The budget battles

[PassedOut]

Evidently the republican base has sent a message that it does not want to cut federal spending by privatizing Medicare: Democrat Kathy Hochul wins House seat in New York special election

 

The seat had been considered safe for Republicans, who had held the district for more than four decades.

 

The crowd chanted "Medicare, Medicare" during Hochul's victory speech in Buffalo, after the issue became the center of the once-little talked about race.

 

Hochul and Corwin attacked each other over it, with both campaigns, parties and outside groups flooding the airwaves with television commercials. Many of the ads spotlighted the political battle over House Budget Chairman Paul Ryan's plan to drastically cut federal spending by reforming Medicare.

Clearly many voters believe in eliminating the deficit, but not by cutting spending that affects them nor by raising their personal taxes. Can't be done. Responsible politicians (and responsible private citizens) are going to have to keep hammering away, explaining that until it sinks in.

 

If voters want to keep the obsolete Medicare Advantage subsidy, for example, that will cost about $1400 per person -- man, woman, and child -- in taxes each year. If voters want Medicare to pay for heroic (and mostly unwanted) end-of-life treatment, that will cost an additional $2100 per person per year in taxes.

 

There is no magic. There is no free lunch. And there is no responsibility when politicians -- and voters -- sidestep the truth about that.

[awm]

It may be worth mentioning that no one has really been presented with a budget that calls for truly shared sacrifice.

 

It seems quite reasonable to oppose a budget which makes massive cuts in programs I'm depending on while actually cutting taxes for people who are much wealthier than I am! This is not to say that I would necessarily oppose a budget which raises taxes on everyone, or a budget which makes mild cuts to programs I'm depending on while asking rich people to chip in more taxes.

 

A belief that sacrifice ought to include the wealthiest Americans and corporations (some of which pay zero in taxes!) is not the same as wanting a "free lunch."

[PassedOut]

A belief that sacrifice ought to include the wealthiest Americans and corporations (some of which pay zero in taxes!) is not the same as wanting a "free lunch."

Indeed, it is not.

[awm]

I'm curious as to whether there might be room for the two parties to come to a compromise regarding the Alternative Minimum Tax (AMT).

 

The AMT was created in 1969. The statement from congress (from Wikipedia) was as follows:

 

"The prior treatment imposed no limit on the amount of income which an individual or corporation could exclude from tax as the result of various tax preferences. As a result, there were large variations in the tax burdens placed on individuals or corporations with similar economic incomes, depending upon the size of their preference income. In general, those individual or corporate taxpayers who received the bulk of their income from personal services or manufacturing were taxed at relatively higher tax rates than others. On the other hand, individuals or corporations which received the bulk of their income from such sources as capital gains or were in a position to benefit from net lease arrangements, from accelerated depreciation on real estate, from percentage depletion, or from other tax-preferred activities tended to pay relatively low rates of tax. In fact, many individuals with high incomes who could benefit from these provisions paid lower effective rates of tax than many individuals with modest incomes. In extreme cases, individuals enjoyed large economic incomes without paying any tax at all. This was true for example in the case of 154 returns in 1966 with adjusted gross incomes of $200,000 a year (apart from those with income exclusions which do not show on the returns filed). Similarly, a number of large corporations paid either no tax at all or taxes which represented very low effective rates."

 

Basically, the point was that some very high income individuals were paying lower rates than individuals with much more modest incomes. People saw that this was unfair, and created AMT to deal with it. Yet today, we still have very high income individuals paying much lower rates; most middle-class americans pay at a 25% marginal rate while many very wealthy individuals pay at close to a 15% marginal rate because of capital gains. At the same time, AMT is affecting people lower and lower on the income scale because it was never indexed to inflation.

 

So I'd propose the following changes:

 

(1) Lower the AMT rate from 26%/28% to 25% to reflect the marginal rate paid by most middle class Americans.

(2) Roughly double the AMT exemption so that AMT doesn't hit middle-class families (say to 100K for individuals and 150K for married couples).

(3) Eliminate all other deductions (in particular the mortgage interest deduction and the capital gains rate) for the computation of AMT.

(4) Index the AMT exemption to inflation.

 

The net effect would be that AMT would no longer be a concern for most Americans in the middle to upper-middle class. Most who are paying AMT would get a tax cut because of the increased exemption and lower rate. However, the revised AMT would make sure that the very wealthy still have to pay at least the 25% marginal percentage rate that most working people pay -- no more of this nonsense where Warren Buffett pays a lower rate than his secretary. This would restore the AMT to what it was meant to do, might actually increase revenues (by raising taxes on some very wealthy individuals who pay at the 15% capital gains rate), and cuts taxes for the majority while simplifying the tax code. Note that this is also fairly similar to suggestions made by the bipartisan deficit commission (i.e. eliminate deductions, tax capital gains as income, cut rates) albeit only applying to the AMT.

[mike777]

I wish Congress would at least consider raising the Gift tax rate and getting rid of most of the exemptions.

 

As far as a carbon tax that has been discussed in depth in the forums, all politicians and the vast majority of voters seem to feel energy prices are too high now at present tax rates let alone a carbon tax.

[PassedOut]

However, the revised AMT would make sure that the very wealthy still have to pay at least the 25% marginal percentage rate that most working people pay -- no more of this nonsense where Warren Buffett pays a lower rate than his secretary. This would restore the AMT to what it was meant to do, might actually increase revenues (by raising taxes on some very wealthy individuals who pay at the 15% capital gains rate), and cuts taxes for the majority while simplifying the tax code. Note that this is also fairly similar to suggestions made by the bipartisan deficit commission (i.e. eliminate deductions, tax capital gains as income, cut rates) albeit only applying to the AMT.

An approach like this or something like it, plus small increases in the higher marginal rates, would add some useful progressivity to the current tax structure. I'm sure that the congress won't balance the budget right away, but a built-in bracket creep automatically helps to push tax revenues ever closer to expenditures. That was a significant factor in the success Clinton had in erasing the huge deficits of the Reagan-Bush years.

 

Speaking of Clinton, he has some good advice for the democrats in congress now: Bill Clinton: We’ve Got to Deal with Medicare

 

“You shouldn’t draw the conclusion that the New York race means that nobody can do anything to slow the rate of Medicare costs. I just don’t agree with that,” Mr. Clinton said at a budget forum sponsored by the Peter G. Peterson Foundation. Instead, he said, “you should draw the conclusion that the people made a judgment that the proposal in the Republican budget is not the right one. I agree with that.”

 

But Mr. Clinton said he feared that Democrats would conclude “that we shouldn’t do anything.”

 

“I completely disagree with that,” he said. “I think there are a lot of things we can do to bring down Medicare costs.”

Hope they listen.

[Winstonm]

Mike,

 

That's quite the euphenism, the funding of corporate tax breaks and tax decreases for the wealthiest Americans is "growing the economy".

 

In Sand Springs, we call it something quite different.

[y66]

I don't quite get what Clinton was saying there.

 

A clear message Dems can win on is that health care problems and health care cost problems demand responsible solutions; that ObamaCare, which aims to cut approx 500 billion out of Medicare spending between now and 2019, is an important step in this direction; that we obviously need to do more to bring costs under control; and that there is and always has been plenty of room for both parties to work constructively on these problems. But please, Mr. Ryan & Co., no more zombie proposals. They're killing us.

[luke warm]

the problems with medicare aren't, imo, ones of concept but of implementation... if you take as a given that something like medicare *must* exist, it's hard to beat a system that pays $.95 (or so) out of every dollar toward benefits... they do pay for almost everything, though, which is a problem... there's also so much fraud and abuse that it's hard to hold prices down... even if another couple of % were added in admin costs to help curb the f & a it would be worth it

 

i realize there are studies that dispute this, but they're based on the (admitted) fact that medicare covers mainly the elderly... if a single payer system for all, or most, americans was based on the medicare model, that objection would no longer be relevant... again, assuming something approaching universal health care is desired

[phil_20686]

The net effect would be that AMT would no longer be a concern for most Americans in the middle to upper-middle class. Most who are paying AMT would get a tax cut because of the increased exemption and lower rate. However, the revised AMT would make sure that the very wealthy still have to pay at least the 25% marginal percentage rate that most working people pay -- no more of this nonsense where Warren Buffett pays a lower rate than his secretary. This would restore the AMT to what it was meant to do, might actually increase revenues (by raising taxes on some very wealthy individuals who pay at the 15% capital gains rate), and cuts taxes for the majority while simplifying the tax code. Note that this is also fairly similar to suggestions made by the bipartisan deficit commission (i.e. eliminate deductions, tax capital gains as income, cut rates) albeit only applying to the AMT.

 

The warren buffet comments are a bit disingenuous. One of the main reasons that capital gains should be lower than top rate income is that the value of one "capital" is not adjusted for inflation*. If I buy a share that `holds its value' by which I mean that it rises exactly in line with inflation (accepting there is some uncertainty about what inflation even means in this context), then when sell it I will pay capital gains on the change in nominal value despite the fact that by construction I have not made an real "capital gain"**. Given that dividends are generally taxed as income*, you actually have to do really quite well for the broadening of the taxable base during inflation not to increase the marginal tax rate of your capital gains above 25%, which is about how it should be.

 

To illustrate, suppose that I take an investment of £1000, and it grows 10% in nominal value in one year with inflation %5, then I sell it, then I have to pay 15% on $100=£15, but my `real gain` (ie above inflation) was only $50, so in reality my `tax rate' was 30% of my real gains. Thus in order to pay "only" 25% tax, my investments real gains need to be more than twice as much as inflation, the difficulty of which varies strongly with inflationary expectations.

 

I think it would be a serious error to bring capital gains tax rates in-line with higher rate tax rates for this exact reason. Exactly how much lower they should be is the provision of economists, and depends on the returns one can generate etc, and would overall lead to a significant decrease in investment.

 

*= I am assuming that american tax is similar to uk tax in this regard, but I think it is.

**= in Britain one can sometimes get around this by realising a loss in the same tax period as your gain and you can offset this gain against your loss and only pay tax on the net gain. I have no idea if this applies in other tax jurisdictions.

[Winstonm]

To illustrate, suppose that I take an investment of £1000, and it grows 10% in nominal value in one year with inflation %5, then I sell it, then I have to pay 15% on $100=£15, but my `real gain` (ie above inflation) was only $50, so in reality my `tax rate' was 30% of my real gains

 

Then that means the wages I earn in the U.S. between April 15 and May 15 have a real value of 0.6% less than what I am taxed on (1/12 x 5%) and so on, and therefore only the wages earned from March 15 until April 15 should be taxed as full valued wages.

 

After all, what is good for the goose...

[awm]

The capital gains rate is not effected by inflation, which in recent years has been quite low.

 

Inflation effects all sorts of income. If I put my money in a CD, my interest rate may well be less than inflation. So by this argument I am losing money... yet I still must pay tax on my "earnings" at income tax rates. If I stash my money under my bed, I guess I am taking a "capital loss" each year because of inflation, but I don't get a write-off.

 

For most of the history of income tax in the US, capital gains was just income. The idea of a separate capital gains rate is a relatively recent thing. And I don't think the "inflation" argument really holds water. As far as I'm concerned, income is income. Why should someone who works full-time pay more in taxes than someone who lives off a trust-fund for the same annual income?

[Winstonm]

The other side of the capital gain argument is that the gains on higher risk investments can outstrip the effects of inflation by huge magnitudes while the tax margin does not adust to the higher return. Fixed income investments are safer but can be easily ravaged by inflation. That is the nature of risk/reward.

 

Regardless, capital gain taxes won't balance the budget. There are only three categories that need be discussed: Social Security, Medicare, and Defense.

 

Everything else is a sideshow.

[awm]

Regardless, capital gain taxes won't balance the budget. There are only three categories that need be discussed: Social Security, Medicare, and Defense.

 

Everything else is a sideshow.

 

Disagree with this one. Revenue needs to be part of the discussion; the Bush tax cuts are actually responsible for quite a bit of the deficit. Further, if we don't adjust current law (i.e. allow Bush tax cuts to expire, don't adjust AMT, etc) then the budget comes roughly into balance by 2013 due almost entirely to revenue hikes. Raising capital gains taxes won't "fix the problem" by itself, but it's a part of a very reasonable solution that combines cuts with raising taxes (especially on those who can most afford it).

 

Also, I disagree that social security is a significant part of the problem here. The total revenues from the payroll tax and the total payouts from social security are in balance through at least 2037; we "fixed" social security already in the 1980s. The problem is that the rest of the government is spending too much while taxing too little. But social security is a contract with America's workers, and it's not overspending (or under-taxing). It should be left alone.

 

Medicare and defense are certainly worthy of discussion.

[phil_20686]

Then that means the wages I earn in the U.S. between April 15 and May 15 have a real value of 0.6% less than what I am taxed on (1/12 x 5%) and so on, and therefore only the wages earned from March 15 until April 15 should be taxed as full valued wages.

 

After all, what is good for the goose...

 

while this is somewhat true, its also misleading. After all, it is only the difference between when you earn and when you spend that is effected by inflation, and most of us spend most of our earnings within the month when we earn them. Many companies adjust wages for inflation on a month to month basis. My research grant is adjusted on a quarterly basis. That is pretty common too.

 

Of course, inflation does hurt savings in all its forms, but that is why one invests. If you do not either lower capital gains, or inflation adjust it, you put a massive wealth-tax on people, which is not ideal. You wish those with wealth to invest it, wealth taxes in all their forms tend to de-capitalise the economy, which makes it more difficult to make the most of new opportunities and technologies. It also massively decreases the appeal of prudent financial management for the middle classes, since small changes in capital gains taxes have large effects on holdings that people have for a long time. It also effects things like business premises. Suppose my SME is built on property valued at $500,000, then after a decade of high inflation, of say, 5%, then if I wanted to sell and move to another similar premises in a different city, I would owe $122,000 in taxes in order to move from one premises to an identically valued one in another city. This can make it hard for small businesses to be flexible about moving into new markets.

 

There is a reason that even high tax countries like the UK or Germany typically have rates of capital gains below 20%. I think capital gains taxes are one of teh worst kind of taxes in general. Sales taxs and income taxes and corporation taxes are much more sensible

[phil_20686]

Why should someone who works full-time pay more in taxes than someone who lives off a trust-fund for the same annual income?

 

Generally in that set up the payouts from the trust-fund would be taxed as income. So your trustee would be getting taxed twice. Once whenever he takes money out of the trust fund as personal income, and again in capital gains tax whenever he buys and sells shares without removing money from the fund (assuming doing so makes money). Of course, trust funds are strange objects and rules about them vary differently among different countries.

 

I think you are possibly not understanding how general capital gains tax is. The vast majority of it is not paid by individuals at all, it mostly effects corporations and pension fund and stuff like that. In particular CGT (as paid by individuals) is paid largely by the old people. Contrary to popular beleif only a small fraction of CGT is paid by the rich.

 

Look say, here:

http://adamsmith.org/files/capital-gains-tax.pdf

 

finally, CGT has existed in the US since at least 1950. I'm not sure before that. So im not sure what you meant by "recently".

[phil_20686]

Disagree with this one. Revenue needs to be part of the discussion; the Bush tax cuts are actually responsible for quite a bit of the deficit. Further, if we don't adjust current law (i.e. allow Bush tax cuts to expire, don't adjust AMT, etc) then the budget comes roughly into balance by 2013 due almost entirely to revenue hikes. Raising capital gains taxes won't "fix the problem" by itself, but it's a part of a very reasonable solution that combines cuts with raising taxes (especially on those who can most afford it).

 

generally speaking capital gains taxes take in less money when they are raised for at least 3-5 years, as often people can avoid seeing investments hoping that the CGT rates will fall again. You can see that in the reference I gave on the graph.

[hrothgar]

Many companies adjust wages for inflation on a month to month basis. My research grant is adjusted on a quarterly basis. That is pretty common too.

 

I have never worked at a company that indexed wages to inflation.

Of the top of my head, I can't think of a single US company that does.

 

Social Security Cost of Living Adjustments are indexed to inflation.

There might be some cushy union contracts that provide the same.

However, I suspect that these are a distinct minority here in the US.

[Winstonm]

Disagree with this one. Revenue needs to be part of the discussion; the Bush tax cuts are actually responsible for quite a bit of the deficit. Further, if we don't adjust current law (i.e. allow Bush tax cuts to expire, don't adjust AMT, etc) then the budget comes roughly into balance by 2013 due almost entirely to revenue hikes. Raising capital gains taxes won't "fix the problem" by itself, but it's a part of a very reasonable solution that combines cuts with raising taxes (especially on those who can most afford it).

 

Also, I disagree that social security is a significant part of the problem here. The total revenues from the payroll tax and the total payouts from social security are in balance through at least 2037; we "fixed" social security already in the 1980s. The problem is that the rest of the government is spending too much while taxing too little. But social security is a contract with America's workers, and it's not overspending (or under-taxing). It should be left alone.

 

Medicare and defense are certainly worthy of discussion.

 

I wasn't very clear. I assumed it obvious that revenue had to be part of the discussion without declaring its need. My fault.

 

Yes, end the Bush tax cuts.

 

My basic point was that all the talk about waste and revenue on small items like captial gains or subsidies cannot begin to come close to balancing the budget.

 

SS is a contractual obligation.

Medicare needs revisions.

Defense spending is out of hand and ridiculous.

 

My position is simple. Massive cuts to defense are necessary. It won't happen. We are screwed.

[Winstonm]

while this is somewhat true, its also misleading. After all, it is only the difference between when you earn and when you spend that is effected by inflation

 

It is not really misleading although it is accurate that timing of spending determines the affect of inflation.

 

It is not misleading as capital could be either withdrawn and reinvested monthly, keeping and spending the gain, or capital could be borrowed against and the resultant debt would be reduced 5% by the affect of inflation.

 

The capital gain argument is a slippery slope as the investments of the wealthy have recently gone into funding FIRE economy bubbles rather than funding technological or industrial gains.

[kenberg]

Is Social Security a contract? Legally speaking? I'm not so sure..

 

I regard my pension as a contract. The University offered me certain inducements to join the faculty. I was given choices about which pension plan I would sign up for. These plans required (fairly substantial in the one I chose) contributions. I don't see that they can now say they changed their mind.

 

 

FICA was much more like a tax. I was offered no choices, they took a fraction of my earnings. It's not so clear I was given any contract.

 

Now I do object to some of the formulations. As I understand it, the payments that were made into soc sec have been adequate to fund it for a couple of decades, and will be for longer if we simply increase the income level at which payments into the system stop. That money is, apparently, not actually there. But I think is is right to distinguish between "The payments were insufficient to cover the commitments", and "The payments were sufficient but someone already spent the money elsewhere".

 

Bottom line: I am willing to listen to arguments about social security reform, especially some sort of means testing, but the argument can't be "Well, we already spent it on something else so tough luck".

[Winstonm]

My understanding is that company benefits can be altered without consideration. For example, if my company offered to pay a portion of healthcare benefits but later decided to cancel their contribution, I would have no recourse other than to change the company I work for. If, on the other hand, the company plainly stated that if I pay them "x" dollars they would furnish me "y" insurance, then it would be a contractual obligation.

 

A real attorney may set us right on this issue.

 

But due to my understanding, SS would be considered a contract and not a benefit, having been established so that if I pay "x" I will receive "y" at a future date, rather than it being a benefit-type inducement to become a U.S. citizen.

 

The other consideration between benefit and contract is that 1/2 of the tax is paid by the employer, so that a change also affects the implied contract that the government had with the business to provide retirement benefits of "y" to employees in exchange for payments "x".

 

I am much more open to changes in Medicare than OASDI. The cost increase to OASDI could and should have been planned for, as the baby boomers are not exactly the stealth bombers of higher costs.

[PassedOut]

Hospitals have a little more than a year left to prepare for efficiency-based Medicare payments: Medicare Plan for Payments Irks Inefficient Hospitals

 

Under the new health law, Medicare will reduce payments to hospitals if too many patients are readmitted after treatment for heart attacks, heart failure or pneumonia. In addition, Medicare will cut payments to hospitals if they do not replace paper files with electronic health records, and it will further reduce payments to hospitals with high rates of preventable errors, injuries and infections.

 

Hospital payments account for the largest share of Medicare spending, and Medicare is the single largest payer for hospital services.

 

Senators Max Baucus, Democrat of Montana and chairman of the Finance Committee, and Charles E. Grassley, Republican of Iowa, have led efforts to pay health care providers for their performance — for the quality of services, rather than the quantity. House members from Iowa, Minnesota, Washington and Wisconsin have pushed for measures of efficiency, saying Medicare should reward low-cost, high-quality care of the type they say is provided in their states.

Linking payments to clearly understood metrics is the way to improve efficiency, and the US healthcare system is embarrassingly inefficient. The metrics will not be perfect at the start and I expect that tweaking will go on for years. Lobbyists will do their damndest to tweak the metrics to favor their clients, so transparency will be very, very important.

 

Nevertheless, not doing this is tantamount to giving up on solving the problem of eliminating the monumental waste in US healthcare. My business experience has ingrained in me that keying rewards to metrics is always necessary (though by no means sufficient) to run an efficient operation. Good performers -- suppliers as well as employees -- welcome this. Poor performers fight it tooth and nail.

[awm]

Linking payments to clearly understood metrics is the way to improve efficiency, and the US healthcare system is embarrassingly inefficient. The metrics will not be perfect at the start and I expect that tweaking will go on for years. Lobbyists will do their damndest to tweak the metrics to favor their clients, so transparency will be very, very important.

 

Hopefully doctors and nurses will be involved in defining the metrics. The above formula has been tried for years in public education and is a complete disaster in that domain... partly or perhaps mostly because the people defining the metrics have little to no experience in public school classrooms.

 

Unfortunately our political system often treats definition of such metrics as a negotiation between elected representatives with no knowledge of the field and businesses which seek to make profit in the same field at the expense of the public (in education this is entrepreneurs wanting to make money from privately-run charter schools; in health care it would be insurance companies).

[helene_t]

Hospitals have a little more than a year left to prepare for efficiency-based Medicare payments: Medicare Plan for Payments Irks Inefficient Hospitals

 

Linking payments to clearly understood metrics is the way to improve efficiency, and the US healthcare system is embarrassingly inefficient.

On this side of the pond, the introduction of health care quality metrics has spawn a whole new industry producing nonsensical statistics.

 

A hope you will learn from our mistakes. Please keep us informed about your mistakes so we can learn from them in return :)