The Presidential Campaign: Tax Policy and Health Care

I promised to write the wildly ambitious post about the serious issues of the campaign: the economy, health care, energy, the Iraq War, terrorism. But that, I'm sorry to say, is way beyond me... There is a ton of information out there about these topics already written by folks a ton smarter than me. The problem is that I worry that most of you do not access that information, and really neither do I. Much of the really substantive stuff is highly technical and hard to find and parse through...

But the information is becoming more and more readily available. During my daily treks to the gym, I am blessed with my ipod where I can listen to NPR podcasts, and some of them are mind-blowingly informative.

It's really cool. How NPR works at least for the really good shows likeDiane Rehm Show and Fresh Air (these are the two shows I podcast I listen to almost religiously), is that while the presidential candidates are blowing smoke about certain issues... (The ridiculous debate between McCain and Obama about energy right now makes me want to puke, seriously)..., NPR at the same exact time has a show with leading experts in these same areas having very intelligent discussions...

I used to be a big AM talk radio junky actually, but I hardly go there anymore. Once you hear the good stuff, AM radio just seems like a bunch of nonsense, and largely it is.

Admittedly, NPR has a slight bias left, but in my view this is the Republican party's fault. They made a decision starting in the late 1980's with Rush Limbaugh (I still remember the time I listened to Limbaugh for the first time, an how thrilled I was to hear somebody validate my Reagan religion) to label the main stream media as elitist liberals. As a result of this, their main source of news and information, e.g. Fox News, AM talk radio, is filled with shrill fluff mainly mixed in with some good points, but only enough good points to make just enough sense to folks to convince them of the truth of all the other distortions and narrow views of the issues.

I've already talked about this before, but really NPR is truly a neutral news source, they do get really smart experts from all sides of the political spectrum (yes there are really smart folks in both parties). But when the large segments of the Republican party labels NPR as elitist leftists, it really places that part largely on the fringes of the political spectrum. And the fringe is almost always the wrong place to be...

Ok, enough of my introduction. I spent way too much time on the following, but it's a transciption of an interview I heard, you can listen to it here for yourself.

I actually really enjoyed transcribing this, and there have been other podcasts I've heard on energy, a whole ton on the war, some very interesting ones describing the downfall of the conservative movement, another I only saw the title of from some smart young republicans who want to reinvent the party (and the party is in desperate need of reinvention), and a few on health care. Maybe I'll transcribe some of those as well.

But this one is about tax policy mainly and also health care of both presidential candidates. In the podcast, Terry Gross interviews the head economic advisors for both campaigns and the finishes off with a conversation with a tax policy expert, Leonard Burman of the Urban Institute and a Director of the Tax Policy Center.

The interviews with the campaign advisers were actually pretty worthless. Leonard Burman's interview was astonishingly interesting, so I transcribed that portion only. These are mostly Burman's words, paraphrased and directly quoted. I did try to inject some organization to it for clarity (my inserts are capitalized):

AN INTRODUCTION:
No one, not even those inside the campaigns know completely what each candidate's tax proposals are.

WHAT MCCAIN HAS FAILED TO NAIL DOWN:
McCain has failed to specify what he's going to do with people in the non-group health insurance markets, those people who are buying heal

And OBAMA:
Obama has failed to specify exact subsidy schedules... how much subsidies at what income levels...

TAX BURDEN DISTRIBUTION FOR BOTH CANDIDATES:
Bush's tax cuts are scheduled to expire in 2010.

McCain: Will extend all of President Bush's tax cuts and adds additional cuts for businesses, and will cut the estate tax somewhat.

Omama: Will extend most of Bush's tax cuts. Raise taxes on high income people, returning their tax levels to what they were on 2001. Bunch of tax cuts targeted for low and middle income people.

Middle 20% under Senator McCain get a $1400 tax cut, Obama, $2100 tax cut in 2012.
Bottom 20% (<$19000/year) McCain $100, Obama almost $700.

Obama: big cut at the bottom and a big increase at the top.
McCain: tiny cut at the bottom and huge cuts at the top.

Obama's plan: $2.8 trillion tax cuts over the next ten years.
McCain's plan: $4.2 trillion tax cuts over the next ten years.

Debt ramifications: With interest added in:
McCain's plan will increase debt by $5 trillion
Obama's plan will increase debt $3.4 trillion

AMT (The Alternative Minimun Tax):
Obama has been silent. Assumption is that he will continue the actions of the last 4 to 5 years. Patched the AMT - raised the exempt amount of income every year to keep millions of Americans from becoming subject to the tax... Increase it for inflation every year... Obama has not been specific, but they have not objected to this characterization.

McCain: Extend the AMT patch, but increase it over time to drop the number of people affected. Talked repeatedly about repealing the AMT, which would result in $400 billion in lost tax revenues.

CAPITAL GAINS AND DIVIDENDS
Tazes of earnings on stock is at 15%. High tax bracket will put your income tax much higher than this.

Dividends: Money paid to shareholders of companies.

McCain: Leave the rate at 15%
Obama: Raise the rate to 25% or so and leave it there permanently.

His book: The Labrynth of Capital Gains Tax Policy.

Almost a religious crusade regarding captital gains tax:
Some think cutting capital gains is absolutely essential to economic growth.
Others believe a low capital gains tax is inherently evil because the benefits go almost all to high income people.

His view: in the middle. Cutting the rate produces some good outcomes and some bad ones.

- Encourages some new investment that would not occur otherwise. Gives people an incentive to hold onto things longer than they otherwise would...

Bad thing about it: Huge incentive for people to make income look like capital gains. If you are a high income person and make $1 million dollars, it taxes at a 35% rate, you can save $200k in taxes to make that million dollars look like capital gains. A whole industry exists to devise schemes to make regular income look like capital gains... Very wasteful. A lot of talent putting a lot of work of little social value... Also the tax shelters themselves often involve really dubious investments.

ESTATE TAX
Neither one of them would eliminate the tax altogether.
2010, it dissapears.
2011, it comes back.
If you have a rich relative, 2010 is the for them to die.
McCain: Has been a long standing critic of eliminating the estate tax. His plan would be to keep it but at a very low level. Would not apply until your estate reaches $5 million. Only about 4000 descendants would be subject to in 2009, and the rate would be 15% same as capital gains.

Obama would set the level at a $3.5 million exemption, but taxed at a 45% tax rate...

For couples, $10million exemption for McCain, $7million exemption for Obama.

Burman's opinion is that the estate tax is an important part of the overall tax system. Its the most progressive tax that there is. Only applies to very wealthy individuals, only applies after they're dead when they don't need the money anymore.

Reduces the incentive to engage in tax shelters. Its a back stop to the income tax. If you manage to avoid taxes all of your life, your still going to pay it in the estate tax.

To roll it back dramatically, or eliminating it altogether, you encourage a lot of ineficient tax sheltering activity.

HEALTH CARE PLANS
Both agree that the tax subsidies for health care should be targeted more at low and middle income people than what they are right now.

Current system: huge tax subsidy for getting health insurance, but it's in the form of an exclusion of income. If your employer provides you with health insurance, the value of the insurance is not included in the value of your income. You save in income, social security, and medicare taxes. That's worth the most to higher income people. The higher your tax bracket is, the more benefit you get... Its an upside down subsidy. The people who need it the most, get next to nothing from the current system.

McCain will replace the current system with a tax credit. $2500 for a single policy or $5000 for family coverage. It would be refundable, you would get the tax credit even if you had no tax liability. Low income people would get a substantial benefit. You would get the subsidy even if your employer doesn't offer insurance.

A lot of people complain that the credits are too small for low income of people to be able to afford insurance, but this is a big improvement over current law.

The tax credit doesn't depend on how much you actually spend on insurance, which means there's a built in incentive to get cheaper insurance... A lot of people think that generous insurance encourages people to spend too much on health care because it doesn't cost anything, everything's covered by insurance... A tax credit that's fixed in dollar terms, you would have an incentive to shop around for a cheap policy.

Drawback of this proposal: A lot of people would end up in this individual market. A lot of employers would stop providing insurance because individuals can get it themselves. If you're young and healthy you can get a really good deal on insurance, but if you have serious health problems, you might have a hard time finding affordable insurance.

McCain has a proposal to cover people with serious health problems, but he's given no specifics on how that works. Burman's analysis suggests that if that high risk pool is not very comprehensive, McCain's proposal would not end up covering that many more people than the current plan. A lot of people would get insurance in the individual non-group market, but a lot of people would also lose insurance through their employers.

Obama's plan: Also proposing refundable tax credits that would benefit low and middle income households. They could get insurance in a new health insurance exchange that he would create. A pool of insurance plans that would be available to anybody who buys insurance using these tax credits. Credits would be available to anybody with incomes up to about 4x the poverty level => roughly $80k for a family of four.

Very large subsidies are provided for people below the poverty line, then they would decline as income increased.

Mandate for covering children. Required by law to cover children with insurance. Expand the public program that provides insurance for children, S-CHIP (State Children Health Insurance Program), expand it to children with family incomes up to 3X the poverty level. Expand the Medicaid program for very low income people.

Mandate for employers to provide insurance: Pay or Play. If an employer did not provide insurance, they would have to pay a payroll tax, they assumed it would be about 6%, no details yet offered from the campaign.

Under the assumptions of his analsyis: Obama's plan will cover all kids and most adults, but wouldn't come close to reaching universal coverage. Still be about 30 million adults in 2018 who didn't have health insurance coverage.

SOME CONCLUSIONS ON THE PLANS
Important details that they didn't know about. They had to make stuff up... Making the plans better to cover more people would also cost more money.

Senator McCains plan: adds up to $1.3 trillion dollars over the next 10 years.
Obama's plan would add up to $1.6 trillion over the next 10 years.

A lot of money considering they had $3-4 trillion dollars in tax cuts already.

Pay or Play plan would exempt small employers, not clearly defined, assumed to be employers with fewer than 10 employees.

GREATEST STRENGTHS OF EACH CANDIDATES TAX PLAN:
McCain strength: intends to spur economic growth. Best feature of his plan: Plans to cut corporate tax rate. We have the second highest corporate tax rate in the developed world at 35%, encourages a lot of bad behavior. Keeps income oversees, encourages a lot of tax sheltering activity. We have a high tax rate, but we don't collect a lot of tax revenue from the tax because of the tax sheltering.

Preference would have been to include many more loophole closers at the same time as it cut the tax rate, but its a good idea to cut the corporate tax rate.

Obama's strengths:
One of the big issues over the last couple decades is that high income people have taking home almost all of the economic gains. The economy has grown dramatically, but most of those gains have been going to the people at the top.

By one measure, the richest 1% of Americans now earn something like 16% of the overall income of the United State. Highest level since the eve of the Great Depression.

It is a legitimate issue about whether we should be doing something to share the economic gains more equally.

At the same time as the economic distribution has been getting more skewed, that high income people have been taking home a larger and larger share, we've been cutting taxes on those very high income people and not been doing much for those in the middle. His proposals are aimed at providing help for low and middle income people so they can share more in those economic gains...

BIGGEST WEAKNESSES
Both plans will increase the deficit by a lot. The law of holes is being violated: Both will dig the hole a lot deeper.

Just the non-health care part of their plans will add between 3.5 to 5 trillion dollars to the national debt in the next ten years. Well, we're rich countrym so we can afford it...

But, we're heading into what's going to be a really challenging period for us... The baby boomers are starting to retire. They are going to be putting unprecedented demands on the government. We're going to be needing more revenues not less.

We've got to figure out what we're going to do about Medicare and Social Security which so far nobody has been able to do.

The best thing we can do for our kids, if we can't fix those programs would be at least not to saddle them with a huge amount of additional debt, so they won't have to pay back our borrowing with interest at the same time they are trying to also pay for our social security and health care.

He worries in Obama's plan he has all of these special targeted breaks. One provision that would exempt senior citizens earning under $50,000 from income tax.

Right now, most senior citizens don't pay tax. The ones that are making 30, 40, or 50 thousand dollars are doing relatively well, they have income from pensions and other assets that make them subject to a little bit of tax. We've made these huge promises to seniors we have no way of paying for, and now we're saying that almost all seniors won't have to pay any income tax either.

We might decide that's a bad idea 5 or 10 years down the road, and if we set this precedent, it would be hard to reverse that.

National Debt that we have:

McCain at times in the past has been very responsible. He was a deficit hawk, voted against Bush's tax cuts, the things he would now make permanent.

In a campaign, there's a lot of pressure on the candidates to just make people happy, which is proposing tax cuts and proposing new spending programs to do stuff for people.

Recognizing fiscal reality has been determined to be a losing strategy for someone who wants to be president. Berman would like to have a president who would respect the public's intelligence, we can't do everything, we can't cut taxes and increase spending and if I'm going to tell you I'm going to pass huge tax cuts, but I'm going to pay for it by cutting spending, I'm going to be very specific about what I'm going to cut and how I'm going to make that happen.

And how I'm going to be succesful, when every president before has talked about getting the government more efficient, getting rid of agriculture subsidies, and has a really hard time getting those things through Congress...

McCain would like to cut spending a lot, but he has to deal with Congress...

Would be a really good idea to get rid of all of the agriculture subsidies, but the Senate is a huge constituency for those, and its implausible that we'll eliminate them.

McCain wants to hold discretionary spending fixed, below the levels they are right now in real terms, but then it wouldn't even keep up with inflation, that means a lot of things people rely on from government won't happen anymore. Could be a good idea, but he hasn't raised any specifics about how he's going to do that.

Obama has talked about all these new spending programs: education, infrastructure, health care, but they also talk about cutting spending too... They want to make the government more efficient, save $50 billion dollars by making health care more efficient.

Sounds really optimistic to him...

Fiscal prudence ought to be a bi-partisan issue, we all have children. Policies over the last 10 years, and the policies of both candidates will saddle our children with thousands and thousands of dollars of additional debt that they will have to pay back.

Nobody should be happy about that.