Raise *these* taxes

So many problems out there — health care costs, climate change, mortgage crisis — and so many complicated solutions being pursued.  Some solutions that economists would tend to favor that do not seem to be part of the current political debate involve eliminating a couple of expensive tax loopholes, for health insurance and mortgage interest, and imposing a carbon tax.

All of these would raise a lot of revenue, and tax increases of any kind are like kryptonite to politicians and of course counterproductive in a recession, but they could be made revenue-neutral by cutting tax rates or increasing the personal exemptions or standard deductions.  Or, when the economy has recovered, tax increases like these could be part of a deficit-reduction package.

One by one:

(1) Close the health insurance tax loophole, which makes people with employer-provided insurance feel like they’re getting it for free, when of course the employer pays for it (and the worker probably pays indirectly in the form of a lower salary to offset this big benefit, and other people pay in the sense that more of the tax burden gets shifted to them).  So most people aren’t going to be very cost-conscious when it comes to their health care.

I actually kind of liked John McCain’s proposal last year to eliminate this loophole and replace it with a $7000 (?) tax credit so that people could buy their own health insurance directly.  The main thing I found missing in that proposal was the lack of some kind of public option that would ensure that everyone would be able to afford some kind of minimally acceptable health plan.  Combine McCain’s proposal with the public option in some of the current Democratic plans, and you’ve got something.

Employer-provided health insurance is really not the best way to go, as Matt Miller argued in The Financial Times this week. (In fact, it’s mainly the outcome of World War II labor markets and another loophole: The government imposed wage controls but did not think it needed to regulate fringe benefits. Labor demand was high, and so was workers’ bargaining power, so workers got firms to provide health insurance. Since then, it’s been a path-dependent process.)  Under the current system, people who lose their jobs also lose their health insurance (unless they qualify for Medicaid or Medicare), and people whose employers can’t or won’t pay for health insurance are S.O.L.  The system is hard on employers as well, as health insurance is a high and rising part of their labor costs over which they have little control.  It hurts their bottom line,  and it hurts their competitiveness. Just ask General Motors.

(2) Eliminate the mortgage interest deduction – Among the lessons of the mortgage meltdown is that homeownership is not for everybody and the government should not be subsidizing it quite so much.  A house is simply not that great an investment — before the bubble, housing prices did basically no better than the general price level. Many people would be better off renting and putting their extra money into stocks, bonds, etc., instead of tying themselves down financially and geographically with a mortgage. The mortgage interest deduction is one of the biggest ones, so ending it would raise a lot of revenue.  (It might also simplify a lot of people’s tax preparation — before we bought a house and started paying a mortgage, we always took the standard deduction, so tax prep was a breeze.)

(3) Impose a carbon tax.  Something like this is in every microeconomics textbook:  If certain profitable activities cause negative externalities like pollution or global warming, then the market (which doesn’t care about externalities unless made to do so) will produce too much of them.  A tax on those activities, or better yet on the emissions themselves, will induce firms to produce less of them.

This seems a lot simpler, more straightforward, and less subject to political maneuvering than the current cap-and-trade plan that is before Congress.  Cap and trade (where there would be emissions permits adding up to a total emissions ceiling and firms would be allowed to buy and sell those permits among themselves) is not a bad idea, but economists generally prefer that those permits be auctioned off at market value rather than just handed out to firms, as in the leading bill.  It’s hard to believe that the better-connected firms didn’t get a disproportionate share of those free permits.

***

Yet another idea, which would find less consensus among economists than the first three (sometimes economists break down along partisan lines just like everyone else), is to raise the top marginal tax rate, currently at 35% (exactly half what it was when Ronald Reagan took office in 1981, by the way).  Candidate Barack Obama proposed hiking it to 39.6%, where it was when Bill Clinton left office, but President Obama has shelved that idea while the depression is still raging.  It’s not a bad idea, though. And it seems preferable to imposing pay caps, as has been discussed (and done with TARP recipients).  It should be up to the shareholders to decide if executives are overpaid and then to act (another thorny issue, the lack of shareholder power and what to do about it, but one for a future post). Also, a higher top tax rate — preferably starting at a much higher threshold, like $1 million, instead of the current threshold of about $300,000 — would apply to everyone earning above that amount, not just financial executives or whichever Freak of the Week has earned the public’s wrath.  Netflix CEO Reed Hastings had a great NYT op-ed back in February advocating raising the top tax rate to 50%.  I would set it a bit lower, so that virtually nobody has to pay more than half their income in taxes (which seems to me like an important psychological threshold).

When the economy returns to full employment, however many years that might be from now, deficit reduction will probably crowd out nearly every other domestic priority.  (And in the minds of many, mostly Republican politicians and CNBC talking heads, the crowding out is already here.)  Tax increases are never popular, but they’ll be hard to avoid with the country in a precarious fiscal position.  (1) – (3) would command majority support among economists, I think, and raising the top tax rate to about 40% or so works for me, too.

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9 Responses to “Raise *these* taxes”

  1. democommie Says:

    Ranjit:

    I think the health care item is a good one if, as you said, they combine the two ideas into one plan.

    The mortgage interest thing, I’m not so sure about. I don’t have a mortgage, but I think that homeowners generally get a far better deal in ownership than they do by renting. Rent is money that you get no return on. It has been my experience in renting for almost 35 years that my landlord often had a smaller monthly payment than I did. Granted he had maintenance, RE taxes, etc., to deal with. But I think at the end of the process, when I moved, he was ahead of the game and I was not. Than again, I’m no good at comlicated math, so I can’t do a real CBA.

  2. Ranjit Says:

    I agree with what you said about owning vs. renting. Owning generally *is* a better bet, at least if you keep the house for enough years and if house prices in your area aren’t too volatile (e.g., here). But I don’t think the government should use a tax loophole to nudge people into making that decision — it’s expensive, regressive (favors owners over renters), and tends to contribute to housing bubbles.

  3. Richard Says:

    Homeowners may ultimately get a better deal than renters in some instances; renters may ultimately get a better deal than homeowners in others. However, if government incentivizes homeowning over renting, then a superoptimal amount of homeowning takes place relative to a now-suboptimal amount of renting, and there is a cost of this inefficient allocation which must be paid by someone–if these cost were paid by the market participants, than the outcome would approach optimality. This payment is made where tax incentives are provided for the homeowners and not to the renters.

    It is obvious that a tax reduction for certain behavior is simply a tricky way to mask a government subsidy. Say ten people pay $10 in taxes each. Now say the government allows one person to pay nothing. It is clear that, if $100 was necessary to run the government, that the remaining nine people must now pay $11.111…. There is therefore a $10 subsidy for that one individual. If this subsidy is directed toward certain behavior, then that behavior is essentially being subsidized through taxation. Resources are being taxed away from certain individuals (or perhaps “borrowed,” as our government seems fond of doing lately, as if borrowing does not redirect real resources in the same way taxing does…), and provided to individuals who are behaving in the manner that the government desires.

    There was recently a large tax break for a certain restaurant opening up in Syracuse. It oftentimes interests me how some business owners hail such state behavior, and yet are distraught when their competition receives direct money from the government instead.

    It seems to be a common theme in the Republican party to use the coercive powers of the state to guide individuals’ moral behavior. Perhaps due to their devotion to that Higher Being which wants us to own more homes, they support subsidies for homeowners, to be paid for by all. As to whether such a diversion can contribute to a “housing bubble,” I think you may have pointing out a factor which caused the bubble to happen to end up in the housing market, but no subsidy can logically create a bubble–all of the resources diverted to homeowners must necessarily be taken (taxed, borrowed, what have you) from some other individual, and so the net result materially seems to be zero. One can however make an argument that utility may decline, since this allocation by force must be different from what individual market participants would have decided had government force not been used, hence certain more pressing wants would have to go unsatisfied as a result of this violent allocation; this however is an argument I tend to avoid, since it’s possible (though it approaches impossibility) that individuals are actually indifferent to either outcome, and I can’t rule that out without making a subjective interpersonal utility comparison which is philosophical, and uneconomic.

  4. democommie Says:

    Richard:

    You are correct, I think, in your assumptions about how taxes and tax breaks work on the market. I think, however, that almost everyone gets something for which other people have paid. The devil is in the details of course.

  5. Goswald Hughes Says:

    It is often overlooked that the AMA has a monopoly on the number of doctors they qualify. They are fewer than required which grants them a monopoly. When a life saving industry gets a monopoly there is no chance prices will ever decline.

    We need more doctors, higher co-pays, medical savings accounts, Insurance exchanges, co-operatives and tort reform, before we raise taxes.

    Employer based health care also encourages people to work. so I am OK with that. There is a cherry picking dimension too. Employers with great health care can attract the best employees. It is good for competition.

    The also must be a public option. What is happening in the insurance business is not free market. It will become free market when the govt. option exists as a moderating force. There is a place for private companies to compete with a government plan and prove that they can do it better and cheaper.

    Markets need government to maintain their freedom. Regulation is what makes markets free. The public plan must exist for capitalism work correctly in health care. The government already cares for the worst candidates, the wounded and the elderly, at a very reasonable cost. Can you imagine what they might be able to do when millions of healthy people join in?

    • Mark Eanes Says:

      I really like Goswald Hughes reply on the heath care issue. The goverment’s role here should primarily be to ensure a free market system here, even if that means they must become one of the health care options. He’s made some great points for keeping costs down, but it seems there is just more to this issue.

      It seems to me that the biggest problem with health care is the high costs borne not just to the patient, but to many parties along the chain. From a layman’s perspective, it seems that a very few individuals are making a mint off of everyone else (I guess this would be my same concern with the financial crisis, in general). From that, I would conclude that if we can’t get that problem under control, possibly no system can be effective.

      My biggest confusion with the whole issue is why the problem I proposed above is barely even given lip service (I should mention that I get most of my info via various media filtered outlets,so I am really thrilled that such blogs like this exist). If any of you can shine some light into my possibly overly logical, but certainly underinformed mind, I would really appreciate it.

  6. Goswald Hughes Says:

    On the Mortgage Deduction.

    I think property rights provide the substrate upon which capitalism rests. It took us a long time to get away from the exploitation of landlords. Even if it not a wealth builder (people will disagree) what would our suburbs and cities look like without owners.
    The crisis is not caused by the community reinvestment act, but by greedy bankers who were derelict in their duty. Home ownership is the engine of the economy. I would not discourage it in any way. Except maybe for a few rich people for whom the mortgage tax deduction is a giant subsidy.

  7. democommie Says:

    Goswald Hughes:

    Until fairly recently, mortgage companies and banks had been the “new landlords”.

    With no training in economics, finance or marketing I–doofus that I am–have been saying for a long time that real estate that was “increasing in value” by double digits, every year (with no apparent change in its condition) had to be subject to as rapid deflation as it had been to inflation. Of course I was wrong–the deflation happened a lot faster.

    “We need more doctors, and we should raise taxes.”

    Insurance companies, Big Pharma and HMO’s have demonstrated–repeatedly–that the only health that genuinely concerns them is their own economic health. They could probably undercut government pricing for health insurance for six or eight quarters (long enough to convince people that the “public option” was a failed idea) but they have no vested interests in reducing their own revenues. The two biggest reasons that the Medicare Prescription Plan is such a boondoggle is that the program allows for NO price negotiations with pharmaceuticals suppliers and requires a byzantine array of forms to deal with the sundry plans that are out there.

    I’m in the Veterans Healthcare system at the moment. My caregiver looked at my prescriptions and said “Here’s what we can do. Your co-pay for meds is ‘X’; if you can get them cheaper from Wal-mart, go for it–if not, we’ll fill them. VA does negotiate prices. Also, when I need something done I can make an appointment at my local clinic or go to the hospital, 45 miles away. I can keep going to my former PCP if I like, paying for him out of my own pocket. It’s not a perfect system, but it’s a hell of a lot better for me than the former set up-for which I would be paying in excess of $10K/annum.

    Sorry, I have absolutely no faith in “the market” in this area. It’s far too deeply flawed to respond in anything like the way it needs to the healthcare crisis. This was proven yet again by the recent brouhaha over the $3T “savings” that the public would realize over the next ten years–that’s been a bust as of the latest I’ve heard.

  8. Richard Says:

    democommie writes: “Sorry, I have absolutely no faith in “the market” in this area. It’s far too deeply flawed to respond in anything like the way it needs to the healthcare crisis. This was proven yet again by the recent brouhaha over the $3T “savings” that the public would realize over the next ten years–that’s been a bust as of the latest I’ve heard.”

    Interestingly, you seem to have “faith” in the free market to provide sufficient food, clothing, energy, and ideas for your life. Though we could state this much more realistically: you have “faith” in yourself to produce sufficient output in order to trade with others and thereby obtain what you wish to own. It is apparent that to have “faith” in the free market is to have faith in nothing, since the free market is not a thing, but rather an idea. Of course, you can have faith in government, since government is a rather more tangible thing, for it has guns and tasers and handcuffs and all of that, which it can use to take from other people in order to give you what you want. In the case of the free market, other individuals who seek to nonviolently pursue their own happiness are clearly not as “faithful” to your, or anyone else’s, wishes. Except of course to the extent that you can provide them the capacity to increase their utility.

    Anyway, it seems evident that it is primarily government intervention that has escalated health care costs. Milton Friedman makes this point very well here:

    http://www.hoover.org/publications/digest/3459466.html

    Also a Forbes article regarding this:
    http://www.forbes.com/2009/06/18/milton-friedman-medical-insurance-opinions-columnists-health-care.html

    Goswald Hughes writes:
    “The also must be a public option. What is happening in the insurance business is not free market. It will become free market when the govt. option exists as a moderating force. There is a place for private companies to compete with a government plan and prove that they can do it better and cheaper.”

    I can barely begin to counter this argument. First, there is an obvious redefinition here, which is very pernicious. You write that a system of trade can become apparently closer to a free market when government intervenes. An attempt to simply redefine “free market” as “whatever seems to work best for me” is a silo of empty rhetoric.

    It is obviously clear from definitions that the insurance business will be obviously less laissez-faire if more government interference takes place. I agree with you that private companies will have to compete with the public option in an attempt to stay in business. However, as I have posted elsewhere on Dighe’s blog, by the definition of the public option being run by the government, it will have an unfair advantage–namely, it will be favored by the government through subsidies or disparate regulations. In other words, the public option might look cheaper and therefore compete forcefully with the private firms, but the reason for this apparent cheapness will be government redistribution of resources, not actual innovation. (If the public option can compete with the private firms without government assistance, then it is a private firm by definition.)

    If the private firms are operating at a point where their return on capital is equal to investments of the same comparative risk, and the public option forces them to reduce their revenues, they will lose their capital funding to the alternative investments. As a result, they will, perhaps slowly or perhaps quickly, whither and be liquidated from the system. If a public option exists, the immediate result *may* be a reduction in healthcare cost since markets cannot respond in an instant, but the long-run (and I mean long-run by economic definition, as in, when we can assume capital is mobile) result logically seems to be a reduction in competition due to the elimination of private competitors from the market.

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