Yes, There’s Real Money at the Top

August 18, 2011 at 5:06 pm

When billionaire investor Warren Buffet recently called on policymakers to “get serious about shared sacrifice” by raising taxes on the nation’s wealthiest people, some critics claimed that this wouldn’t make a serious dent in our budget problems.  Nonsense.

IRS data show that the top 1 percent of taxpayers had a combined income of $1.7 trillion in 2008, the most recent year available.  This is fully 20 percent of the nation’s total adjusted gross income — and much more than the bottom half of the population had (around 13 percent).

Moreover, the tax burden at the top of the income scale has fallen dramatically in recent decades.  IRS data show that the top 1 percent of taxpayers paid an average of about 23 percent of their income in federal income taxes in 2008.  That’s far below what they paid prior to the Bush tax cuts, and about a third less than they paid back in 1980 (see graph).

Returning the average tax rate on the top 1 percent of taxpayers to its 1996 level of 29 percent could raise about $100 billion a year, or $1 trillion over the next decade.

By itself, of course, that wouldn’t solve the country’s long-term fiscal problems.  Spending restraint, particularly in the health area, will also be needed, and taxes on other Americans will have to go up as well.  But $1 trillion over ten years is real money and would make a real dent in the deficit.

The “Supercommittee” and Medicare

August 18, 2011 at 3:27 pm

As the new congressional deficit-reduction committee considers proposals to cut Medicare spending, it needs to keep two critical — but often overlooked — facts in mind.

First, the problem of rising health costs affects the entire health care system, public and private.  In recent decades, Medicare and private-sector health care costs have grown at about the same rate per beneficiary (see chart), which shouldn’t be surprising since they use the same doctors, hospitals, and medical procedures.  In fact, Medicare has been a leader in adopting cost-control policies that private insurers have then widely adopted.

Second, health reform — the Affordable Care Act (ACA) — holds the potential to vastly improve Medicare’s long-term financial outlook.  If the law’s Medicare savings fully materialize, they will close four-fifths of the long-term shortfall in Medicare’s Hospital Insurance program.  And they will shrink Medicare’s total cost in 2035 by more than one-fifth — from 7.2 percent to 5.6 percent of gross domestic product — according to Medicare’s trustees.

To achieve these savings, the ACA establishes a host of new initiatives that aim to transform Medicare into a program that rewards health care providers based on the value of their care, not the volume of their procedures.  These include bundling payments for episodes of care, reducing avoidable hospital readmissions, testing and implementing new ways to increase the value of care, coordinating care under Medicare and Medicaid, informing patients and payers about the quality of health care providers, and increasing funding for comparative effectiveness research.  The law also creates an Independent Payment Advisory Board that will develop and submit proposals to reduce cost growth and improve quality in both Medicare and the health care system as a whole.

These reforms will take time to plan, test, and implement.  But they can succeed only if we give them a chance, and that won’t happen if health reform opponents succeed in repealing them.

Even if all of the ACA’s savings materialize, we’ll need to do more over the long run to slow the growth of health care costs in the private and public sectors alike.  In the near term, however, achieving large additional savings will be difficult, since the ACA includes most of the good ideas for slowing the growth of Medicare spending.  Other proposals, like increasing the age of eligibility for Medicare or replacing the program with vouchers that wouldn’t keep pace with health costs, would generally just shift costs to beneficiaries, states, and employers — and in many cases would increase total health care spending.

Given the limited possibilities for more Medicare cuts in the next five to ten years, the congressional “supercommittee” needs to develop a balanced package of deficit-reduction measures, including significant additional revenues, to reach its goal of achieving $1.2 to $1.5 trillion in deficit savings over the next ten years.

Kicking States While They’re Down

August 17, 2011 at 3:28 pm

With state revenues still well below pre-recession levels, the last thing states need is new federal restrictions on state and local taxing authority — but that’s exactly what they’d get under several bills before Congress.

I’ve already described one such bill, which would make it much easier for corporations to shelter profits from state corporate income taxes.  The latest such bill to be introduced (the Digital Goods and Services Tax Fairness Act) would restrict states’ and localities’ ability to tax downloaded music, movies, and online services like photo storage and payroll processing.  Backed by a powerful lobbying coalition that includes the U.S. Chamber of Commerce, Amazon, Verizon, Comcast, and Time Warner, the bill threatens to:

  • reduce state and local tax revenues even as states and localities struggle to fund critical services like education, health care, and public safety;
  • seriously disrupt fundamental features of state and local sales taxation that extend far beyond the kinds of online goods and services covered by the bill; and
  • open up major tax-avoidance opportunities for large multistate corporations selling physical goods online.

As one of our two analyses of the bill explains, the bill’s proponents claim that states and localities want to ease their current fiscal problems by imposing discriminatory taxes on digital goods and services, such as by taxing the sale of a digital book delivered online at a higher rate than the sale of a printed book.  They also claim that the bill is needed to stop taxation of digital goods and services by more than one state and more than one local government.  But they’ve presented no concrete examples of discriminatory or multiple taxation of digital goods and services, and in any event, the federal Internet Tax Freedom Act already bans “multiple or discriminatory taxes on electronic commerce.”

Moreover, as our companion analysis explains, the bill could cause a host of problems for states and localities, from interfering with sales taxes on physical goods to sparking widespread litigation.

Far from being discriminated against, digital goods and services often start out with an unfair 5-10 percent price advantage over their physical counterparts because they are exempt from sales taxes.  Almost every state with a sales tax imposes it on books, music, movies, software, and games delivered on physical media.  Many states also tax newspapers and magazines, cable and satellite TV service, pay-per-view movies, and satellite radio subscriptions.  Yet only a minority of states tax these same goods and services when they are sold in the form of a digital download or as a service delivered over the Internet.

In short, the bill is largely a solution in search of problem, and it could have large unintended consequences.  Given these facts, Congress shouldn’t enact it in its current form.

Making Coverage Affordable for Families

August 16, 2011 at 2:43 pm

As my colleague January Angeles has explained, the three draft regulations related to the Affordable Care Act that HHS and the Treasury Department issued last week will help people apply for coverage more easily.  Unfortunately, one provision of the proposed Treasury rule could, if left standing, leave many people uninsured, undermining a core goal of health reform.

Under the Affordable Care Act (ACA), people who are eligible for Medicaid or employer-sponsored insurance generally can’t qualify for tax credits to help them buy private coverage in the new insurance exchanges.  But there’s an exception:  people whose employers offer coverage can still qualify for the tax credits if their employer coverage isn’t affordable.  The ACA considers employer coverage unaffordable if it costs more than 9.5 percent of a family’s income.

The problem is that Treasury’s preliminary interpretation of the ACA considers employer coverage affordable for the entire family as long as coverage just for the employee costs no more than 9.5 percent of the family’s income.

On average, employer-sponsored health plans charge employees more than twice as much for family coverage than individual coverage.  Under the proposed rule, many workers wouldn’t qualify for help buying coverage for their family even though the cost of family coverage that their employers offered far exceeded the ACA’s 9.5 percent affordability threshold.  Many family members would remain uninsured as a result.

A better reading of the ACA would consider the affordability of coverage for an employee’s family as a whole.  If family coverage costs more than 9.5 percent of the family’s income, even though coverage just for the employee costs less, the other family members should be able to get a tax credit to help them buy coverage in the exchange.  This approach would advance health reform’s goal of providing coverage for people who are uninsured because of a lack of affordable options.

Providing premium credits to families in this situation would no doubt cost more than allowing them to remain uninsured.  But the increase would likely be far less than some recent claims.  Over the next two months, we will make our case to Treasury on why it is so important that spouses and children who can’t afford to buy employer-based coverage can take advantage of the ACA’s new coverage option.

Proposed Rules to Implement Health Reform Will Streamline Access to Coverage

August 16, 2011 at 10:59 am

The Department of Health and Human Services and the Treasury Department last week issued three proposed rules that are central to ensuring that the Affordable Care Act (ACA) greatly reduces the number of uninsured Americans.  The rules will help states modernize their systems for enrolling people in health coverage to replace the outdated systems that most states use in their Medicaid programs.

Under the proposed rules, consumers will be able to use a single, streamlined application for Medicaid, the Children’s Health Insurance Program (CHIP), and the new tax credit to help people buy private coverage through a state insurance exchange.  The state will then determine which (if any) of these forms of assistance the applicant qualifies for.

The rules also allow states to use data they already have, such as from tax returns or other programs like the Supplemental Nutrition Assistance Program (formerly called food stamps), to verify applicants’ incomes, eliminating the need for consumers to send in paper proof such as pay stubs.

People will be able to apply for coverage online, in person, and by phone, and many of them should get a decision on their application the same day.

States still have a great deal of work to do to implement these changes before the fall of 2013, when people will first be able to enroll for coverage.  But overall, these proposed regulations would make a number of important improvements to the eligibility and enrollment process that will be critical to achieving the coverage goals of health reform.