Wallace Forman

Inside the Twisted Mind of a Government Tax Planner

Posted by Wallace Forman on Friday, September 18th, 2009, 1:49 PM PERMALINK

Title 1, Subtitle D of the Senate Finance Committee’s Chairman’s Mark establishes “Shared Responsibility” requirements for individuals and employers. For employers, this requirement entails a tax linked to the number of their employees receiving subsidies in the General Fund.

“For each full time employee (defined as working 30 hours or more each week) enrolled in a state exchange and receiving a tax credit, the employer would be required to pay a flat dollar amount… equal to the average tax credit in the state exchanges.”

The tax is no doubt intended to strong-arm employers into providing insurance. But what does it actually do? In essence, the fine punishes employers who hire low-wage employees. The value of subsidized employee’s productivity decreases by the amount of the tax the employer is expected to play – so their market wage will drop by the same amount. If this wage falls below the minimum wage – likely, because their wages are already low – then many employers will simply fire them.

Realizing this dilemma, the tax planners attempt to “fix” this problem with an arcane tax cap:

The assessment is capped for all employers at an amount equal to $400 multiplied by the total number of employees at the firm (regardless of how many are receiving the state exchange credit).”

Baucus’s planners provide a helpful scenario to demonstrate how the cap will affect incentives:

“For example, Employer A, who does not offer health coverage, has 100 employees, 30 of whom receive a tax credit for enrolling in a state exchange offered plan. If the flat dollar amount set by the Secretary of HHS for that year is $3,000, Employer A should owe $90,000. Since the maximum amount an employer must pay per year is limited to $400 multiplied by the total number of employees (for Employer A, 100), however, Employer A must pay only $40,000 (the lesser of the $40,000 maximum and the $90,000 calculated fee).”

Because the employer is paying a $400 penalty per employee, rather than a $3000 penalty per subsidized employee, the employer has no specific incentive to decrease the wages of subsidized workers. Problem solved, right? Wrong.

Now the employer has an incentive to lower the wages of all of his workers (or fire them if they are already at minimum wage). Instead of “fixing” the costs created by the original tax, the government planners have spread it across a new group of employees. The tax penalty is of course lower – but this simply means it will be less successful in achieving its questionable objective.

And what if the company in the above example had only 13 workers receiving subsidies? Then the penalty paid would be $39,000 (13 subsidized employees times the $3000 average tax credit, which is less than the $40,000 cap). Now of course, the incentive is to decrease the wages or fire only the subsidized workers. And because the tax is higher, it affects each of these subsidized (and therefore “low-wage”) workers more strongly.

Other costs abound. Because the fee is applied only to subsidized employees working for more than 30 hours a week, companies can dodge the fee by reducing these employees’ hours. Only companies with more than 50 employees are subject to fees, so companies have an incentive to reduce the scale of their operations, or to spin off part of their business as a smaller subsidiary. Seeking these new arrangements bears a cost on the company and the economy at large. Even determining what arrangement is most efficient bears a cost on a company – even if it ultimately decides the best option is to provide health insurance!

The tax planners have attempted to “fix the market’s behavior, and then fix the perverse consequences of their original intervention. Inevitably a new perverse consequence is created. All of this for what? Wages are determined by productivity – this measure only strong-arms employers into offering compensation in a less liquid form than cash. However undesirable the other health care goals of central planners may be, none of them require an employee mandate. Planners could just as easily force citizens to buy health care with an individual mandate – then consumers would have at least the option of directly picking their preferred level of insurance. Community rating, guaranteed issue, pre-existing coverage, and deductible caps do not rely in any important sense on an employer mandate. Only Baucus’s arbitrary desire that employer insurance dominate the market is satisfied by this harmful web of byzantine regulations. Employers, workers, and taxpayers, as usual, are left with the bill.

Photo Credit: cliff1066

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Where is President Obama's Health Care "Plan"?

Posted by Wallace Forman on Thursday, September 17th, 2009, 12:23 PM PERMALINK

Obama “plan” as transparent as a Cheney cabinet meeting, says Norquist

Click here for PDF

WASHINGTON, D.C. -- Last week, President Obama spoke at length about what he called “my plan” before a joint session of Congress. Since that time, he has talked about “my plan” quite a bit over the last several days. By our count he has mentioned the “plan”:
But exactly where is President Obama’s actual plan? The House and Senate have introduced at least four Democrat health care proposals – at least two versions of H.R.3200, the Senate HELP Committee’s bill, and the recently released Baucus proposal. All of these are real plans – hundreds of pages long – that may be enacted into law. Obama’s “plan”, so far as we can tell, is three pages of bullet points on the whitehouse.gov website. 
When are these bullet points going to be translated into an actual piece of legislation? Obama swears that his proposal will not raise taxes on the middle class or drive Americans out of their current insurance arrangement. Yet every one of the Democrats’ actual plans contain precisely those things Obama says he would never allow. He has not said he would veto those bills.
“If there is an Obama plan it is as transparent as a Cheney cabinet meeting,” said Grover Norquist, president of Americans for Tax Reform. “Until Barack Obama comes forward with an actual piece of legislation or endorses a specific bill now being debated in Congress, his ‘plan’ is entirely notional.”
“Obama has referred repeatedly in his speeches to union bosses and to the Congress to his ‘plan’.  But we have asked to see it and are told it is as real as the Emperor’s New Clothes.  Only he can see it.”
Norquist concluded: “A real plan can be debated. It can be criticized. It can be improved.  It can be praised in parts or in whole.  Imaginary plans are an insult to the American people.  Or perhaps it is as real as a unicorn.  Or is it written down somewhere but kept secret because it is so frightening to real voters, the elderly and those with insurance that it cannot be shown in public—yet.”

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Democrat Senator Rips Middle Class Taxes in the Baucus Health Care Bill

Posted by Wallace Forman on Thursday, September 17th, 2009, 10:07 AM PERMALINK

Senator Baucus released his supposedly “moderate” health care proposal yesterday, and he is already drawing fire from Democrat Senator Jay Rockefeller (W. Va..) for raising taxes! Rockefeller complained that:

[Baucus] should understand that (his proposal) means that virtually every single coal miner is going to have a big, big tax put on them because the tax will be put on the company and the company will immediately pass it down and lower benefits because they are self insured, most of them, because they are larger.
Rockefeller is no doubt worried that the tax will fall on the wrong sort of taxpayers – his own constituents. “Cadillac coverage”, ironically enough, is most common among some groups of the lower and middle class. West Virginia’s coal industry is heavily unionized, and these unions have negotiated generous benefit packages for their members. These workers and older, sicker Americans with high premiums, will bear the brunt of Baucus’s proposed tax. The AFL-CIO, for one, is not pleased.
Americans for Tax Reform agrees that this tax hike is a bad idea. But the solution is not to dump the tax on another group of voters that happen to live outside of West Virginia, as Senator Rockefeller no doubt prefers. The solution is to enact consumer-based health care reforms that don’t require the Baucus bill’s $900 billion increase in wasteful spending.

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Capitalism and Socialism are Opposites, Not "Two Complementary, Good Ideas"

Posted by Wallace Forman on Friday, September 11th, 2009, 5:40 PM PERMALINK

Perhaps the most frustratingly incoherent part of Obama speech Wednesday was his repeated portrayal of the market and government planning as just two possible, non-exhaustive, mutually-reinforcing “solutions” to the current health care “crisis”. 

There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada's -- (applause) -- where we would severely restrict the private insurance market and have the government provide coverage for everybody.  On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own.... I have to say that there are arguments to be made for both these approaches.
Obama likes to present his plan as a sort of third way between government-run health care and the market, incorporating, as he said, “the best ideas of both parties together”. This is essentially nonsense. Our health care system cannot be made “more free market” and “more government-regulated” simultaneously.
The free market and government planning are exhaustive opposites. Every health care choice is either made freely by consumers selecting their most favored option, or it is chosen for them by government mandates. Under a market system, for example, consumers can either choose to buy health insurance through their employer or on the individual market. In a planned economy, by contrast, the government may order them to buy through their employer.
President Obama leaves little doubt as to which direction he will take our health care system:
Now, even if we provide these affordable options, there may be those -- especially the young and the healthy -- who still want to take the risk and go without coverage.  There may still be companies that refuse to do right by their workers by giving them coverage. 
And that's why under my plan, individuals will be required to carry basic health insurance -- just as most states require you to carry auto insurance.  (Applause.)  Likewise -- likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers.
But we can't have large businesses and individuals who can afford coverage game the system by avoiding responsibility to themselves or their employees.  Improving our health care system only works if everybody does their part.
Obama’s plan, at its heart, requires that consumers be deprived of their free choice, so that the government can micromanage insurance premiums based on arbitrary notions of “just cost distributions”. This is, at its heart, socialism.

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Obama Punts on Cost Reductions

Posted by Wallace Forman on Thursday, September 10th, 2009, 4:21 PM PERMALINK

“I understand that the politically safe move would be to kick the can further down the road -- to defer reform one more year, or one more election, or one more term. “

- President Obama, September 9, 2009, in his address to Congress
In his speech last night, Obama tried to imitate a man concerned by the costs of his health care proposal. Obama promised that his bill would be deficit neutral:
I will not sign it if it adds one dime to the deficit, now or in the future, period.  And to prove that I'm serious, there will be a provision in this plan that requires us to come forward with more spending cuts if the savings we promised don't materialize.
Obama’s “serious” promises lack substance. As previously argued, pledging “not to sign” a bill is meaningless: the President must veto a bill to block its passage. But the “promised savings” suggestion is even more insidious. Such a provision merely promises to delay any budgetary solution until a crisis has actually arrived. As Obama would say, it kicks the can further down the road to defer reform one more year, one more election, or one more term.
What faith should people have that actual budget cuts will be made at this future point, when they cannot be made now? Congress would have to actively draft specific cuts – cuts that hurt special interests eager to preserve their spot at the public trough. Congress would retain all power to break this non-binding promise. So how likely is it that Congressmen would take up arms against their campaign contributors, instead of raising taxes or taking on more debt?
If Obama were really interested in proposing a fiscally responsible bill, he would be proposing conditional spending, not conditional spending cuts. He would propose subsidies that took effect after his “savings” were realized, not unspecified spending cuts after the savings proved illusory. “Trust me” is not a cost-cutting reform worth $900 billion – or any amount.
Obama’s unserious proposals force us to choose between two conclusions. Either he doesn’t know what he’s doing, or he is insincere.  Given his eloquence, education, and the vast resources of his office, the former seems precluded.

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The Fundamental Incoherence of Obama's Health Care Crisis Claims

Posted by Wallace Forman on Thursday, September 10th, 2009, 2:04 PM PERMALINK

In his speech to Congress last night, President Obama grounded his health reform plans two contradictory claims. First, President Obama insisted that health insurers were increasingly denying health care to their clients. Then, he argued that America was suffering from a crisis of rising health care expenditures.

More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care.  It happens every day.
Then there's the problem of rising cost.  We spend one and a half times more per person on health care than any other country, but we aren't any healthier for it.  This is one of the reasons that insurance premiums have gone up three times faster than wages.
Obama’s argument betrays either ignorance or a willful disregard for economic reasoning. If insurers engaged in wholesale jettisoning of their most expensive customers, their costs would fall. An insurance company with lower costs would be able to capture more market share from its rivals by lowering its prices. Those rivals would be forced to compete either by matching the new lower premiums or competing in quality – i.e. by indulging in less rescission!
Health care premiums are rising, so we can safely assume that more, not less, health care is being delivered by insurers. To argue that both costs and rescissions are increasing simultaneously is to deny the basic reality of free market competition. Radical overhauls of the health care system should not be grounded in this populist fantasy.

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The Government Refuses to Take Your Money... While You're Watching

Posted by Wallace Forman on Wednesday, September 9th, 2009, 4:28 PM PERMALINK

You'd think politicians would get used to taking and spending their constituents' money, but apparently the arbitrary nature of redistribution bothers even them sometimes. At a Washington state town hall last week, Keli Carender confronted Democrat Congressman Norm Dicks with the reality of health care reform:

Carender threw down this challenge to her congressman:

“If you are so keen to forcibly take from one person to give to another who you deem as needier than me, if you believe that it is absolutely moral to take my money and give it to someone else based on their supposed need, then you come and take this twenty dollars from me and use it as a down payment on this health care plan.”

Congressman Dicks refused to take money from Carender or any of the other audience members who defiantly waved bills at him. It would have been too unseemly to openly acknowledge the reality of Democrat health care reform. Now Dicks must decide whether he will vote to forcibly tax the same constituents whose money he would not accept when it was offered voluntarily. Let’s hope he is as embarrassed by the idea of arbitrary takings as he seems in the video – and not just embarrassed at getting caught!

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A Free Economics Lesson for Media Matters

Posted by Wallace Forman on Friday, September 4th, 2009, 2:39 PM PERMALINK

Every day after ATR posts new state figures on how cap and trade will destroy jobs and increase energy costs, Media Matters Action’s blog responds, like clockwork, that Waxman-Markey would instead create “green jobs”. For example, after Tuesday’s post on Kansas, Media Matters responded that 17,000 green jobs would be created. Because we know that Media Matters is reading our blog, we figured that we should give them a free economics lesson to explain why cap and trade may “create green jobs” but will still hurt the economy. Read on, Media Matters!

Cap and trade works by setting a cap on CO2 emissions – effectively creating a carbon energy quota. Firms bid for permits from the government to contribute toward this quota. The bidding process imposes a de facto excise tax on the carbon-based energy market. This tax causes the supply of carbon-based energy to decrease. The tax increases – and supply decreases – by the amount necessary to create a new supply-demand equilibrium at the level set by the carbon quota. This can be represented graphically.

The above is a standard supply-demand model of the carbon-based energy market. The horizontal axis represents the quantity of energy produced and consumed. The vertical axis is the unit price of energy. The red line D is downward-sloping demand. The blue lines shows supply, which decreases (shifts left) after the imposition of the cap and trade quota. The quota is shown by the green vertical line “capping” carbon-energy at Q2. The vertical distance between the two supply lines shows the size of the excise tax created by cap and trade.

Economists use the concept of “total surplus” to measure the benefits of a market. Roughly explained, total surplus represents the sum of differences between the benefit for each consumed unit (shown by the demand curve) and the cost for each produced unit (shown by the supply curve). On the graph, the total surplus can be seen as the triangular area between the supply (S) and demand (D).
What happens to the total surplus when the government imposes cap and trade? When the de facto tax goes into effect, the cost of each additional unit of production increases by the amount of the tax. Thus, each unit of energy produced and consumed yields less surplus; the unit surplus by the excise tax. Part of this surplus is taken from consumers in the form of a price increase (P2 is higher than P1). The rest of this reduction is felt by lower unit revenues for producers (P2-Tax is lower than P1).
This tax revenue is retained by society in the form of government revenue. This area is shown on the graph as the two green areas. We can think of this tax revenue as the source of “green job” funding. As the graph demonstrates, “green jobs” are created by eating into and displacing pre-existing economic prosperity. Where the government creates “green jobs”, it destroys other jobs or eats into the taxpayer’s wallet.
But worse than arbitrarily distributed government revenue is dead-weight loss. Dead-weight loss represents goods whose benefit exceeds their cost, but are not produced. The energy quota and tax ensures that a certain amount of production will be lost– represented by the two purple areas on the graph. The real production costs of these goods are lower than their benefit to consumers, but taxes put them out of reach. Dead-weight loss is felt as a decrease in consumer wealth and supplier jobs, and these losses do not yield any ameliorating increase in government spending – the wealth simply disappears.
The government cannot “create” jobs. It can only arbitrarily displace one industry with taxes and then replace it with spending. When it does this, it creates dead-weight losses that harm the economy as a whole. When Media Matters writes that the government will “create” green jobs, they really mean that the government is going to rearrange the energy sector for the detriment of all – what we have argued all along!

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President Obama, Promise to Veto the Democrat Health Care Bill!

Posted by Wallace Forman on Monday, August 31st, 2009, 5:27 PM PERMALINK

President Obama stated adamantly that he is unwilling to sign a health care bill that will increase the deficit. For example, at his July 23 Shaker Heights press conference he explained:

I pledged that I will not sign health insurance reform -- as badly as I think it's necessary, I won't sign it if that reform adds even one dime to our deficit over the next decade -- and I mean what I say.

He means what he says. And in case what he said wasn’t clear enough, he repeated the promise at his August 11 town hall in New Hampshire:

I won't sign a bill that adds to the deficit or the national debt.
So if Congress passes a health care bill, and Obama doesn’t sign it, what happens? The bill still becomes a law – if Congress stays in session. Or as the Constitution states:
If any bill shall not be returned by the President within ten days (Sundays excepted) after it shall have been presented to him, the same shall be a law, in like manner as if he had signed it, unless the Congress by their adjournment prevent its return, in which case it shall not be a law.
If President Obama is trying to make a meaningful promise to the American people, the word he needs to use is “veto”. Promising “not to sign” a bill is a carefully crafted dodge. President Obama has repeated this empty promise so many times that it has begun to appear intentionally deceptive.
So how about it, President Obama? Will you pledge to veto any bill that increases the deficit? And will you pledge to veto House Democrats' current deficit-increasing health care proposal? Do you want to stop legislation that increases the deficit, or do you just not want your name on it?

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When Does The Government Think Taxes Are Bad?

Posted by Wallace Forman on Friday, August 28th, 2009, 11:19 AM PERMALINK

When It Has to Pay.

Via the UK’s Daily Mail comes a report that the US is demanding an exemption from the 50 million pounds (about $82 million) in VAT taxes it would have to pay to construct a new London embassy. It’s nice to see our government so concerned about conserving taxpayer money spent on enormous public projects of dubious utility, but the same sort of considerations ought to apply to its own citizens’ expenses. Tory politician Edward Lister has worried that:
'Substantial' economic benefits and future tax revenues risked being lost to London if the Treasury's 'rigid attitude' [is] not reversed.
By the same token, our own government’s burdensome tax rates discourage private industry right here in the United States, in commercial sectors that by their very existence must satisfy a real and important demand. Our government ought to spend at least as much time worrying about the taxes Americans pay at home as it does about the taxes it pays abroad.

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