No matter what form the final package looks like, this will be part of it.

I agree with spm on this. As I noted on my blog, I think both insurance companies and employers would love elimination of the health insurance tax deduction. It would shrink the comprehensive insurance pool to the wealthiest and healthiest few, who would both pay more for their coverage and use less of it. It also would push people into health savings accounts and consumer-directed plans, which put a higher financial burden on the enrollee (in other words: insurers would take in less money, but they'd likely pay out less due to patients using services less often). The plan would free up what many employers feel is the biggest drag on their profits (see what GM did the other day). The massive new numbers of uninsured would also put incredible pressure on state budgets and safety net providers, however.

Then there's the political angle to this proposal. As so-called "tort reform" would do for trial lawyers, this would attack the financial base of Unions, since Union members would likely have to renegotiate their benefit packages with their employers, giving them less money to spend on Dem-friendly political donations, 527s and the like.

To give further voice to the comment my brother obliquely made above, the AMT as it stands now forces many Americans living abroad to pay US tax. This is because the IRS decided that the AMT is not subject to double taxation treaties, so no matter how much tax you pay to a foreign government you still can get screwed by the IRS and end up paying tax to the US government. By all means keep the AMT in a form which ensures that "rich" people (whatever that means) pay their fair share of tax, but US citizens who live abroad should not be caught in this dragnet.

Here are some helpful links to quantitative evidence:

Size of the tax preferences for employer paid insurance = $113 billion/yr +self-employed $4BB/yr; s+local taxes = $46 BB/yr + $19BB/yr on owner-occupied homes. Chap. 18 of http://www.whitehouse.gov/omb/budget/fy2005/pdf/spec.pdf

Income sources by amount of AGI are at http://www.irs.ustreas.gov/pub/irs-soi/02in01ia.xls

Deductions at http://www.irs.ustreas.gov/pub/irs-soi/02in03id.xls

Taxes paid at http://www.irs.ustreas.gov/pub/irs-soi/02in02tl.xls

There's going to be some very funky math in whatever "reform" package eventually emerges.

I believe just about everyone in this thread has a hold of parts of the elephant.

With regard to the backlash against these proposals (we'll see if they make it that far)step back and look at the animal in its full terrible majesty. The point of shifting taxes from the rich to the middle class, from savings and capital to labor, and from the Federal level to the state and local level is revolutionary, diabolical, and within reach.

The Republican machine wants to create lots of new Republicans, who will vote Republican for at least a generation. These tax shifts will not result in a backlash directed toward Republicans but rather a colossal revolt against all forms of taxation at all levels of government, as the cost of government is fully born by the populations least likely to tolerate and afford it, and as those substantial populations demand that their self-interest be granted its full reward.

That is the world these revolutionaries are creating. Say goodbye to the common good, the social contract and all that has made life tolerable since 1932.

Radical measures must be taken to combat these ruthless people, who view compromise as treason to the ideology. Pick a side or get out of the way.

Apparently the Bushies have no problem with double-taxation when levied by both states and the federal government on the same (primarily wage) income-- we'll see if they carve out an exemption for state income taxes on dividends. But heaven forbid that dividend income be double-taxed at both the corporate and individual levels.

Parsing through the double-speak in the Post article, their tax-exempt savings accounts look to be vehicles created to insure that capital gains be taxed not once (as they currently are at a preferential rate) but NEVER. This doesn't exactly jive with "broadening the tax base", unless the tax base is restricted to mean "labor".

I actually do see logic in taxing dividends only once, but think the deduction should be given to corporations, not individuals. This would give profitable companies a strong incentive to increase dividend payouts by 35% without affecting cash flow (assuming they're actually paying a marginal 35% tax rate-- a dubious proposition, I know), while preserving progressive taxation (at the individual's marginal rate) on dividend income.

Those proverbial "little old ladies" living off dividends would fare better in such a system. By giving the deduction to individuals, the Bushies not only reduced taxation but removed the progressive element. This, I believe, was not by accident.

scrapping the business tax deduction for employer-provided health insurance

This should have been Kerry's #1 campaign issue. This is the most regressive tax policy one can imagine. The government sponsors health care for the rich, not the poor, through this tax expenditure. End the deduction and businesses will get out of health care, which would be a very good thing.

Right now GM and Ford are finished because of health care, as are many other companies.

My apologies to Bernard Yomtov, who made one of my points in an earlier post. I havn't yet had a chance to read all the comments.

Moe Levine - Those corporations that can not "get out of health care" because of union contracts, retiree committments etc. would get screwed viv-a-vis their competitors. And since fringe benefits like health insurance cost the employer money, it makes no sense as a matter of tax policy to deny a deduction to the employer. *If* you want to remove the subsidy for health insurance, the way to do it is by making the benefit taxable to the recipient, not by a rule that pretends a cost isn't a cost.

By the way -- isn't labor income being double taxed currently, since it bears the burden of social security and income taxes? And won't any scheme that emerges from this administration place a premium on the tax adviser's art of converting high-end work income into something that is reported as income from capital? (Stock options and S-Corp distributions, for example.)

KevinM,

You're forgiven. I also agree that the way to deal with dividends is to make them tax-deductible,with an offsetting increase in the corporate tax, rather than reduce the tax rate to the individual recipient.

This would address the distortion caused by having interest, but not dividends, be deductible. It would also affect all shareholders equally, rather than just benefitting individuals who hold the shares in personal non-retirement acounts.

Incidentally, doesn't the reduced rate make holding dividend-paying stocks in retirement accounts a bad proposition?

As I have always suspected, George Bush is a closet Leninist, determined to foment Red Revolution.

His timing is wierd, but his methods far surpass anything the Russians or Chinese ever could pitch to the West.

Beyond the issue of reform at large, dividends and capital gains are already tax advantaged over interest. Further extensions of current law or reductions in taxes on dividends and capital gains ought to be accompanied by changes in the tax rates on interest to avoid disadvantaging bond holders.

It seems hard to believe that Bush would remove the deduction on state income and property taxes without some other loophole being put in place. Of course Bush would love to screw the blue states, but not rich people in the blue states! There are some big donors there.

Robert: Your point is a good one. If bush were to propose ending the deduction, I would expect that it would also require such to be reported as income--that puts direct pressure on the unions to give up the plans and take the medical savings accounts.

I also agree that labor is taxed twice and I am totally opposed to FICA, both employer and employee. Talk about a tax on capital--40% of venture capital dollars go for FICA and health care, according to some studies.

I would end FICA and replace such with a wealth tax--a progressive gross receipts tax on property and casualty premiums.

What's the URL for the USA deadpool?

There may be tax structure changes that will add to debt, but there will be no changes that harm home owners or limit medical insurance. Realism is needed to stand against harmful tax changes.

Bush promises NOT to eliminate deductions for home mortgage interest and charitable contributions.

BUT... how many of the 30% of taxpayers who itemize will still be able to deduct mortgate interest -- without also itemizing state & local taxes, etc.?

In other words, the pledge not to touch mortgage interest & charity is totally hollow.

Brad,

You are missing the point -- the core of this proposal is the elimination of state/local tax deductions. It is a state war for the red and against the blue. Furthermoer, as PQUINCY points out, this is an effort to turn blue states to red states. I am with theCoach -- I want state rights now!

I think the democrats should seriously consider the possibility that we (meaning our values and priority) may not win at the national level for the next 20-30 years. While the probability of this may be small, it is not negligible. Therefore, the prudent strategy is to diversify the risk -- instead of focusing on the national level, focusing on battles on the state level. But for this diversifying strategy to work, we first need to minimize the power/size of the federal government.

And it gives me chill to hear the proposal of eliminating the state tax deduction -- Bush and co have already seen this coming while the democrats still couldn't face the reality that the majority of Americans may be intolerant, selfish, and corrupted by the superior military fire power now, and could remain so for a long time. The US as a country currently may fit this R J Rummel/Acton citation very well:"power corrupts/kills, and absolute power corrupts/kills absolutely".

So Bush and co is a step ahead of us, this cannot be good ...

"..scrapping the business tax deduction for employer-provided health insurance,.."

Given the contributions of the managed care companies to this administration, how likely is this?

I've got a great idea since it is pigs-at-the-trough time; make all 401k and IRA withdrawals tax-free!