Told Him So
Robert Waldmann
told Paul Krugman so
About 21 months ago Paul Krugman had a question
lower and middle-income Americans would be substantially better off under the Obama plan. But where is the money for health care reform?
there are two puzzles in Obama’s proposals
1) How does he plan to pay for both health care reform and his middle class tax cut ?
2) Why is he raising the social security tax even though it is probably not needed to pay old age and disability pensions ?I think the two questions answer each other. I think that Obama is planning to pay for health care reform with the donut FICA increase (taxing individual labor income over $250,000).
Now we know. Yes most of the money for health care reform came from planning to have the CMS squeeze hospitals and nursing homes, then much from eliminating the Medicare advantage boondoggle (not eliminating the program just paying private insurance companies the same per policy holder as the CMS spends), then from the tax on expensive health plans.
However, when cutting that unpopular tax, expanding subsidies, making the special deal for Nebraska universal and making the special deal for collectively bargained health insurance benefits universal, Obama was short a few hundred billion. So in the Obama compromise proposal (the first proposal from the Obama administration) the donut tax returned.
OK so it’s described as an increase in the Medicare plan A tax not the social security old age and disability pension tax. It starts at income of 200,000 or family income of 250,000. It applies to capital income too. The rate is lower than I guessed way back then (I just assumed it was 6.25%). Still I now type “I told you so.”
It was always there in his mind in case it was needed.
Robert:
The dougnut hole fix for SS first appeared in early Bush years appearing under the Diamond – Orszag Plan for SS. Anyone look familar there?
Initially, the proposal was a 2-4% surcharge on those making a high salary >$200,000 Here it is stated at 3%.
Second, create a legacy tax on earnings above the maximum taxable earnings base, so that very high earners contribute to financing he legacy debt in proportion to their full earnings. This legacy tax would start at 3.0 percent and increase along with the universal charge, described next. http://www.brookings.edu/views/papers/orszag/200504security.pdf
Why the surcharge on higher incomes, taxes on capital, and increased payroll wage taxes? So the gov doesn’t have to pay back the TF. Much of the issue is about paying back the TF and people such as Keating, Biggs, Peterson, etc. get really nervous on the subject of having to pay back the TF. They also get sweaty when SS payouts exceed payroll wage withholding revenues (minus interest). That a lot of surplus revenue the gov no longer has in its coffers to subsidize private capital investing which is not taxed at the same level as payroll wages.
The problem, which Bruce and coberly have pointed out, is they are taking a 75 year snapshot of the issue when the economy does gyrations every 5 to 10 years. I really do not know what we would be doing 75 years from now and to plan for it now does not appear to be feasible when we are viewing the short term.
Further point we at best know the population situation in 62 years (due to statistics gathering lags) We don’t really know if there will be another baby boom, which would solve social securities problem in 50 years, as the parents involved have not been born yet.
Many middle class workers use Flexible Spending Plans to offset increases in health care deductibles and co-pays, and also to help fund uncovered dental and vision.
By capping at $2500 Obama has snuck in a tax increase for some number of middle class taxpayers.
This bill has 8 years of phase-ins, tis a mess in the making.
Well not all FICA is created equal. [Text deleted]
(Oh never mind, Robert ended up addressing my objection in the last paragraph. A lesson. Read to the END of the post before commenting.)
Moving on. No we don’t know what will be happening in 75 years. But we have a reasonably good idea of what will be happening in the next 10 and 25 years. And luckily for us the Trustees provide a breakdown of that 75 year projection into 25, 50, and 75 year intervals. And the implications are pretty interesting.
http://www.ssa.gov/OACT/TR/2009/VI_OASDHI_payroll.html#131183
Table VI.F3.—Summarized OASDI and HI Income Rates and Cost Rates for Valuation Periods, Calendar Years 2009-83 [As a percentage of taxable payroll ]
(And yes I love Social Security geek-speak)
The actuarial gap for 2009-2033 for OASDI is 0.17% of payroll, for HI it is 1.4%. The insistence by the Peterson people that we need to address the 75 year gap RIGHT NOW is simple artificial hysteria, we don’t address other budget issues that way, instead they have traditionally been addressed over a ten year period and only this last year or so have we been asking CBO to take a look at the second ten-year period (because of the elaborate gaming around the Bush tax-cuts).
25 years is a pretty rational time frame to start planning for retirement, by the time you are 40 you probably have a pretty good idea of what your career arc is going to look like and what kind of life-style you want to target in retirement. So framing policy in terms of the projected 25 year valuation period presented in this table is reasonable enough. The ten year numbers for DI look terrible and even the relatively mild challenge represented by a 25 year gap of 0.17% of payroll is worth facing. Which is why Dale, Arne and I propose an immediate 0.3% of payroll increase, it actually would fix DI almost totally through the 75 year projection period while also taking a chunk out of the combined OASDI gap over the 50 year projection. Certainly it is a responsible reaction, even conservative overreaction to the numbers that are statistically pretty secure. But crafting policy based on numbers after mid-century or after the turn of the next century is kind of ridiculous, if you look at the probability spreads in the figures in either SSA or CBO reporting you would have to laugh.
Fix what we know is broke and then move on.
Thanks Bruce
but what is broke appears to be the President’s brain.
Congress never had one to begin with. And the President’s advisors don’t even understand the question. But being bright kids they can answer it anyway.
Nice prediction
Muni bonds and growth stocks (non-dividend paying stocks) just became very valuable, becuase these will be the #1 instruments to avoid these new taxes for unearned income – the kind earned by the truly rich.
Sounds good to me. Muni bonds typically pay for infrastructure and growth stocks for, well, growth, i.e. productivity, it seems to me that anything which diverts money from consumption to investment is on the whole a good thing.
It is for this reason that I suggest that the whole foundation of supply side is flawed. A high marginal rate on realized gains which translate to consumption leads to a reduction in that consumption in favor of more reinvestment. Which explains how we combined 50’s level 90% marginal rates with an actual rising tide lifting all boats outcome. Every shift away from tax on gains/consumption has led to ever more conspicuous consumption at the expense of productive investment that historically spills over into Real Wage.
Here’s to the Muni Market and Corporations who focus on productivity over dividends! Long may you reign!.
I don’t understand where you get the number $2500.
The justification for the excise tax is that copays and deductibles are socially desirable, since people spend too much if they have no skin in the game.
After a year of debate, I think there should be a calculation for the number of your “many middle class”. I’ll just ask, do you consider a family with income $150,000 per year middle class ? Last I checked that was well above the 95th percentile so, for any definition of middle class, there can’t be many middle class families that rich.
My point is tax revenues to not go up as intended, though government expenses increase. You need consumption and investment.
http://online.barrons.com/article/SB126903927809864777.html
Indeed, the top rate was above 90% from 1950 to 1963. It was levied on income exceeding $400,000 a year, which would be $2.7 million today. To some Americans who believe in redistribution of wealth and income, it sounds like a vision of heaven.
A Cracked Mirror
The ’50s look better in memory than in reality. The dollar was strong, U.S. companies dominated many industries, and life was better than it had ever been. But there were three recessions during the Eisenhower years, and real GDP growth averaged 2.5% over those eight years.
The high top rate was an illusion. Only about 1,000 taxpayers paid the top rate — there were many more ways to shelter income in those days.
Also, the 1960 system laid a heavy tax on low-income workers. From 1954 to 1963 the bottom rate was 20% on the first $4,000 of income; 22% on the next $4,000; and 26% on the next $4,000. The bottom half of the 60 million returns filed in 1960 had taxable income of less than $5,000, and they paid 16% of the income tax. In today’s tax system, the bottom half pay virtually no tax, so today’s system is actually more progressive.
The individual income tax took about 13% of total income in 1963 — about the same as it does now. But the rich pay a much larger share of total income taxes today.
McWop
how do you go from taxing low incomes at 20% to taking a total of 13% of total income?
I don’t remember what tax rates were back then, but the fifties had something going for it that might be hard to measure by rate of growth of GDP (I thought it was pretty high actually, measurable improvements in standard of living for us poor folk. not something i can say i feel today.)
i suggest that all of your statistical measures of “how well we are doing” must miss the point somehow.
numbers like “they paid 16% of the income tax” are completely meaningless.
My points:
1) The new health care taxes will easily be avoided by the rich as there are still many loopholes
2) I countered the My Site poster’s contention that 90% tax rates worked all sorts of magic, in the magical 50’s. The 50’s was a different time as we emerged from WWII. So yes there was great growth, good feelings, but we were coming off a pretty miserable bottom. The ecomony is much larger now than in the 50’s. Comparing this past decade to the 50’s is like comparing Microsoft’s growth rate of teh 80’s to the 2000’s – MSFT is bigger now and high growth is harder to achieve.
3) The high tax rates of the past had many, many, many deductions. So actual tax rates paid were much lower. Many of those deductions no longer exist.
McWop
i think i agree with this.
but the ease with which we “felt good” in the fifties (and no we didn’t in general, but that’s another problem) is more than a matter of comparison with the dismal thirties and forties. it’s an indicator that people can do fine with a lot less than we imagine today. indeed there is something about our present need for “more” that is helping cause the misery we are creating for ourselves. this is not only the psychic misery of “wanting more” but the actual economic misery that comes from running an economy / government on the idea that mximizing “growth” is the purpose of human life.