Wink and Nod Tax Policy

Although the proposals for a special tax on the very wealthy by Alexandria Ocasio- Cortez (AOC) and Elizabeth Warren has received a lot of criticism, it also has gained a lot of support.  Like the dumb farmer that doesn’t learn from experience or adapt to agricultural conditions, these proposals assume that the very wealthy are dumb and won’t adapt to changes in tax law.

The super wealthy like Warren Buffett and Bill Gates have helped give these confiscatory tax proposals life by claiming that they are under taxed.  Bill Gates says, “I need to pay higher taxes” and Warren Buffett joined him by saying “I don’t need a tax cut.”  They are not alone, founded in 2010, a group named Patriotic Millionaires also advocates higher taxes on the wealthy.   According to an article in The Atlantic–pay more—a survey by US Trust found that 48 % of those with several million dollars in assets are willing to pay more taxes for the common good.  There is no doubt there is a a survey that also shows that Venezuelans love Maduro.

Implicit in the US Trust survey and the views of the very wealthy like Gates and Buffett is the belief that the Federal Government can spend their money more efficiently and wisely than they can.  That is a triumph of hope over experience.  But this implied belief is contradicted by those like Gates who have set up foundations for philanthropic objectives as a way to spend their wealth before the government gets its hands on it.

What is driving these wealthy individuals to act against their self interest?  One explanation is fairness. The super wealthy have to believe that they benefit disproportionately from tax cuts.  They also seem to believe that lost federal revenue means higher deficits and a growing debt.  Neither explanation passes the red-face test.  The Tax Foundation reports show that the tax system is already very progressive.  Forty four percent of tax filers pay no federal income tax while the top 1% pays 37.3% and the top 10% pays 69 %.  The tax rate for the top 1% is 26.9 % which is 7 times higher than the percentage paid by the bottom 50%.  To make the point more compelling, a CATO Institute analysis that “the Top 400 paid $29.4 billion in federal income taxes in 2014, an average of $74 million each.” This represents 2.13% of all taxes paid.  While that might seem like a small percentage, in it represents 70% of the taxes paid by the bottom 50% in 2016, the latest year available.

As for the notion that paying higher taxes will help with reducing the deficit and debt, the proponents of higher taxes on the wealthy have made clear that they want more revenue for increased spending; not fiscal responsibility.

The wealthy who say they want to pay more taxes know these facts. So, there must be some other reason especially since Bill Gates and Warren Buffett have pledged to give away half of their wealth and have recruited a number of others to do like wise.  As of last year, 183 people or couples had signed onto Bill Gates’ Giving pledge which involves a commitment “to dedicate the majority of their wealth to giving back.”

A more compelling reason may be the GroupThink effect of being viewed socially responsible by the public and their social network.  In fact, those who have created philanthropic foundations to give away the majority of their wealth are showing the shallowness of their support higher tax rates by giving away money for which they have received tax deductions that resulted in lower taxes.

People like Bill Gates and Warren Buffett, and perhaps most of the super wealthy, derive most of their income from capital gains which makes it easier to advocate higher incometax rates.  They know that the effect will be small and would encourage those subject to it to search for other ways to shelter income.  At some point, the AOCs and progressive presidential candidates will turn to raising the capital gains tax as a way of increasing taxes on the very wealty.  That will make for much political theater but won’t produce much in the way of income or economic benefit.

Increasing the capital gains tax rate would be counter productive in that it would provide an incentive to hold capital assets longer thus delaying when the government would get tax revenue.  Economists call this the locked in effect which means that more profitable investments can’t be pursued.  Further, economic research has shown that lower not higher capital gains rates increases economic growth.  While the case is made that lower capital gains rates encourage more sheltering because of the larger difference between capital gains and regular income rates, the evidence supports the economic case for a low rate because it increases capital investment and new business formation. 

At least some of the politicians advocating for these taxes understand behavioral economics and the tax policy effects because they are already wealthy and know how to protect their wealth.   Wink and nod policy proposals make for grand illusions and great politics but they are lousy and dangerous economics.  What people like Warren, AOC, and the other progressives running for president are really doing is using one of Saul Alinsky’s Rules for Radicals–Pick the target, freeze it, personalize it, and polarize it—to demonize the wealthy for their own political gain.  Class warfare has unintended consequences.

Oops Journalism

The coverage of the Covington HS incident during this year’s March for Life may have shown journalism at its worse. Depending on your personal bias, you could find a version of the event to confirm it.  

In this age of 24/7 news and instantaneous coverage of events, journalists and the media that employs them have incentives to be first with a piece of news.  If they get it wrong, many don’t engage in introspection; they simply move on. Partly this is a result of two conflicting definitions of what constitutes journalism–writing characterized by a direct presentation of facts or description of events without an attempt at interpretation and writing designed to appeal to current popular taste or public interest.  The second definition, which seems to be the one followed today, has no emphasis on facts without attempted interpretation.  Interpretation moves an article from reporting to opinion without admitting it.

The pejorative, Fake News, is not new but today, more journalists appear to follow Mark Twain’s counsel; “get your facts first, then you can distort them as you please.”  That this is taking place so frequently can be attributed to the 24/7 news cycle and the explosion of sources of media.  Seventy years ago, George Orwell wrote 1984.  Almost 60 years ago, Daniel Boorstin, historian and former Librarian of the Library of Congress, wrote The Image:  A Guide to Pseudo Events in America.  One insightful observation by Boorstin was “By harboring …and enlarging our extravagant expectations, we create the demand for the illusions with which we deceive ourselves.  And which we pay other to make to deceive us.”  This was not a new finding.  Boorstin points out that P.T. “Barnum’s great discovery was not how easy it was to deceive the public, but rather, how much he public enjoyed being deceived.”

Unfortunately, Boorstin offers no quick fix.  “There is no formula for mass disenchantment. … Each of us must disenchant himself, must moderate his expectations, must prepare himself to receive messages coming in from the outside.”

The lessons that not only journalists should take from the Covington incident and similar ones is one that I learned from a former colleague, Phil Goulding, who wrote a book—Confirm or Denyafter his tenure as Assistant Secretary of Defense for Public Affairs.  That lesson is “first reports are always wrong-or so often wrong that they always must be considered suspect.”  He amended that later to say third reports should be taken with a grain of salt.  At least that is my recollection.The volume of what is described as news is so great and comes at us so rapidly that all of us would be better served by starting with the view 

Free is Expensive

In 2010 President Obama gave us the Affordable Care Act which it isn’t.  Republicans pledged to repeal and replace, which they didn’t.  Now, progressive democrat candidates for president are promising healthcare or Medicare for all.  

Milton Friedman once said something like if you want to know how expensive something is, make it free.  The Brookings Institute and the Mercatus Center have estimated that healthcare for all would cost over $32 trillion dollars in its first decade.  While in theory it would reduce healthcare costs by $22 trillion, the net effect remains a $1 trillion a year increase in the growing deficit and debt.

Healthcare in the United States is a mess and various attempts to “fix it” have only made it worse.  If Congress and a President ever get serious about improving the delivery of healthcare and reducing its cost, they first have to understand its many problems.  Tinkering doesn’t work.

Advocates for change often refer to systems in European countries like the Netherlands, Norway, and Switzerland.  While there are elements of those programs that might be appropriate here, they can’t be adopted in a wholesale fashion.  But US healthcare does not compare well with countries like Sweden, Norway, or Switzerland in terms of cost and quality. So, they are worth taking into account.

What’s the answer for us?  It begins with recognizing that we don’t have insurance as it is understood; nor do market forces come into play.  Employer provided health care along with government provided subsidies for Medicare and Medicaid have blunted normal market incentives. In the case of employer provided “health insurance”, wage controls during World War II led employers to provide medical coverage as a benefit to get around those controls.  Much of our health insurance involves third party payers, meaning consumers have low or no incentives to control costs. In addition, the market is balkanized and bureaucratically controlled resulting in no real competition.

Here are some suggestions for consideration.

Employer provided health coverage should no longer be tax deductible.  Employees who receive employer provided insurance should be taxed on its value or alternatively could receive the cash equivalent of that insurance.  Instead of providing insurance, employers should be encouraged collaborate in forming non-profit exchanges which would provide insurance companies incentives to compete for a large pool of employees’ business.  With a reformed health insurance market, employees would have more options to choose from.  Insurance companies should be allowed to sell across state lines to increase competition and provide employees the widest range of insurance options.

The government should draw on the Swiss model which produces good outcomes at a national cost well below ours.  The Swiss mandate that all citizens purchase insurance from private insurance companies, establishes a minimum package of benefits, and mandate coverage of preexisting conditions.  Those provisions are similar to ones in the Affordable Care Act.  Republicans hate those features but there are strong reasons for them.

Medicaid should be reformed along the lines of the Swiss model to subsidize premiums for lower-income people to keep their costs less than 10 percent of their incomes.  The subsidy should cover 100% of the premiums for the unemployable and permanently disabled. As a rich nation, we should take care of those who can’t take care of themselves.

The Swiss model also has other features worth adopting.  The Swiss require insurance companies to offer minimal policies on a nonprofit basis. They are based on relatively high out-of-pocket expenses to encourage consumers to spend wisely.  The Swiss also mandate that prices be made public, which helps consumer markets function efficiently.

To avoid adverse selection by those with pre-existing conditions, states should establish high risk pools similar to pools for uninsured motorists.  And like auto policies, there would be a fee as part of health insurance premiums to fund the high risk pools.

The reform of the health insurance market must also include Medicare reform.  Medicare spends much more money than it takes in and as a result is one of the drivers of the growing deficit and debt.

To change that, the age for eligibility should be increased in line with increases in life expectancy.  Also, the cap on social security and medicare taxes should be raised and benefits means testing levels should be raised.  There have been a number of proposals for making Medicare more efficient and for doing a better job of lowering costs.  Those need to be pursued aggressively instead of just gathering dust.