Ultimately, we should blame the American voters. The average Medicare couple pays $109,000 into the program and gets $343,000 in benefits out, according to the Urban Institute. This is $234,000 in free money. Many voters have decided they like spending a lot on themselves and pushing costs onto their children and grandchildren. They have decided they like borrowing up to $1 trillion a year for tax credits, disability payments, defense contracts and the rest. They have found that the original Keynesian rationale for these deficits provides a perfect cover for permanent deficit-living. They have made it clear that they will destroy any politician who tries to stop them from cost-shifting in this way.
The fiscal deal struck last night makes one thing clear: President Obama must have really hated the recommendations of the bipartisan Bowles-Simpson commission that he appointed. The commission said that we needed to reform entitlement programs to rein in spending and that increased tax revenue should come in the form of base broadening and lower marginal tax rates. The deal appears to offer no entitlement reforms, no tax reform, and higher marginal tax rates. After all the public discussion over the past couple years of what a good fiscal reform would like like, it is hard to imagine a deal that would be less responsive to the ideas of bipartisan policy wonks.
Several tax-reform panels, including commissions in 1985 and 2005, have called for abolishing the deduction. Although we wouldn’t go that far, a $50,000 cap would enable most itemizing taxpayers to deduct the same amount of state and local taxes they currently do, while still enjoying other deductions under the cap. High-income individuals, however, might be forced to pay a bigger share of their state and local tax bills – not necessarily a bad thing.
How would all of this affect taxpayers? Those in the top 1 percent would see their average tax bill increase by about $51,548, for a 2 percent increase, according to the Tax Policy Center. Those in the middle income quintile (with earnings between $42,597 and $67,608) would see an average increase of $823.
Notably, it would help close the revenue gap. A $50,000 cap with a charitable exemption would raise about $490 billion over the next decade, according to the Tax Policy Center. Replacing the charitable deduction with the 25 percent credit would bring in an additional $25 billion over 10 years. Add those savings to the $566 billion gained by allowing the Bush tax cuts to expire on household earnings above $500,000 – along with increasing the rates paid for capital gains and dividends to at least 20 percent – and the U.S. gains about $1.2 trillion.
If he wants the real deal, Mr Obama must distance himself from supporters who understate the fiscal challenge. This week, for example, the economist Paul Krugman complained that “deficit scolds” are “fighting fiscal phantoms”. This is fair up to a point: the extraordinary doubling in America’s federal debt ratio since 2007 has been a necessary response to collapsing private spending, and fixing the deficit is not a near-term imperative. But consider what looms in the future. According to the Congressional Budget Office’s “alternative fiscal scenario”, which assumes that current policy continues, today’s net debt ratio of 73 per cent of GDP is on track to hit 100 per cent 12 years from now.
With both parties positioning for difficult negotiations to avert a fiscal crisis as Congress returns for its lame-duck session, Democrats are latching on to an idea floated by Mitt Romney to raise taxes on the rich through a hard cap on income tax deductions.
The main reason Romney’s effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. That’s something that strikes many people as unfair on its face, and particularly unfair since it often means very low rates for extremely rich people like Rommey. And Rommey himself as a rich guy who’s also a member of the political party seen as favoring the rich, and who’s been recorded as whining that the working poor are undertaxed is perhaps not an ideal messenger for a defense of this policy.
But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.
The JAMA study doesn’t surprise advocates of this “consumer driven” health care. “Medicare fee-for-service is an inefficient way to deliver care,” says James Capretta, associate director of the Office of Management and Budget from 2001 to 2004. “It’s an engine for volume-driven spending.” Cost savings under a full-fledged voucher system would be much larger, he argues, because Medicare Advantage’s modest size has created only “muted competition.”
Until recently, coverage of the discussions about entitlements—programs that eventually touch almost everyone—has been has been largely unhelpful, or cloaked in political spin. But covering Medicare (and Medicaid too) is hard. How do journalists cover and clarify the debates about reform without getting too deep in the weeds?