As Mr. Ryan is set to give the Republican response to the SOTU, now is a good time to take a look back at his Roadmap. It's not mentioned much these days in Republican discussions of their budget plans, but the Roadmap offers some helpful insights into their mindset.
Here's a sample of what's below the fold:
▫ Health Care. The plan ensures universal access to affordable health insurance by restructuring the tax code ... shifting the ownership of health coverage away from the government and employers to individuals.
- Provides a refundable tax credit – $2,300 for individuals and $5,700 for families...
Here’s my first question: How much does your health insurance cost? I pay about $1800/mo for my family plan. $5700/yr won’t go very far, but this is supposed to be an equivalent replacement for Obamacare. This element is how they make up a big chunk of the overall revenue savings that the CBO projects (and Ryan keeps touting). They leave out how much more we’ll all be paying out of pocket to get decent care (what disappears from the federal budget reappears in our own personal ones . . .).
Here are some points from the summary, with my thoughts. Further down I’ve done some more specific rebuttals of the individual points.
http://www.roadmap.republicans.budget.house.gov/...
▫ Health Care. The plan ensures universal access to affordable health insurance by restructuring the tax code, allowing all Americans to secure affordable health plans that best suits their needs, and shifting the ownership of health coverage away from the government and employers to individuals.
- Provides a refundable tax credit – $2,300 for individuals and $5,700 for families – to purchase coverage in any State, and keep it with them if they move or change jobs.
We’ll talk more about this below, but here’s the first question that springs to mind: How much does your health insurance cost? I pay about $1800 a month for mine. $5700 won’t go very far, but somehow this is supposed to be an equivalent replacement for Obamacare. This element of the proposal is how they make up a big chunk of the overall revenue savings that the CBO projects (and Ryan keeps touting). What they leave out is how much more we’ll all be paying out of pocket to be able to get decent care (what disappears from the federal budget reappears in our own personal ones . . .).
▫ Medicare. The Roadmap secures Medicare for current beneficiaries, while making common-sense reforms to keep it solvent for the long term.
- Preserves the existing Medicare program for those 55 or older.
- For those currently under 55 – as they become Medicare-eligible – creates a Medicare payment averaging $11,000 per year when fully phased in. Adjusts the payment for inflation, and pegs it to income, with low-income individuals receiving greater support. Provides risk adjustment, so those with greater medical needs receive a higher payment.
As with everything in the bill, the hard parts are put off for at least 10 years (at least in part to appease older voters, who vote much more frequently than the kids). What’s not clear from a logic perspective is why they insist on retaining Medicare at all (at least for everyone under 55)? If their insurance plan is such a good idea, let’s just phase out Medicare altogether and go with the new approach. Of course, that’s political suicide, but as we’ll see below, that’s effectively what they’re doing, but without dropping the name (a remarkable bait-and-switch, gambling on the idea that if they keep calling it the same thing people won’t notice that it’s not).
▫ Social Security. The proposal saves and strengthens this important retirement program and makes it sustainable for the long term.
- Preserves the existing Social Security program for those 55 or older.
- Offers workers under 55 the option of investing over one third of their current Social Security taxes into personal retirement accounts, similar to the Thrift Savings Plan available to Federal employees. Includes a property right so they can pass on these assets to their heirs, and a guarantee that individuals will not lose a dollar they contribute to their accounts, even after inflation.
- Makes the program permanently solvent, according to the CBO, by combining a more realistic measure of growth in Social Security’s initial benefits, with a gradual, modest increase in the retirement age, consistent with Americans’ improving lifespans.
I have a lot to say about this below. In a nutshell, (and again, as with so much of this proposal), the high-level gloss sounds great, but the details leave a lot of unanswered questions. And again, if the plan is such a good idea, why not do it now for everyone? Unless of course it’s not better than what we currently have, which is of course why you’d delay implementing it until later.
▫ Tax Reform. This plan offers an alternative to today’s needlessly complex and inefficient tax code, providing the option of a simplified mechanism that better promotes and rewards work, saving, and investment.
- Provides taxpayers a choice of how to pay their income taxes – through existing law, or through a highly simplified code that fits on a postcard with just two rates and virtually no special tax deductions, credits, or exclusions (except the health care tax credit).
- Simplifies tax rates to 10 percent on income up to $100,000 for joint filers, and $50,000 for single filers; and 25 percent on taxable income above these amounts. Also includes a generous standard deduction and personal exemption (totaling $39,000 for a family of four).
- Eliminates the alternative minimum tax [AMT].
- Promotes saving by eliminating taxes on interest, capital gains, and dividends; also eliminates the death tax.
- Replaces the corporate income tax – currently the second highest in the industrialized world – with a border-adjustable business consumption tax of 8.5 percent. This new rate is roughly half that of the rest of the industrialized world.
I won’t even touch these here—see the point-by-point below.
▫ Job Training. The Roadmap helps the Nation’s workforce prepare for success in the global economy by transforming 49 job training programs, scattered across eight agencies, into a flexible, dynamic program focused on results, and accompanied by clear measures of transparency and accountability. The plan requires the development of performance measures, and gives each State the option to consolidate funding into one program, if such an approach can be shown improve outcomes and achieve job training goals.
The funny thing is, if they tried to pass this last one as a standalone, they’d probably get good bipartisan support. I’m not sure what the argument against doing it separately would be—it’s not an integral part of the rest of the proposal (in fact, it almost seems like it was tacked on, since it has so little to do with budgetary or entitlement reform, and will only have a modest impact on finances). Of course, if they offered it up and it passed, it would be beneficial for Obama, which is a no-no at the moment.
GETTING INTO THE WEEDS: THE FULL ANALYSIS
HEALTH CARE
(http://www.roadmap.republicans.budget.house.gov/...):
Besides the "how much does it cost" problem, there’s this basic inconsistency in their position:
Geographic differences are a significant driver of current health care problems. The characteristics of patient populations differ from State to State. This means the type of basic medical care also differs from State to State. A uniform, national health care plan ignores these regional differences and lowers the standard of care the medical community can provide. Allowing each State to develop and regulate health coverage that meets the unique characteristics of its population and economy will encourage the innovative and patient-oriented health care that should be the hallmark medicine in America.
And a few paragraphs later:
Allowing consumers to shop across State lines will balance State regulation of health insurance. Individuals no longer will have to pay for health benefits mandated by their home States that they do not need; they will be able to choose policies from States whose mandates better fit their personal circumstances. States will then have an incentive to balance their insurance mandates against costs to remain competitive with other States.
So, states should be able to design plans that best fit their populations, but the individuals in those populations should be able to disregard the choices that the states have made. Besides being absurdly contradictory on the face of it, what it means is that, when you combine this with the remarkably low tax credits they’re planning to give, it will be a race to the bottom, with a handful of low-benefit, high-deductible plans setting up in states that will provide the least amount of regulation and most people being forced into those plans because it’s all they can afford.
A number of the other suggestions in this section are good ones, but guess what? Most of them are already covered in Obamacare (no mention of that here :). Here’s the bullet list:
▫ Establishing High-Risk Pools – Check
▫ One-Stop Marketplace for Health Insurance – Check
▫ Benefits by the Same Standard Used For Member of Congress – Check
▫ Guaranteed Access to Care – Check
▫ Affordable Premium – Check
▫ Simple Auto-Enrollment – This one I’m not entirely sure about, but if it’s not in there, I’d agree with adding it
Medicaid:
Here’s an interesting question—as I read this:
Direct Assistance. Providing low-income families with dependent children the financial assistance to purchase high quality private plans will end the two-tiered health care system that exists today. In addition to the health care tax credit, this individual Medicaid payment will provide Medicaid beneficiaries with nearly $11,000 that can be applied to health care costs. Additional assistance is provided for pregnant women and families with children younger than 1 year old. This will ensure families stay together within one provider network and foster coordinated and personalized health care as well as promote new and innovative care models for patients.
They’re proposing to give Medicaid beneficiaries nearly twice the value of the family tax credit they’re giving the rest of us. If the insurance is affordable at $5,700 (what we’re all getting), why do they have to pay $11K to these folks?
They do have a section on Removal of the Stigma which makes some good points, but it begs the question, why isn’t the best solution just to create a single universal system that we all participate in?
Medicare:
Besides the fact that they’re proposing a wholesale shift from a defined-benefit plan to a defined-contribution one, this section has another interesting payment point:
When fully phased in, the average payment is $11,000 per year (the average amount Medicare currently spends per beneficiary), and is indexed for inflation by a blended rate of the CPI and the medical care component of the CPI. For affected beneficiaries, the payment replaces all components of the current Medicare Program (Medicare fee-for-service, Medicare Part B, Medicare Advantage, and Medicare Part D). Payment amounts are income-related and risk-adjusted. They also are partially geographically adjusted, with the geographic adjustment phasing out over time.
Again, the question comes up—why are they paying twice the amount for this group as for the premiums that we’re all supposed to be buying (and in fact, it’s substantially more than that, since this is per-beneficiary, whereas the $5700 is for a whole family).
The other interesting aspect of this (which is another way they make this plan’s numbers ‘work’), is that they’re going to raise the Medicare eligibility age over the course of years from 65 to 69.5. But that again begs the question—if the insurance we’re supposed to be able to get through the tax credit is good enough, then why do we need Medicare at all? The clear truth is that the tax credit won’t be enough to cover the cost of the insurance anyone will actually need.
RETIREMENT SECURITY
(http://www.roadmap.republicans.budget.house.gov/...)
This one is fascinating:
Guarantee of Contributions. Individuals who choose to invest in personal accounts will be ensured every dollar they place into an account will be guaranteed, even after inflation. With the recent market downturn, individuals must be assured their retirement is secure. By guaranteeing the dollars put into an account, individuals can be assured that a large-scale market downturn will not cost them their Social Security personal accounts.
Personal Choice in Retirement Accounts. Beginning in 2012, the proposal allows each worker younger than 55 to shift a portion of his or her Social Security payroll tax payment into a personal retirement account, chosen from a group of investment funds approved by the government (see below). When fully phased in, the personal accounts will average 5.1 percentage points of the current 12.4-percent Social Security payroll tax.
I would be quite interested to know if anyone actually ran the numbers on what the effect of these two facts would have been during the last downturn in the market. By the time this is fully phased in, over 40% of a worker’s Social Security will be in guaranteed accounts. If we were working in that model when the market took a 25% nosedive in 2008, the government would be making up a pretty big loss. Wonder what that number looks like?
Another interesting point:
Property Right. Each personal account is the property of the individual, and the resources accumulated can be passed on to the individual’s descendants. This contrasts with current government Social Security benefits, which are subject to reductions or other changes by Congress, and which cannot be passed on.
This has a certain appeal, but also raises two questions: One, how likely is it that there will be any real value in the accounts by the time a person dies? And two, how does this affect the overall financing of the program? Part of the advantage of the current system (from a government accounting perspective) is that when people die their ‘unpaid balances’ lapse back to the SS coffers. If that money is being taken out of the system, how is it being balanced out? My guess is that it’s an overall reduction in the benefits being paid.
Next up:
Soundness of Accounts. Those choosing the personal account option will select from a list of managed investment funds approved by the government for soundness and safety. After an account reaches a low threshold, a worker will be enrolled in a "life cycle" fund that automatically adjusts the portfolio based on age. A worker may continue with the life cycle option or choose from a list of five funds similar to the Thrift Savings Plan options. After workers accumulate more than $25,000 in their account, they can choose to invest in additional nongovernment options approved by the Personal Social Security Savings Board.
Two interesting observations here—first, who decides which funds are going to be acceptable (and how much lobbying money will be involved in those decisions?). Second, isn’t it odd that the champions of the free market are recommending that the investment options be restricted to government-approved choices? I thought we were letting the market decide these things?
I’m not sure what to make of the Progressive Price Indexing, other than that it seems generally anti-worker (in the sense that any progress made on wage improvements won’t be reflected in the benefits paid out to retirees). But I’ll leave that alone. Modernizing the Retirement Age, on the other hand, raises an interesting question—what happens if there are no jobs for folks over 65, who are thereby locked out of the workforce and yet unable to turn to SS as a lifeline?
FEDERAL TAX REFORM (http://www.roadmap.republicans.budget.house.gov/...)
I’m ok with the first point—the AMT should have been tossed a while ago, but no one has had the guts to date.
The second point, on the other hand, is just BS:
Elimination of Double Taxation of Savings. The current system essentially taxes savings twice: individuals pay tax on their earnings and, if they choose to invest those after-tax funds, they pay another tax on the return from their savings (i.e. interest, capital gains, or dividends). This proposal eliminates the second layer of taxation. Not only is this fair to individual taxpayers, it also is good for the economy. Greater savings leads to more investment and higher rates of productivity. Higher productivity ultimately drives increased living standards. The plan also eliminates the estate tax, another form of double taxation that is particularly harmful to small businesses.
It’s not double taxation, in that the same amount (the invested income) is not being re-taxed after it’s earned. The only thing that’s being taxed is the profit on that capital. My question is, why should that passive return not be taxed at an even higher rate than income? You don’t have to do a damn thing to earn it other than stick it in the bank or an investment account. On the other hand, you do have to drag your ass out of bed in the morning to earn your earnings. And if you look at a chart of earned income v. investment income, most of the investment money is going to a small percentage of folks on the high end of the overall income scale.
Second is the estate tax canard. Here’s the truth:
Yet if the 2009 estate tax parameters were made permanent, almost no small business and farm estates would owe any estate tax: just 140 such estates in the entire nation would be taxable in 2011, and virtually none of them would have to be liquidated to pay the tax.
Almost no small farms and businesses owe any estate tax.http://www.cbpp.org/...
It’s just not a real issue, but the Republicans keep bringing it up because it allows them to ring the ‘save the small businesses’ bell once again.
And this one just seems kooky:
Taxpayers Choice. The proposal allows individual income taxpayers to make their own choice about how best to pay their taxes. Within 10 years of enactment of this legislation, individuals choose one of the two tax systems. But they are allowed one additional changeover between the two systems over the course of their lifetimes. Individuals are also allowed to change tax systems when a major life event (death, divorce, or marriage) alters their tax filing status.
So, if you make a bad choice about which way to go (because you’re not aware of all of the potential ramifications), you’re basically screwed. More to the point, if the problem is that the system is too complicated, why on earth would you argue for maintaining it while simultaneously running a parallel system? That’s guaranteeing work for all of the CPAs in the country, but I’m not clear how it’s a good thing for the average taxpayer. But, it would allow the existing system of loopholes and evasions to stay in place, so high-earners don’t have to pay as much tax as the folks who opt for the simple systems (like the billionaire hedge fund managers who pay a lower effective tax rate than their secretaries).
Here’s the next bit of comedy:
In addition to creating a simpler and fairer income tax system for individuals and families, this plan does away with the corporate income tax, which discourages investment and job creation, distorts business activity, and puts American businesses at a competitive disadvantage against foreign competitors. In its place, the proposal establishes a simple and efficient business consumption tax [BCT] that will enhance the international competitiveness of U.S. businesses and put the economy on solid footing to meet the challenges of the 21st century.
This one is very funny, because the Republicans have been railing for months that Obama is planning to impose a Value-Added Tax (VAT) like they have in Europe (the damn socialists! :). But in the next paragraph, the plan describes the BCT as follows:
Business Consumption Tax. The proposal creates an 8.5-percent BCT on goods and services. The tax is calculated and administered based on the "subtraction method," under which a business determines its tax liability by subtracting its total purchases from its total sales. The BCT is then imposed on this net receipts figure (i.e. the firm’s value added) and paid to the Federal Government once each reporting period (i.e. each business quarter).
The big Republican complaint about VAT (at least used to be) that businesses would just pass it on to the rest of us. The big Democratic complaint about it is (and still is) that it’s a form of a hidden sales/consumption tax, and therefore remarkably regressive (since everyone consumes, and the lower your income, the more of it is spent in consumption). Taxing corporate profits takes a swipe at shareholder value (and is ultimately harder for corporations to ‘pass on’, since it’s based on something as uncertain as ultimate profitability). The VAT or BCT, on the other hand, gets paid out by the consumer of the good/service, not the shareholder.
Another interesting element:
Under the BCT, the cost of an investment is fully deducted immediately – in other words, investments are "expensed." That becomes important from a tax perspective because a dollar’s worth of tax benefit today is worth more than a tax benefit in the future for any business. Expensing becomes the key element in shifting from a system that taxes income to a system that taxes consumption (i.e. income less investment). This will boost overall investment in the economy, spurring job creation, productivity and rising living standards.
That’s one way of looking at it—the other is that it will encourage companies to spend somewhat more recklessly, since they can write off the investment immediately. One of the reasons for the concept of depreciation is to encourage companies to recognize that assets have a useful life, and the relative cost of that asset should be offset over the course of its life, rather than effectively rendering it disposable because its immediately expensed. In other words, depreciation is the more conservative accounting approach, which raises the question why the Republicans are pushing to get rid of it?
Next, Corporate Tax Rates:
The current statutory U.S. corporate tax rate (including State corporate taxes) is 39 percent, the second highest tax rate in the Organisation for Economic Cooperation and Development [OECD] and 8 percentage points higher than the OECD average. This adds to the disadvantage already placed on American businesses and, in turn, American jobs.
But the reality is that statutory rates aren’t necessarily relevant—it’s the effective rate that matters, and on that count, we’re doing ok:
In its Paying Taxes 2009 publication, based on its 2009 Doing Business report, the World Bank-International Finance Corp. estimated that the United States has a lower effective rate of current corporate tax than that of several other nations, including Germany, Canada, India, China, Brazil, Japan, and Italy
http://mediamatters.org/...
The simple truth is that most corps don’t locate here or elsewhere because of the tax rates (at least not relative to the many other economic and cultural factors).
On the other hand, they’re arguing that the BCT will manage to reduce the marginal effective tax rate on new business investment to zero. If that’s the case, but they’re also arguing that this restructuring won’t change the overall revenues that are being generated from corporate activity, that BCT must be a pretty good revenue-producer. And as I noted above, guess who pays the BCT? It’s not the guy who’s sitting on a million shares of Microsoft . . .
Quick recap rebuttals to three of the summary points:
▫ An uncompetitive business tax climate has forced many U.S. companies to relocate and send jobs abroad, often through mergers and acquisitions with foreign companies. This tax plan reverses the trend.
They’re not pushing jobs abroad because of taxes, it’s because the wage rates are lower overseas. It’s not clear how this tax plan will change that (though if they’d like to tie their tax plan to some sticks for companies that offshore jobs, then it might be worth discussing).
▫ With an enhanced investment climate, international businesses, particularly capital-intensive industries such as manufacturing, will have a greater incentive to invest in the U.S. and expand production here, which creates jobs.
Again, this is more a function of relative wage rates than investment potential.
▫ The United States’ relatively high statutory corporate income tax has led to multinational corporations shifting their profits to lower-tax countries, essentially shifting the tax base overseas. Many U.S. businesses also delay the repatriation of earnings from their foreign affiliates. This plan brings these earnings and profits back to the U.S.
That last point may be true, but if we’re not taxing the corporations or the capital gains/dividends of shareholders, we’ll never see any benefit of those repatriated profits/earnings. Rich people don’t spend—they reinvest. And while the argument (going all the way back to Reagan) is that the trickle-down approach of supply-side economics will somehow generate tons of jobs and economic prosperity for all, in practice all that has happened as a result of cutting tax rates (both individual and corporate) whenever it’s been done is that giant holes have been blown in our budgets.
I’ll leave the next section, JOB TRAINING, alone—I don’t think anyone would argue about any of it, and it’s not going to have enough of an economic impact (in terms of spending) to really be relevant to the overall budget issue.
Finally, with regard to the last element, REFORMING THE BUDGET PROCESS, I’d have to say that I agree with this proposal, specifically this:
We believe that these three programs must be subjected to serious periodic review and decision. Their estimated future costs must be shown clearly and budgeted in advance. If they run significantly over budget, a triggering mechanism should force the President and Congress to deal with the shortfall. This requirement would give the public and their elected representatives a chance to decide explicitly how much they want to spend on these three entitlements, how much on other priorities – such as national defense, education, and scientific research – and what level of taxes they are willing to pay to support these programs.
It will be a great day when we can get past the demagoguery that passes for political debate in America at the moment and have an honest and serious discussion about these exact points. Do we need to be spending more than all of the rest of the world combined on our military? Do we need to be spending billions of dollars on new planes/tanks/submarines just because the contractors were clever enough to make sure to spread the development around to lots of Congressional Districts? Or should we be redirecting some of those resources to make sure that we’re keeping our kids healthy and well-educated, and figuring out the innovative scientific and technological breakthroughs that will fuel the growth of our economy for the next hundred years?
That’s the debate we should be having. Unfortunately, it doesn’t seem that the Republicans are really serious about having it. We'll see what happens when Mr. Ryan starts the process of drafting the House budget this year, but I'm guessing that we're going to get a lot more smoke and mirrors, with increasing pain to the middle class at the expense of the well-to-do.