Sunday, October 24, 2010

Deficit Commission

Report from the WSJ on the deficit commission working toward negotiating what items they can agree on before their report is to be released Dec. 1, 2010. This report notes that they are focused in on so-called tax expenditures--aspects of the tax code that benefit some persons and not others. The two largest are the home mortgage deduction and the tax exclusion of employer paid insurance. These two alone reduced tax receipts, and therefore increased the deficit, by around $450 Billion this year.

I have written alot about the tax exclusion of employer paid insurance, and it is certainly the next step I would take in 'implementing and improving' PPACA. For all the brave cost cutting members of Congress and those running for election who say they would be for health reform, "if it did more to deal with costs" well capping the tax exclusion and moving toward ending it is by far the simplest, most effective means of applying downward pressure to health care costs. Lets see if there is a rush to co-sponsor the bill.....I have my doubts. Capping or ending the tax exclusion would be a very flexible policy, meaning it would work as intended under almost any imaginable direction in overall health policy. This of course will be reducing a benefit that people like me (those with good jobs) now get, so don't be surprised to learn that many of the angry voters 'who hate government spending' actually like quite alot of it.

The article linked also points out an argument that will be made against capping or ending tax expenditures, that they are pushed under the guise of tax reform but are actually ways to increase revenue. This is nonsense. If you claim to want a balanced budget, that simply means the ins (taxes) must match the outs (explicit spending plus tax expenditures). All the tax expenditures combined increased the deficit by around $1 Trillion this year. If you claim you want a balanced budget, then a dollar of tax expenditure is no different from a dollar spent by a program. The ins must match the outs....

Finally, the article discusses Social Security reform. The inexorable rise of health care costs, when coupled with the impending retirement of the baby boomers makes fixing Medicare much more difficult than Social Security. The 'third rail of American politics' is now the easy are 30 policy options for Social Security reform that the CBO put out in July, 2010. That is because Social Security only has a demographic problem since benefits and indexed to inflation. Medicare, because it pays for health care, has the same demographic problem, but it has another problem because it purchases medical care that has been rising around 3 times faster than inflation for the past 30 years.

What we should do: (1) pick a social security option or options; (2) cap the tax exclusion of employer paid insurance and move toward ending it; (3) implement PPACA and beef up the ability of Medicare to be a more active purchaser of health care via the Independent Payment Advisory Board.

These policy options will be very good for addressing health care cost inflation, which means they will be good for improving the long range budget issues of the U.S. The deficit problem we have is not due to the TARP or the stimulus--in fact, it seems obvious we needed more stimulus. The real issue is the long term deficit that is primarily a health care cost problem that is exacerbated and made acute by the retirement of the baby boomers. It is using deficits to finance normal and predictable expenditures (notably health care) over the next 30-40 years that is the essence of the unsustainability of the federal budget.

It will be interesting to see what happens after the election and the expected large gains of the Republican party....there has been lots of talk of fiscal responsibility from them during the campaign, but history suggests that at least in the recent past they only talk but don't act in a fiscally responsible manner. Maybe it will be different this time. We will see.

Update: Austin Frakt correctly noting that these 3 are fairly general. A bit more detail.
  • #1 Social Security reform needs to be done. I have some general preferences, but really mean it when I say we just need to pick one or a mix of fixes outlined by CBO.
  • #2, tax exclusion of employer paid insurance, I would want to move much earlier than 2018 to cap the tax exclusion and would want to let it apply to more policies, quicker. I agree with Austin that a tax on high cost insurance can have mostly the same economic effect. However, this was and is sold as a tax on insurance companies, when they will pass on the costs to employers and therefore to employees. In fact, if they don't it won't work. Capping the tax exclusion would give more focus on the end user of health care--you and me--and this would help us to be clear that it is the employee that is getting the benefit of the tax exclusion. I would suggest a schedule along these lines: cap the tax exclusion at 75%ile of the national average in 2012; median in 2014; 25%ile in 2016; and then end it by 2018. In its December 2008 policy options for health care, CBO noted that capping it at the mean would reduce the deficit by around $500 Billion over 10 years....what I wrote above would probably be of similar and likely a bit more in terms of cost savings.
  • #3, IPAB, Austin is probably correct that at this point we should simply hope what is now written into law regarding IPAB remains and I also agree that Leonhardt and Orszag notions of what it would look like make sense.

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