Can’t Have Health Reform Without Revenue
Jonathan Cohn makes the important point that a bit lost in the week’s news that Harry Reid is cracking the whip on Max Baucus is the fact that this whip-cracking seems to have involved ruling out the idea of limiting the tax-exempt status of employer-provided health care as a revenue source for reform. Some important labor unions don’t like this idea and it doesn’t poll very well, but it’s too bad to see it ruled out because it’s a pretty good idea. And what’s more, even if you don’t like the idea you do need some idea of how to raise the $1 trillion to $1.3 trillion over ten years that something like the Senate HELP plan would cost.
This seems like a good moment to issue my dozenth call for congress to take another look at the Obama administration’s original revenue proposal—limiting tax deductions for high-income itemizers. This would target basically the same group of people (rich people) as House liberals’ plan for a surtax on high-income couples but raise the money in a substantially more efficient way.
When possible, it’s better to raise money by broadening the tax base—curbing loopholes, deductions, and exemptions—than by simply raising the rates. The reason is that higher rates on a narrow base do a lot to encourage people to shift income into loopholes, which both undermines your revenue-raising efforts and also distorts the economy. Both the employer tax exclusion proposals and the itemized deductions proposal fit that good model.
30 Responses to “Can’t Have Health Reform Without Revenue”
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July 9th, 2009 at 10:48 am
Further, my impression is that much of the complexity of the tax code is due to the myriad exemptions and deductions; removing or limiting a few key ones, as you suggest, might have the side effect of simplifying the tax laws.
A smart politician could play this up – I’ve never thought complex taxes were a huge problem, but they are a big deal for some folks – hence the initial appeal of stupid ideas like the “flat tax”.
July 9th, 2009 at 10:49 am
And broadening the tax base was, after all, Reagan’s idea, so if the Dems adopt Matt’s, I mean Reagan’s idea, the Repubs can take all the credit!
July 9th, 2009 at 10:49 am
“When possible, it’s better to raise money by broadening the tax base”
Like when you raise taxes on beer and cigarettes?
Moreover, politically, you can’t forget that a large part of the Obama campaign platform was not raising taxes on middle class folks. Maybe it’s time to reconsider that. But it would, in fact, be a reversal of course.
July 9th, 2009 at 10:58 am
Lift the FICA cap for starters.
July 9th, 2009 at 10:59 am
It seems like raising income taxes on the rich would be more popular than creating a scary new tax, which you happened to campaign against.
Modifying the exemption can be done later, too. It may be less effective under new rules–for example, if doctors have less incentive to perform unnecessary procedures, the spending wasted by Super-Insurance would already be attenuated.
July 9th, 2009 at 10:59 am
The good news about having Biden around is that you can just say you always intended on raising taxes for those earning more than $50K. Saying “two-hundred and” in front of the figure was a gaffe. After all, Biden thinks Obama is articulate, but the compliment has never been returned.
July 9th, 2009 at 11:12 am
As a matter of political timing, it is much more important to get a robust public option into law now than to put the ideal way of paying for it into law now. That is because once a robust public option is in place and becomes familiar and popular, it will be much easier politically to fund it properly.
In other words, I don’t disagree with the substance of what Matt is saying, but I do think this is an issue that can be pushed off for a while. On one minor point:
[R]emoving or limiting a few key ones, as you suggest, might have the side effect of simplifying the tax laws.
Removing yes, limiting not so much. With limiting, you are usually adding to the complexity of the tax code since you now need both the part of the code defining the deduction and the part of the code specifying the limits.
But honestly, I think the complexity of the tax code per se is not as important as it used to be. If you combine cheap and user-friendly tax filing programs with Goolsbee’s idea of sending people optional pre-filled tax returns, raw complexity isn’t really as much of an administrative issue as it once was. Basically, you just want to limit the amount of informational questions the tax-filer has to answer, and what the code then does with that information can be as complex as you like.
July 9th, 2009 at 11:14 am
Nice video … great backing vocals (and what a cute bow at the end)
July 9th, 2009 at 11:15 am
Once again, ignoring the elephant. The US spends about $1 trillion per year on militarism and yet no one can figure out where to find a tenth of this to fund health care.
Is it blindness, abject fear of a non-existent enemy, rapacious contractors or craven legislators that never notice the actual largest part of the discretionary federal budget?
Whichever it might be why do the pundits fall into the same trap? How about it Matt, read through the biggest appropriations and war expenses and see if you can find $100 billion to shift to health care. It can’t be that arduous the big programs are staring us in the face: useless new fighter planes, two new nuclear subs, another aircraft carrier, star wars, etc.
July 9th, 2009 at 11:20 am
You’re listening to Ezra too much. He’s had the implant.
Please read, e.g., Susie M or Jane H, just for balance:
“We bailed out the banks to the tune of 2 trillion dollars in the past year, put through an enormous stimulus bill, bailed out the European banks, put through yet another war supplemental, and never asked how we were going to pay for it. We just wrote a bunch of big checks.
“But now that it has come to taking care of the health of Americans, well, we have to tighten the old belt and it’s suddenly “pay-as-you-go.”"
Before you jump into a debate, try to remember that big media is dedicated to framing the limits of the debate from the center-right to the wingnut right. That now includes Ezra.
Wake the f*** up! Please.
July 9th, 2009 at 11:23 am
Definitely and by far, but of course when you have a Congress full of whores who are paid to fellate the rich, that can be a bit difficult to pull off.
July 9th, 2009 at 11:24 am
The unlimited deduction for health insurance is ludicrously unfair. Not only are rich people the only ones who can get their employer to pay for lavish health care plans but they also benefit more from the exclusion because of their higher marginal rate. However, it’s going to be pretty hard for Obama and other liberals to get people to buy into capping the exclusion since they did such an effective job at painting McCain as a monster for proposing something similar in the last campaign.
Also, why the obsession with the charitable giving exception? I understand it’s not an ideal policy, but non-profits will be absolutely devastated by its removal at a time when they’re already seeing dramatically reduced giving due to the economic crisis. It’s not going to happen. Give it up and come up with another idea.
July 9th, 2009 at 11:36 am
Funny how we “need” to find a way to pay for health care reform but we didn’t “need” to find a way to pay for the invasion and occupation of Iraq and Afghanistan, the Medicare drug benefit, the Bush tax cuts, or the bank bailouts.
July 9th, 2009 at 11:38 am
[N]on-profits will be absolutely devastated by its removal. . . .
There is not a lot of evidence to support this claim: there will undoubtedly be some marginal effect on contributions, but it may not be a large effect.
July 9th, 2009 at 11:43 am
Adams: Those are completely different things. The bailouts and the stimulus were one-off events, and being deficit spending is the whole point of such things. Health care reform, to contrast, is a semi-permanent change in government policy, and therefore needs to be paid for. There is a valid comparison to be made with things like Medicare Part D, but there’s a simple explanation for that too: it was wrong when Republicans did it and it’s still wrong. Maybe a bit of deficit spending as a sort of mini-stimulus to get the ball rolling is a good idea, though, but ten years is not the timescale of stimulus.
July 9th, 2009 at 12:40 pm
DTM, I realize that I don’t have hard data to back me up, but the way the current system works is that a $100 donation essentially means (given a 30% marginal rate) that the donor is giving $70 and the government is giving $30. If you take away the deduction, the cost of giving $100 become $100 for the donor. That’s an increased cost of 43%. It’s very hard for me to believe that raising the cost of something by 43% would have a marginal impact, but I’m open to persuasion.
July 9th, 2009 at 12:45 pm
This is a bad idea. Taxing people making over $250k may be enough to pay for healthcare, but what about the overall structural deficit? Sooner or later everyone is going to be paying higher taxes. It is a fallacy for democrats to rule out taxing health benefits because it is unpopular: all tax increases are unpopular. It will be easier to raise taxes on the middle class to pay for their healthcare than it will be to raise them to pay for annual appropriations bills, for example. My concern is that this reflects a larger illness: that democrats simply don’t intend to raise taxes on the non-rich, and thus don’t intend to fix the underlying structural deficit.
July 9th, 2009 at 1:04 pm
Sancho,
Obama’s proposal was to limit the deduction to 28% for high-income filers, not eliminate it entirely. A couple groups did studies and predicted total charitable contributions would drop 1.3% and 2.1% respectively. So, again, it likely would have an effect, just not a huge one.
July 9th, 2009 at 1:16 pm
Raising top rates to 70% is an imperative.
The US has very low top rates world-wide. Plus, high top rates are required to prevent a non-democratic concentration of wealth.
July 9th, 2009 at 1:45 pm
After all, Biden thinks Obama is articulate
=====================================================
And clean, too! Don’t forget that!
July 9th, 2009 at 2:46 pm
Anonymous:
You’ve got a point. To a point. It’s true in a sense that the point of the stimulus was deficit spending. The bailout not so much, rather it was to save world credit markets. But the core structures and (lack of) regulation and enforcement that caused the problem were not seriously questioned before the cash was shoveled out the door. Paulson said, “Give us the money or the sky will fall.” And the Democratic Congress said, “OK, sure, but you’ve got to give us more than two pages. Come back with two hundred pages and we’ll write you a blank check for $700B.” Do you think that paying out billions through AIG to prop up wobbly banks (including foreign banks) that made very profitable deals they knew were irresponsible was the best way to support the world credit system? What did taxpayers get in return? What has been done to assure it won’t happen again? How much do you think we’re going to get back? How long will that debt stay on the books? Our grandchildren will be paying for it. That’s not a long-term commitment?
The war funding isn’t going away either. What’s the withdrawal strategy? We still have 135,000 troops in Iraq. We’ve withdrawn from the cities to the outskirts, but are still patrolling the streets and in some cases we just redrew the boundaries so bases are now outside the city limits. We’re still ramping up in Afghanistan and no one wants to talk much about Pakistan. We’re building more walled fortresses and calling them embassies. Many Democrats vowed not to vote for any more war funding bills that didn’t contain a pull-out dates. The administration and Congressional leadership strongarmed them into reneging on that commitment, and they pulled out all the stops to get that funding bill passed. On schedule. Do you think that our kids won’t be paying for those wars?
Conversely, with health care reform, the administration and Congressional leadership took single-payer off the table before the discussion began, and built their strategy around wooing substantial Republican support. Now comes Rahm to say the public option is negotiable, we just want more competition among those nice, regionally monopolistic insurance companies that have been ripping us off for decades. Democrats like Kent Conrad propose softball alternatives like state-based, non-profit cooperatives that wouldn’t have the leverage to bargain on costs.
Your invoking Medicare Part D is revealing. Was it wrong because it increased the deficit, or because it was confusing, or because it was a massive giveaway to drug companies? Explicitly taking bargaining with drug companies on prices off the table, then complaining about cost is, um, disingenuous.
All the items mentioned, including stimulus, war funding and bailouts have long-term impacts and long-term, unfunded payouts. Certainly health care costs are out of control, and broader coverage needs to be paid for. Large aggregate health care savings are available through single-payer and the public option. Other countries that have systems based on providing coverage rather than maximizing profit have lower costs and superior health care outcomes. My (and, I think, Jane’s) point here is political will rather than pure economic analysis.
If we can run deficits to bail out foreign banks and corrupt insurance companies , why can’t we run deficits to meet the health care needs of our own citizens? Why is pay-go only important when we’re talking about meeting the basic needs of Americans? And why do so many Democrats accept the phony, Republican “revenue-neutral” framing of the health-care debate?
July 9th, 2009 at 2:46 pm
[...] the tax code. As Matthew Yglesias explained, “when possible, it’s better to raise money by broadening the tax base — curbing loopholes, deductions, and exemptions — than by simply raising the [...]
July 9th, 2009 at 3:26 pm
Ron E has this right. Let’s pay for it the way Bush paid for his Medicare drug (company) benefit, i.e., by issuing Treasury bonds.
July 9th, 2009 at 5:38 pm
Our five trillion dollar Navy isn’t doing much right now. Maybe we could borrow five or six carrier groups from them and blockade the Cayman Islands.
Yes, I know, it wouldn’t accomplish much. You can’t, after all, blockade a wire transfer. Still, we would be making a profound symbolic statement: we are no longer going to sit around and allow this loophole madness!
Instead, and henceforward, we will be keeping a close and careful watch -we will veritably train the peepers- on the loopholers.
July 9th, 2009 at 6:27 pm
Um, *NO*. *WRONG*, Matthew.
Eliminating a deduction *entirely* broadens the tax base *and simplifies* the tax code. This is a good thing.
But the abortive proposal by Obama was a proposal to make the tax code *more complicated* and *less progressive*. So-called “itemized deduction limitations” amount to increased tax rates on people with incomes in a certain range — with marginal rates dropping for the super-rich.
They are part of our *full employment for accountants* tax code program, which seems to be the main driver of every change in the tax code for decades. They are a big damned mistake. They are consistently unpopular — among *everyone* — because they are complicated and ugly.
So, you’re barking up the wrong tree. The correct proposal is one to eliminate a long list of deductions entirely, and increase the standard deduction to compensate. Anything which makes computations on the 1040 more complicated is *evil*.
July 9th, 2009 at 6:29 pm
“If you combine cheap and user-friendly tax filing programs ”
There aren’t any for Linux. Oh, plus said programs *always* get something wrong. I know this because I do taxes. Next question?
July 9th, 2009 at 6:35 pm
@Max424
To add a link to your reference (I suspect you’re referencing this):
http://www.thenation.com/doc/20090601/johnston
July 9th, 2009 at 9:53 pm
Oh, plus said programs *always* get something wrong. I know this because I do taxes.
Slight conflict of interest there.
July 10th, 2009 at 2:02 am
AMERICA’S NATIONAL HEALTHCARE EMERGENCY!
It’s official. America and the World are now in a GLOBAL PANDEMIC. A World EPIDEMIC with potential catastrophic consequences for ALL of the American people. The first PANDEMIC in 41 years. And WE THE PEOPLE OF THE UNITED STATES will have to face this PANDEMIC with the 37th worst quality of healthcare in the developed World.
STAND READY AMERICA TO SEIZE CONTROL OF YOUR NATIONAL HEALTHCARE SYSTEM.
We spend over twice as much of our GDP on healthcare as any other country in the World. And Individual American spend about ten times as much out of pocket on healthcare as any other people in the World. All because of GREED! And the PRIVATE FOR PROFIT healthcare system in America.
And while all this is going on, some members of congress seem mostly concern about how to protect the corporate PROFITS! of our GREED DRIVEN, PRIVATE FOR PROFIT NATIONAL DISGRACE. A PRIVATE FOR PROFIT DISGRACE that is in fact, totally valueless to the public health. And a detriment to national security, public safety, and the public health.
Progressive democrats the Tri-Caucus and others should stand firm in their demand for a robust public option for all Americans, with all of the minimum requirements progressive democrats demanded. If congress can not pass a robust public option with at least 51 votes and all robust minimum requirements, congress should immediately move to scrap healthcare reform and request that President Obama declare a state of NATIONAL HEALTHCARE EMERGENCY! Seizing and replacing all PRIVATE FOR PROFIT health insurance plans with the immediate implementation of National Healthcare for all Americans under the provisions of HR676 (A Single-payer National Healthcare Plan For All).
Coverage can begin immediately through our current medicare system. With immediate expansion through recruitment of displaced workers from the canceled private sector insurance industry. Funding can also begin immediately by substitution of payroll deductions for private insurance plans with payroll deductions for the national healthcare plan. This is what the vast majority of the American people want. And this is what all objective experts unanimously agree would be the best, and most cost effective for the American people and our economy.
In Mexico on average people who received medical care for A-H1N1 (Swine Flu) with in 3 days survived. People who did not receive medical care until 7 days or more died. This has been the same results in the US. But 50 million Americans don’t even have any healthcare coverage. And at least 200 million of you with insurance could not get in to see your private insurance plans doctors in 2 or 3 days, even if your life depended on it. WHICH IT DOES!
If President Obama has to declare a NATIONAL STATE OF EMERGENCY to rescue the American people from our healthcare crisis, he will need all the sustained support you can give him. STICK WITH HIM! He’s doing a brilliant job.
THIS IS THE BIG ONE!
THE BATTLE OF GOOD Vs EVIL!
Join the fight.
Contact congress and your representatives NOW! AND SPREAD THE WORD!
God Bless You
Jacksmith – WORKING CLASS
July 10th, 2009 at 7:15 pm
MY has it right here; broadening the base is the appropriate gambit, reserving a small uptick in rate structure (or the adding of new upper brackets) for later. This should not imply, however, the kind of broadening Sam M envisioned (new excises on cigs or soft drinks), for it is the income tax itself that deserves (and needs) the broadening, since it remains the single-best vehicle with which to structure a fair, stable, and adequate revenue system that can also serve as an engine of economic opportunity. All others fall short, including an income tax that is not so progressive and that is pockmarked with exemptions and deductions. Even if one were to allow some room for social engineering in the tax code (the encouragement of charitable giving or homeownership, for ex.) a straight-line, modestly graduated structure should remain the norm, from which we should veer only slightly. While the current structure still largely reflects such a priority, introduced mainly by the historic 1942 recodification, there are several notable exceptions, the removal or alteration of which could go a long way toward financing health care, state revenue sharing, or any other pressing need that calls for substantial public investment.
Prominent examples: Treat capital gains and dividends as regular income: $100b per yr.; Change mortgage interest deduction to credit with income cap: $45b per yr.; Repeal exclusion of capital gains (stepped up basis) at death: $70b per yr.; Repeal accelerated depreciation: $47b per yr.; Phase out child tax credit at lower income level (60K instead of 110K): $20b per year; repeal special alternate deduction for state sales tax paid (introduced to encourage the no-income tax states to stay that way): $10b per yr.
That’s nearly $300b annually all tied to poorly performing “incentives” that ought to be removed even if we didn’t need the money. A thorough analysis would easily turn up a few more, and we’re not even counting the money that could be raised by enforcing the tax code a little better (to close the estimated $300b annual tax gap between what is really owed and what is paid) or by rolling back the upper bracket Bush tax cuts, both of which changes can surely be classed as feasible and not-too-politically difficult.