Coyote Blog

I have made this argument before -- your lifetime Medicare taxes cover only about a third of the benefits you will receive.   Social Security taxes are set about right -- to the extent we come up short on Social Security, it is only because a feckless Congress spent all the excess money in the good years and has none left for the lean years.

But Medicare is seriously mis-priced.  I have always argued that this is dangerous, because there is nothing that screws up the economy more than messed up price signals.  In particular, I have argued that a lot of the glowy hazy love of Medicare by Americans is likely due to the fact that it is seriously mis-priced.  Let's price the thing right, and then we can have a real debate about whether it needs reform or is worth it.

A recent study confirms my fear that the mispricing of Medicare is distorting perceptions of its utility.

As debate over the national debt and the federal budget deficit begins to heat up again, an analysis of national polls conducted in 2013 shows that, compared with recent government reports prepared by experts, the public has different views about the need to reduce future Medicare spending to deal with the federal budget deficit. Many experts believe that future Medicare spending will have to be reduced in order to lower the federal budget deficit [1] but polls show little support (10% to 36%) for major reductions in Medicare spending for this purpose. In fact, many Americans feel so strongly that they say they would vote against candidates who favor such reductions. Many experts see Medicare as a major contributor to the federal budget deficit today, but only about one-third (31%) of the public agrees.

This analysis appears as a Special Report in the September 12, 2013, issue of New England Journal of Medicine.

One reason that many Americans believe Medicare does not contribute to the deficit is that the majority thinks Medicare recipients pay or have prepaid the cost of their health care. Medicare beneficiaries on average pay about $1 for every $3 in benefits they receive. [2] However, about two-thirds of the public believe that most Medicare recipients get benefits worth about the same (27%) or less (41%) than what they have paid in payroll taxes during their working lives and in premiums for their current coverage.

Update:  Kevin Drum writes on the same study.  Oddly, he seems to blame the fact that Americans have been trained to expect something for nothing from the government on Conservatives.  I am happy to throw Conservatives under the bus for a lot of things but I think the Left gets a lot of the blame if Americans have been fooled into thinking expensive government freebies aren't really costing them anything.

Neither Medicare nor Social Security should be government programs.  The government essentially takes on two roles in these two insurance programs:  1) To subsidize the premiums of low income Americans; and 2) To use its power of coercion to force everyone to participate.  I have no stomach for the latter role and the former could be much more cheaply achieved with some sort of voucher or credit program.

But these programs are not going away.  While both need reform, it may turn out to be politically impossible to even reform them.

But if we take off the table for a moment their existence and their basic structure, there is still an enormous problem we might fix:  pricing.  There is absolutely nothing more deadly to an economy than a false or corrupted pricing signal.  But that is clearly what we have with these two programs.  The Medicare "premium" (tax) taken out of every paycheck is clearly way too small to cover true actuarial costs of this program.  And while Social Security rates may have been set right if the premiums were really being kept in escrow for the future, the fact is that the so-called trust fund has been raided into oblivion by past government spending programs  -- Social Security taxes need to be reset to reflect that fact.

The result, of course, will be a substantial increase in both payroll taxes.  I am not a big fan of tax increases, and find taxes on labor to be among the worst.  But as long as we hold on to the collective notion that these are insurance programs and the taxes we pay are premiums, its time to stop fooling Americans into thinking that the premiums they are paying are truly sufficient to fund their benefits.  Maybe after we reprice the "premiums" to their true actuarial value, we can then have a real debate about the structure and existence of these programs.

Here is some analysis of these reports. A few things I found interesting

• I have always understood the "trust funds" for these programs were a crock, that we had spent the money in these funds years ago.  But the accounting fiction is important for a reason I did not know - when the trust fund is used up from an accounting standpoint  (vs. a cash standpoint, where it is not only already used up but never existed) in 2036 or whenever, statutory authority for spending is capped at annual tax collections, which at that point will be way, way below programmed spending levels.
• Medicare alone is projected to grow to 6% of GDP.  wow.
• The reality of Obamacare's promises of cost reductions is starting to appear, as already these supposed cost reductions are being discounted by folks who have accountability for getting the numbers right.

One thing to note -- Social Security actually has some shot at being repaired, because benefits are a fixed, predictable amount (as long as your actuarial tables are right).  Medicare and Medicaid are far harder, because the benefits are open ended, and every recent "fix" has tended to shift incentives to encourage rather than discourage more spending.  Note, for an example, the political pressure to eliminate the part D donut hole that actually is there to provide incentives to camp drug spending and prices.

One of the arguments Democrats have made for nationalized health care is that government expenses will be much lower than private companies.  This is on its face absurd, given most people's experience with government agencies, but is nominally supported by low expense ratios in Medicare.  I won't go into this today, but this is more an artifact of the way government does accounting as well as operations decisions at Medicare which may be non-optimal (e.g. Medicare does much less claims verification and investigation than private companies, which is why we see huge fraud cases from time to time).

Anyway, we get a fresh example of private vs. public expenses on a very comparable basis in California workers comp.  The public State Fund acts as an insurer of last resort as well as a competitor to many private providers.  The fact that it is an insurer of last resort will increase its loss ratios, but its expense ratios of management or "claims adjustment" expenses should be similar.  But of course they are not.

State Fund's unallocated loss adjustment expense ratio was a whopping 51.4% last year compared to 8.9% for private carriers, while State Funds allocated loss adjustment expenses were 9.8% compared to the industry's 13.8% respectively.

This means the management expense ration of the state agency is 61.2% of premiums vs. 18.7% for private companies.  This just makes laughable the pious requirement in Obamacare that insurance companies keep their expense ratios under 20% -- or else the more efficient government agency will take over.

We are facing a huge 29.6% increase in workers comp rates in California, in part because the very high State Fund expense ratios are averaged into the calculation.

Virginia Postrel has what seems to be a perfectly reasonable suggestion:

Think about this for a moment. Medicare is a huge, single-payer, government-run program. It ought to provide the perfect environment for experimentation. If more-efficient government management can slash health-care costs by addressing all these problems, why not start with Medicare? Let's see what "better management" looks like applied to Medicare before we roll it out to the rest of the country.

This is not a completely cynical suggestion. Medicare is, for instance, a logical place to start to design better electronic records systems and the incentives to use them. But you do have to wonder why a report that claims that Medicare is wasting 30 percent of its spending thinks it's making a case for making the rest of the health care system more like Medicare.

Of course, I think both Obama and Congress know that either 1) such savings are impossible and/or 2) such savings would require steps painful enough to have millions of users squealing.

Next in my series about the health care Trojan Horse for fascism, comes this story via Q&O in Canada  (McQ gives as good a definition of any of the Trojan Horse: "once government has control over your health care, it will use all
sorts of justifications and excuses to exert more and more control over
your life as a result.")

For 60 years or more, libertarians and conservatives have been arguing
that government programs intended to promote the public welfare
inevitably end by restricting freedom more and more: as the state does
more for you, it finds itself doing ever more to you. Who
would dare challenge that premise now, in the face of Judge James
Blacklock's decision? The man made no secret of the chief pretext for
his ruling. Motorcycle riders who don't wear helmets are more costly to the medicare system; therefore, in the name of reducing those costs, the government is free to require the wearing of helmets,
even if that conflicts with a fundamental Charter right and interferes
with the most personal and intimate sort of decision-making conceivable.

Of the more partisan blogs I read, I have always enjoyed Captains Quarters for being thoughtful and well-written.  Ed Morrissy is clearly as skeptical about open immigration as I am supportive of it, which  I am generally willing to put into the "intelligent people will disagree" category, until I found this bit a little frightening (emphasis added):

As I have written repeatedly over the past two years, we simply cannot
throw out 12 million people overnight, so some sort of guest-worker
program is inevitable, if for no other reason than to get an accurate
accounting of the aliens in our nation. Either that, or we will have to
herd people into concentration camps, a solution that will never pass
political muster even if were remotely possible logistically. That
program could form a basis of a comprehensive immigration "reform", if
properly written.

Is the implication that his only real problems with American concentration camps for people born in Mexico are logistical?  When one typically says that an idea can't pass political muster, they generally are referring (with a wistful sigh) to what they consider a good idea that for whatever reason could not survive the legislative process.  Let's be clear: herding people into concentration camps based arbitrarily on their birth location is abhorrent, not logistically difficult. 

I haven't called myself conservative for over 20 years, but I thought that most good conservatives would agree with the following statement:

"Our fundamental rights, from speech to association to property, are not granted to us by any government, but belong to us as a fact of our human existence."

Do conservatives still believe this?  I know liberals gave up on it a while back - that is why I pay a transaction "privilege" tax in Arizona, which presumes that the ability to conduct commerce is a privilege that is granted by the government.  But I thought conservatives stood by this statement.  But if they still do, then on what basis can they argue that people not born within the US border somehow have lesser (or no) right to conduct commerce in this country, to buy and live in a home in this country, to sell their labor in this country, etc.?   The only rights or activities or privileges a country should be able to deny non-citizens are those rights and privileges that flow from the government and not from our basic humanity.  Which are.... none (update: OK, maybe one: Voting, since this is inherently tied up with government.  I have written before about why I think voting is one of our less important rights).

I understand there are good and valid concerns about government handouts and taxpayer-paid services flowing to recent immigrants, but to solve this narrow concern, "reform" discussion should be about setting minimum qualification standards for such services or handouts, and not about putting Mexicans in concentration camps.

Update:  A number of readers have scolded me for overreacting to the Morrissey quote, arguing that the quote is just dry understatement rather than any revelation of sinister plans.  Fine.  I have friends who are both legal and illegal immigrants her in Phoenix, as well as several who are in-between (i.e. are constantly battling to hang on to their visa status by their fingernails) so I have personal emotions in the game here that may make me overly sensitive.

I will admit to a huge blind spot:  I just cannot comprehend why Americans, none of whose families are native to this land, get so upset about high levels of immigration, beyond the public services issue.  And the more I think about this latter, the more I am convinced making everyone legal combined with some eligibility waiting periods (for voting, welfare, etc) would generate more tax revenue than it would consume.  In fact, high levels of immigration may be the only viable solution to the demographic bomb we have with social security and medicare.  (By the way, the public services issue is one reason the Democrats have, if possible, an even less viable position than Republicans.  Our Democratic governor has publicly supported continuing free government services to illegal immigrants but opposed allowing them to work.  This makes sense, how?)

I do understand there is "law and order" argument that goes "well, those folks are breaking the law, and we have got to have respect for the law."  Here's a proposal.  Everyone who has never knowingly violated the speed limit, never done a rolling stop at a stop sign, and never tried illegal narcotics in college are all welcome to make the argument to me about the need to strictly enforce every law on the books.  This same logic is used to send refugees escaping Cuba back to Cuba, and it sucks. 

Generally, in any discussion of taxes, I focus on the foundations of
property rights, to argue that taxation is no different than
stealing.    Most of us agree that grabbing someone else's money at
gunpoint is immoral.  I do not hold to a theory of government that says
that this immoral action is suddenly moral if 51% of my neighbors
sanction it.

Anyway, I am going to leave behind the moral basis (or lack thereof)
for taxes and focus instead on five practical problems that a
well-crafted tax system should be able to avoid.

1.  Complexity and Preparation Time

I probably don't need to go into great depth on this one to convince you that taxes and tax returns are ridiculously complex.  We all know how complicated even the individual 1040 has become, so much so that using tax preparation software is nearly de riguer for most middle class taxpayers.  Last year, our federal and state income tax returns for the company were over 400 pages long.

For a small business, the tax preparation burden goes much further.  For example, the burden of payroll tax preparation, not to mention staying on top of compliance issues, is so high that no sane business person does payroll in house any more.  Quarterly state and federal unemployment and withholding tax returns must be filed, with salary detail to the last penny for every single employee.   As a result, everyone uses a service like ADP, and though this solves the workload problem, it still costs money - about $12,000 a year in our case.  That's not the tax bill, just the cost to keep up with the government paperwork. 

But with payroll taken care of, businesses still must file sales tax returns, excise tax returns, detailed property tax returns, census data requests, labor and commerce department surveys, and of course income tax returns.  Each of these typically have to be done at the state level and in many cases separately for every single county and city where we do business.  Each in and of itself is horribly time consuming - see this example for property taxes, this one for sales taxes, and this one for government surveys. 

In Kentucky, for example, we have to file quarterly state withholding tax returns, quarterly payroll withholding returns in each county we operate in, a quarterly state unemployment return, an annual property tax return in each county, and annual income tax return at the state level, an annual income tax return in each county, a monthly sales tax return, a monthly survey for the US Department of Labor about Kentucky headcount levels, an annual foreign corporation renewal, a new hire report whenever we hire a new employee, and a monthly report to the workers comp state fund

2.  Disguising the Tax Load

Quick, how much total do you pay in taxes?  Perhaps the greatest innovation of statists in the 20th century was the tax load shell game - the clever balkanization of the tax load that makes it nearly impossible for the average person to truly know how much they pay in taxes to the government.

Start with income taxes.  OK, April 15 has just passed, but even so, how many people know how much they paid in income taxes last year?  For many people, this is the single largest expense they have, but the total amount is disguised by the fact that most income taxes are taken out as direct payroll deduction.  Statists and leftists everywhere in the US should get up in the morning and give thanks for direct payroll deduction -- without it, if every American had to write a single check once a year for the sum total of their annual income taxes, there would have long since been a revolution.

OK, so you don't know how much you paid in federal, state and local income taxes.  But in addition to that, how much did you pay in social security and medicare (typically about 8% of salary)?  Property taxes (typically 1-2% of your home value)?  How about sales taxes (typically 6-9% of your purchases)?  What about vehicle licensing fees and special taxes on hotels and airfare and rent cars?  If you add all these up, the average American pays about 30% of his/her salary in taxes.  The Tax Foundation has a great chart summarizing this shell game, with relative burdens expressed as days of work each year required to pay the tax.  Note that on average, your federal income tax is only 1/3 of the total of what you are paying:

 
So those are the direct ones, but how much are you also paying in higher prices due to government import duties?  What about the 8% FICA and medicare that employers pay on your behalf - how much higher might your salary be if they did not have to pay these?  What about corporate taxes - you may not pay them directly, but they certainly get passed on to you in the form of higher prices and lower dividends.  What else? - try this list on for size.

3.  Taxes on Wealth and Savings

Most taxes are on income or sales, and so they are at least marginally calibrated with an individual's cash flows.  The exceptions to this are property taxes and inheritance taxes.  These two taxes both go after an individual's savings -- property taxes mainly on the home, the primary savings vehicle for most Americans, and inheritance taxes on everything you've saved when you die.

Lets take property taxes first.  Many people complain that modern life has become a treadmill, forcing families to work harder and harder to keep up their lifestyle.  To a large extent, I think this is a myth - people may be working harder but their effective standard of living is way, way higher than say 30 years ago.  But one of the things that definitely creates a treadmill are property taxes. 

Many people have worked hard to pay off their mortgage, thinking they could settle down into their retirement in a paid off house.  Unfortunately, they may find that their home has increased in value so much that their property taxes at retirement are actually much higher than their original payment on the house.  Take the case of a couple who bought their house in an urban area for $25,000 and find its now worth $375,000 forty years later (this is an average urban price increase over the last 40 years).  For simplicity, we will assume the effective tax rate has stayed at $1.50 per $100 for these forty years (though its more likely to have gone up).  In 1965, they paid $375 a year in taxes.  Today, they have to pay $5,625.  In other words, their property taxes today are over 22.5% a year of the original price they paid for the house.  Now, this is all fine if the couple strove to work up the corporate ladder and get promotions and grow their income proportionately.  But what if they didn't want to?  What if they just wanted to buy that house, pay it off, and live modestly selling driftwood sculptures at farmers markets, or whatever.  The answer is, because of property taxes, they can't.  Likely they will have to sell this house, give up the urban life they wanted, and either move to an urban dump they can afford the property taxes on, or they move out to the country.  Here is an example, via Reason, of this process of property taxes forcing out urban residents living small in favor of yuppies living the dream.  It is ironic that a tax initially invented for populist reasons to cut back on wealth accumulation hurts the lower income brackets and those trying to step off of the capitalist treadmill the most.  In fact, it was the poor in the Great Depression who typically lobbied for laws to put moratoriums on property tax collections.

The estate tax has many of the same origins and issues.  The biggest downside of the estate tax is that it tends to force premature sales of productive business assets to pay the tax.  Rather than leaving small businesses in the family, who have the experience and passion to make them work, they typically must be sold to third parties outside the family to pay the estate taxes.  Again, the law of unintended consequences crops up - estate taxes and the sales they force have done more to contribute to merger and acquisition activity, which in turn drives consolidation of economic assets into fewer and fewer corporations.  The tax meant to stifle wealth accumulation among individuals has in fact spurred wealth accumulation among corporations.  While used for many purposes today, LBO's, that bogeyman of the left, were invented to manage this estate tax forced sale problem.

Asymmetrical Information has a thoughtful series of posts going on estate taxes.

4.  Picking Favorites for Special Treatment

One of the defining characteristics of statist politicians of both the left and the right is that they think they are smarter and more moral than the average American, and certainly than the average American businessman.  Statists and technocrats distrust markets and assume that they can succeed in managing the economy in general and individual decision-making in particular where markets have "failed" to reach whatever end-state politicians would prefer.

Therefore politicians insist on using tax policy to reinforce (or discourage) certain behaviors or to influence certain outcomes or to frankly enrich some favored group.  Examples are all around us, but include:

• Subsidizing farmers and propping up farm commodity prices for no apparent reason than because farmers somehow have a moral halo around them that other businessmen do not.  This is not a big-small issue, since much of these subsidies go to huge conglomerates and millionaires.
• Subsidizing corporations in many industries
• Subsidizing local relocation of favored industries
• Subsidizing billionaire sports team owners  and the local lodging industry
• Subsidizing billionaire movie producers
• Taxing certain non-politically-correct products (and more)
• Subsidizing home buyers vs. home renters
• Subsidizing corporate debt vs. corporate equity

5.  Class Warfare and Punishing Success

Many of the taxes we pay - income, property, estate - have strong class warfare origins.  Heck, the income tax and the Constitutional Amendment that made it possible because Americans were told that only the richest 1% or so would ever have to pay it.  Today, tax debate is littered with class warfare arguments. 

Today, the richest 1% of Americans pay about a third of the total individual taxes, and the richest 10% pay two-thirds.  The richest 50% of Americans pay 100% of the taxes (in the other half, some pay a bit, and some get a bit back in EITC, but the net is zero).  So, a small percentage of Americans pay for the services and government
cash subsidies enjoyed by the majority.  So how do we treat these
people?  As heroes, or benefactors, or as the most productive?  No we treat them as evil parasites who are not
doing their fair share.

By the way, These shares paid by the rich actually went up after the Bush tax cuts (yes, that's not a typo).  The very fact that this statement might seem unbelievable points to how much ridiculous class warfare demagoguery permeated the last election.  By the way, these numbers are for income taxes.   The numbers for total taxes, including the regressive payroll taxes, yields slightly different numbers but the same results, as outlined in TaxProfBlog today.

The fact is that most "progressive" taxes are in fact punishing the successful and most productive.  The Left loves to wave Paris Hilton around as an example of the useless and unproductive rich who presumably should be taxed into poverty.  They want to obscure the fact that 99% of the rich got to be rich honestly, through hard work, and via the uncoerced interaction with others.  Because saying that your government rewards success with its highest tax rates and confiscates the vast majority of its operating funds from the people who would employ this money the most productively, um, doesn't sound very good.

UPDATE:  I have more here, including a rebuttal of Kevin Drum.