Relevant and even prescient commentary on news, politics and the economy.

Agribusiness, Food, Vegetarianism—-and Taxes

[cross-posted on ataxingmatter–see posting there for additional comments]

As some of you may know, I am one of the many people who eat a vegetarian diet. I don’t eat cows, pigs, fish, whales, sharks, chicken, turkey, sheep, wild game, tame game… As I sometimes say when people ask me about my diet, I eat everything you eat, except for a very short list of items–the critters that can move themselves from one place to another (or move their appendages) under their own propulsion.

(Note that we often have two words for animals that we eat–their live-form word –e.g., cow, sheep, pig– and their edible-corpse form word –e.g., beef, mutton, pork. That evolved when we borrowed the Romance language word for what we ate but kept the Germanic language word for the animals.)

It started when I was a child–I was one of those who would cut the meat into tiny pieces and then spread it all over my plate so it looked like I’d eaten it. The idea of eating a cow, with those beautiful liquid brown eyes, was repulsive. (My father came from a family with thirteen kids in the hills of Tennessee, so I’d seen cows up close.) I even took a whole piece of veal once and hid it behind the dining room cabinet (taking it out to the wastebasket after it dried)! I refused to eat the squirrel and venison that my dad brought home from hunting trips (mostly, if not always, somebody else’s kill). I even refused to let my cocker spaniel share in that dead stock.

But now that I’m an adult, why do I maintain that diet? I get asked that a lot.

Funny, nobody says (with shocked exression)–“Gee, you eat meat? Why would anyone ever want to eat a toxins-laden dead corpse of an animal that lived a horrendous life and suffered an agonizing death? ” But they do often ask–usually treating it as a good-natured tease about a wacky alternative diet–why I’d want to avoid eating corpses.

James McWilliams got me thinking about this again this morning, when I read his “Bellying up to environmentalism” in the Washington Post for Nov. 16, 2009, where he noted that we should be asking questions in the reverse, that make meateaters feel uncomfortable at defending their own meateating. After all, there’s really no good reason for eating meat other than that someone is so addicted to its taste that he or she can’t exert the willpower to do without it.

The whys for not eating meat, on the other hand, are legion. Let me just list a few here, from the mundane to the truly significant:

1. cooking is easier–throw veggies in a pot and steam them; throw veggies in a pot and make soup, throw veggies in a fry pan and fry them, throw beggies in a pot and bake them; and variants thereon

2. clean-up is a lot easier–none of that icky clinging greasy layer of animal fat on every pan

3. refrigerated leftover use is easier–throw the leftovers in a pot and steam them (etc. from one above) and there’s none of that congealed lard on top of the leftovers in the fridge

4. rotten vegetables in the fridge are less disgusting than rotten corpses in the fridge

5. a decent diet is generally considerably cheaper

6. the more people who adopt a vegetarian diet, the more people who are currently going hungry could be fed

  • one of the many articles I’ve read said something that stuck with me (sorry, don’t have the cite)–that it takes the same resources to feed one meat-eater that it takes to feed about 80 vegetarians.
  • That’s because of the huge waste as you use up primary foodstuffs to feed the animals that will be slaughtered, then use up primary energy stuffs to slaughter, process, ship and deliver the meat to the meat eater, compared to even transported vegetables (localvore, with vegetables, is even more saving of resources)

7. without meat-eating, there are no feedlots where animals literally eat and sleep out the remainder of their short lives in their own shit

8. you can have a small flock of hens who live out their natural lives with nice living conditions (indoor/outdoor)

  • disclosure: I had one hen who lived to be 22; she was still laying eggs up until the week or so before her death from natural causes

9. Hens lay bigger and bigger eggs each year that they live past the first year w(hen most are slaughtered) and they still lay fairly regularly

  • disclosure: 6 eggs every 7 days was typical in my experience

10. Even hens have personalities

  • disclosure: when I lived in upstate New York, I had one named Gumption who loved to fly up to the top of a two-story house and survey her domain, and another named “kiss me” who would follow me around all day like a pet dog

11. Animals that we eat are as smart as–or smarter than–animals that we keep for pets (pigs compared to dogs, for example)

12. Animals care for their young and suffer when their young are taken from them (think dairy cattle and the young that are bred so that the mothers will give milk)

13. Some eating of animals is even more obnoxious than the norm (think “veal calves” that are taken and put in tiny sheds to they can fatten without any musculature development or “foie gras” where geese are fattened by having food stuffed down their throats with a tube)

14. Life is precious: there is no reason to sacrifice animal lives to lead a decent human life, so why do it?

15. Agribusiness–the main way that animals are raised and sold for meat–is an environmental nightmare

  • use of fertilizers to grow the grain that is fed to the cattle that are fed to the humans results in polluted land, water and air and uses up petroleum and other resources
  • consolidation results in long transportation (inhumane to animals; wasteful of oil and gas resources)
  • the subsidies (including some tax expenditures) for agriculture have gotten out of control–costly, misdirected, ill-conceived, and essentially now a form of corporate welfare for huge agribusiness enterprises

16. A meatless diet is healthier for humans than a meat-based diet, so we could cut health-care costs by simply cutting out meat

17. The process of butchering animals is a cruel leftover from the dark ages–people who work in slaughterhouses are inured to suffering, and that may well spill over into their “normal” lives outside work

18. The process of butchering animals is itself a source of harm–

  • sick animals are slaughtered, making it possible that eaters of that dead flesh will be sickened as well (mad cow disease);
  • animals are slaughtered in the midst of their own excrement, and some of that excrement gets into the food chain (making people sick as well);
  • the leftovers from the animal slaughter have to be gotten rid of somehow, leading to even more water, land and air pollution
  • workers are exposed to awful conditions–not just the process of mercilessly killing animals day in and day out, but also the risk of infection and injury on the line

19. The use of antibiotics in animal feed (given to healthy and unhealthy animals alike) ensures that resistant strains will develop even more rapidly, while leaving excess antibiotics not absorbed by the animals to pass out in their urine and excrement and into the land and water to act as toxins to others (including fish and birds and humans) leading to additional environmental nightmares…

20. Agribusiness pig farms and cattle feedlots are a blight on any humans within their vicinity (as well as a disaster for the natural world, noted above under environmental problems) from the stench of the manure (that can pollute the countryside for miles around) to the ugliness of the barren, treeless manure-laden fields.

So what to do? Maybe we should enact an excise tax on all meat products, like a”sin” tax for sodas and sweets and cigarettes. Comments, anyone?

PS Arthur C. Clarke has a great sci fi short story, taking place some time in the future, when a more advanced civilization than ours is aghast at the purported discovery that their ancestors used to–cover the young ones’ ears–eat dead corpses of animals…..Clarke’s ideas were way ahead of his time in lots of ways.

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Medicare and "present value"

by reader coberly

Andrew Biggs wrote that current Medicare recipients have not paid enough for the benefits they will recieve. He states that “since this is zero sum, it means that future taxpayers will get less than they pay for.” Here is an excerpt of what he said, followed by my comments.

Biggs said:

unlike Social Security benefits, which increase only to keep up with inflation, Medicare benefits grow in real terms. The Medicare Trustees project that health costs will grow around 1 percentage point faster than the growth of per capita GDP, which in turn they project will grow around 1.3 percent faster than inflation over the next 15 years. So I assume that real Medicare benefits will increase by 2.3 percent each year.

to make taxes and benefits comparable, I convert each to present value terms, assuming a real interest rate of 3 percent. This means that taxes paid in the past have 3 percent interest added each year, to account for the fact that these taxes could otherwise have been invested. Likewise, future benefits have 3 percent annual interest deducted, to account for the fact that retirees must wait to receive them.

So what do we get? This typical person paid around $64,971 in Medicare payroll taxes over his lifetime. Likewise, after netting out Medicare premiums, he’ll receive around $173,886 in lifetime Medicare benefits. The net? He can expect to receive around $108,915 more in benefits than he paid in taxes over his lifetime.

Alternately, let’s put this in terms of return on investment: the typical worker’s Medicare taxes produce an annual compound return of around 6.25 percent above inflation. This is comparable to the return on stocks, without any of the risk. A low-income worker with earnings at half the average wage would receive an 8.45 percent return on his Medicare taxes, while even a high earner at twice the average wage would receive a 4 percent real return—again, without any market=2 0risk.

While we can quibble about some of the assumptions and calculations, the scale of Medicare transfers to current beneficiaries is undeniably huge. And since Medicare’s pay-as-you-go financing is zero sum, these transfers, like similar overpayments to early participants in Social Security, will result in future Medicare beneficiaries receiving far less in benefits than they will pay in taxes.

My objections are below the fold.

My objections to Biggs’ main argument are first that “present value” is not a useful way to evaluate programs like Medicare and Social Security, which are insurance programs. As such they would need to be compared to otherwise similar insurance programs, not to imaginary “investments” with different risks.

Moreover, I question the logic of claiming that Medicare is “zero sum.” It seems to me that for this to be true there would have to be an endpoint at which all the taxes that are ever going to be collected, and all payments that are ever going to be made, have been.

It is easier for me to imagine that while the costs of medical care for each generation might increase so that under pay as you go each “paying” generation pays more than the last, and each “receiving” generation gets “more than it paid for,” this “profit” will continue for each generation in its turn as each subsequent generation lives longer than the last with the benefit of increasingly expensive medical care. It seems likely to me that this approaches a limit, and entirely possible that each generation does a little bit “less better” than the last, but that hardly seems a reason to abandon a program that provides badly needed insurance for each generation in turn.

“Generational equity” is a delusion. Each generation will face different problems like war, depression, inflation, the draft, better or worse weather, compared to which a small difference in the “return on investment” is not worth worrying about… especially an entirely imaginary, projected, difference based on an entirely arbitrary “present value” discount rate. and a complete misunderstanding of the difference between insurance and investment.

Medical care, like retirement costs, are consumed on a “daily bread” basis. Unless you can show that you have a better way to pay for it, with adequate guarantees, talking about it in “present value” terms is false precision and solving the wrong problem. This doesn’t mean that we ought to ignore projections of higher future costs, but it does mean we don’t need to cut off our own heads to avoid the future high cost of living.
_________________________
by reader coberly

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How is Bruce Bartlett Cheating: Let us Count the Ways

Robert Waldmann

Steve Benen made a graph out of a table from a column by Bruce Bartlett. Bruce Bartlett is an interesting figure — a heterodox conservative who praises Reagan and criticizes Bush Jr. The figure sure fits Bartlett’s line. It shows the effective tax rate on families with median income. Sad to say, Steve Benen’s web page is a *.mht ??? and I don’t know how to steal the figure [see UPDATE below] so just click.

Bartlett identified the “effective federal income tax rate — taxes paid as a share of income — for a family with the median income. The median is the exact middle of the income distribution — half of families are above and half are below. It’s as close as we can get, statistically, to the typical American family.”

[UPDATE: I do know how to steal graphics, but you should read the Benen piece as well. Graphic above by Steve Benen, from data presented by Bruce Bartlett. -klh]

It shows an increase up until the election of saint Ronnie, then a decrease, a sharp decrease in 1986, more decline when the GOP took control of Congress, a down tick when Bush was elected and Bartlett still supported him, then a gradual increase as Bartlett became a critic.

Oh how convenient. I describe how he is cheating after the jump.

As anyone who has ever filled out a 1040EZ must know, this is nonsense. Effective tax rates do not depend only on income. The table would be meaningful if Bartlett had calculated the average effective tax rate of families with the median income, but that’s not what he said. I suspect that he used a “tax family” with median income and characteristics such that the graph looked the way he wanted.

Of course, Bartlett is talking about the income tax only. The increase in FICA under Reagan doesn’t appear. That is par for the course for a Republican.

Less importantly for the median family, he doesn’t consider the capital gains tax. However, the average family with median income pays positive capital gains tax (the average of a non negative variable must be positive).

I’m guessing that Bartlett’s “median family” has 2 earners and 2 children. I see a big drop when the marriage penalty was reduced.

The average family with median income has less than 2 earners and less than 2 children. The family which pays the median effective tax rate … I have no idea.

I will now check my guess (starting 5:59 EDT) by clicking a link.

6:00 AM EDT. Yep he lied. The table which appears when I click his link is Entitled “Average and Marginal Income Tax Rates for Four Person Families …”

That is not “as close as we can get statistically to the typical family.”
The Bureau of the Census projected in 1996 that that in 2005 the average number of persons per family would be 3.09 which is rather less than 4.

It does seem that I was wrong about the number of earners. They assume one earner not two. Median income is for four person families.

Now part of what is going on here is that the “Tax Policy Center” is trying to make Reagan look good. However, that isn’t all that’s going on. They care about what they consider to be normal families. Single adults without children and single mothers with children don’t count. Women are assumed to be housewives. The only people that matter are those in families which consist of one working dad, mom and two children. For families with median income single mothers with three children slip into the sampel (lucky duckies). For half median income they don’t as it is assumed that there are 2 children in the family for the purposes of the EITC.

I think their prejudices about what is normal is even stronger than their Hackitude as Bush Jr would look better if one considered the marriage penalty.

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The Advantage to Sin Taxes is Relatively Low IED

My Loyal Reader notes that the economic survival of Zimbabwe’s current government is now largely dependent on sin taxes:

As he presented his revised 2009 budget to parliament, Finance Minister Tendai Biti noted that “indirect taxes made up of customs and excise duty have contributed 88 percent of government revenue, which means that the government has been literally sustained by beer and cigarettes.”

Those who are planning to “go Galt” will need also to Sin No More.

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The Real Difference with 2004

While there was a lot of blather about “values voters” swinging the 2004 Presidential election to the man who had none, the real story has always been that the HENRYs went for W’s policies.

That changed in 2008:

Guess who won Joe the Plumber’s vote…real people who make about $42,000 a year, the median income for plumbers and pipefitters. Barack Obama carried hard-working Americans of that income stripe by 10 points, according to exit polls.

And the only voters who were told directly that their taxes would go up under a new Democratic president? Obama took the rich as well, winning by six points that small sliver of the electorate that makes more than $200,000 [per] year.

The HENRYs can do basic probability calculations, it seems. “Saving” 5% on your taxes while losing 15% on your non-deductible investments is not a great long-term strategy, no matter what Greg Mankiw may have decided to hear from his self-selected group.

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Taxation’s Rhetoric: Today and yesterday’s economic crap

by: Divorced one like Bush

In a posting regarding which presidents would be considered socialist I found the following curious:
1921 – 4% 73% Census
1922 – 4% 56% Census
1923 – 3% 56% Census
1924 – 1.5% 46% Census
1925-1928 – 1.5% 25% Census
1929 – 0.375% 24% Census
1930-1931 – 1.125% 25% Census

1982-1986 12 brackets 12% 50% IRS
1987 5 brackets 11% 38.5% IRS
1988-1990 3 brackets 15% 33% IRS
1991-1992 3 brackets 15% 31% IRS

2001 5 brackets 15% 39.1% IRS
2002 6 brackets 10% 38.6% IRS
2003-2008 6 brackets 10% 35% IRS

Notice anything about these 3 groups of income tax rates? No, I’m not suggesting that the lower rates are the smoking gun of today’s economic crap. Don’t want to run afoul of those scoldings of association is not causation critiques. But, do you not find it just a bit curious that approximately 8 years prior to an economic troubling time we get talked into reducing that tax rates? Three periods in history, all preceding an economy of crap. Varying degrees of crap, but crap just the same. We even had a housing bubble for 2 of them!

None of these tax changes can happen without convincing. A dialog has to have happened to convince the people that it is a good idea. And, I bet that the rhetoric of tax reduction is only part of a package regarding the overall idea of what is best to “grow the economy”. I bet, that tax reduction presentations have never been presented as a stand alone, single issue, unrelated to accomplishing a larger money shift. Being that we are relating today to the Big One, while at the same time hearing muttering that we are in “new territory”, my Angry Bear side asked: What else is similarly presented in the 20’s as part of a sales job of an over all ideology that preceded today’s and yesterday’s crap?

Installment Sell

Manufacturers realized they could expand their profits if they could grow their markets and so installment selling was introduced. The increased production volumes reduced the unit cost of items making them more affordable, and easy terms made for easy sales.

There is a reprint of an article specifically looking at the pros and cons of credit purchasing. Rather fascinating reading.

PAYING FOR THINGS ON “EASY” TERMS has become such a conspicuous element in American life, and so large a factor in our prosperity, that the economists have been doing a great deal of worrying about it. Source: The Literary Digest for March 5, 1927

Sub-prime anyone? Oh, did you notice that it was a concerted effort to sell the consumer that installment purchasing was good? I wonder if blaming the consumer for spending what they did not have was part of the discussion when the economy turned to crap then?

THE CHRISTMAS CHEER IN WALL STREET 1926

Christmas distribution of bonuses in Wall Street, when finally added up, is expected to prove the most generous ever made except during some of the flush World War years.

No accurate account of sums paid out can be made, according to the New York Times, because many firms do not announce their benefactions, but last year’s total was estimated at $50,000,000, and it is expected that the Wall Street firms paying bonuses are being no less generous this year. In fact, some firms which have never paid bonuses will start the custom this Christmas. Probably the largest distribution, we read, is being made by banks, which have been exceptionally prosperous.

Converting that $50 million we get various amounts: $586 million via CPI, $494 million via GDP deflator, and (drum roll please), $1.999 million via unskilled wage factor.

There was one perspective that was not accurate in their prophecies for America:

America has played square in China, and will have an inside track in China against the commerce of other nations.
China buys one billion dollars worth of outside goods every year. But that’s only, a drop in the bucket compared with what this customer may buy some day. “When the per capita foreign trade of China,” runs one government report, “is equal to that of Australia, the total will be sixty-five billion dollars a year which China will pay to the outside world for her imports.
“You can’t help seeing American business grow in China,” a business man from China told me. “Why, it has multiplied itself by four within the past dozen years. It’s eight times bigger than it, was thirty years ago.

The inaccuracy? The quotes are from a perspective of the American selling to China, not from China. And you thought Nixon opened up China.

Getting back specifically to the tax reductions, this web site offers a lot: The Tax History Museum
From reading the site, it appears a progressive tax system was put in place for the WW I war effort. They even put in a munitions tax to “appease” opponents of American involvement in the war; levied on manufacturers of military equipment, it was designed to prevent war profiteering”. There was an “excess profits” tax put in place which appears to be what the later progressive income tax became. Arguments for it were as today: equality. Against it:

It attracted bitter opposition from business groups, who considered the tax a threat to managerial prerogatives. They were certainly justified in their suspicion, since both Wilson and his allies in Congress considered the levy a legitimate means of business regulation.

Well slap me silly! A tax used to curb the excess of business. I hear some of you saying: Excessive CEO compensation regulation please?

After the war, the argument was that such high rates were “unsustainable”. It was the party of today’s tax cuts who yesterday cut the taxes:

Republican lawmakers joined with a series of GOP presidents to engineer tax cuts in 1921, 1924, 1926, and 1928. Andrew Mellon — who moved into his Treasury office in 1921 and stayed their until 1932 — was the principal architect of these reforms.

Certainly some Democratic elected joined in (early Blue Dogs, DLC’s of their time?).

In 1980 we got schooled in the Stockman trickle down theory of economic growth which included lower taxes will raise collections and bolsters economic growth. It was all about cutting taxes by his confession though. So, as I look to find evidence of selling tax cuts as a part of an ideology sell job regarding how an economy should run, such being clues that in the near future we will have economic crap, the following regarding Mr. Mellon’s position just confirms how ignorant we have been in our recent times (post 1981) to have followed those who suggest tax cuts as part of their economic program:

“Any man of energy and initiative in this country can get what he wants out of life,” he wrote. “But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”

Worse yet, Mellon argued, high rates didn’t even raise money. By encouraging both legal tax avoidance and illegal tax evasion, they eroded the tax base and reduced overall revenue. Lower rates, he said, would actually raise money by spurring economic growth and reducing the incentive for tax avoidance. “It seems difficult for some to understand,” he complained, “that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates.”

Can we have been any more stupid, shown our ignorance more than to have taken as a new idea, language regarding taxation’s need to be reduced and it’s effect on filling the government coffers that is as old as almost the day progressive taxation came into existence? Unfortunately, our stupidity has been worse than accepting Mr. Mellon’s similar arguments to those used by Reagan et al suggests. That is because, back in Mr. Mellon’s day he at least understood what Mr. Buffet of today understands but congress and by extension US do not:

Of particular note, he suggested taxing “earned” income from wages and salaries more lightly that “unearned” income from investments. As he argued:

The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs.

Surely we can afford to make a distinction between the people whose only capital is their metal and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.

Again I ask: HOW MANY TIMES DO WE HAVE TO DO THIS? HOW MANY FREAKIN’ TIMES DO WE HAVE TO LEARN THE LESSON?

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McCain’s Health Plan: Tax Cut or Tax Hike, and To What End?

The Tax Foundation sent me an e-mail pointing me to Gerald Prante (who’s participated in our comments section in the past) taking Joe Klein to task for calling McCain’s proposed $5,000* refundable tax credit that would offset income tax on health insurance benefits “insufficient.”

Here’s what the McCain web site has to say:

While still having the option of employer-based coverage, every family will receive a direct refundable tax credit – effectively cash – of $2,500 for individuals and $5,000 for families to offset the cost of insurance. Families will be able to choose the insurance provider that suits them best and the money would be sent directly to the insurance provider. Those obtaining innovative insurance that costs less than the credit can deposit the remainder in expanded Health Savings Accounts.

The McCain campaign already deserves a few demerits for this representation of the plan. First, they don’t mention the tax increase that the health insurance credit offsets. Second, a credit that’s provided directly to insurers in lieu of (some) insurance premiums and then could be rolled over into an HSA if there’s something left over (which there won’t be for any family buying low-deductible health insurance) doesn’t sound much like it’s “effectively cash.”

Klein calls the McCain credit “insufficient” because it won’t pay the premium for typical employer-provided family coverage. (Analysis [PDF] of the plan by the Tax Policy Center indeed yields the result that the McCain plan would not provide for much insurance uptake among the currently-uninsured.) Prante claims that Klein doesn’t know the difference between a credit and a deduction, and provides a calculation purporting to show that the value of the deduction that McCain would repeal is less than the credit:

What [Klein] fails to understand is that the $5,000 value of the credit would be worth more than the current exclusion for almost any taxpayer. For example, a family in the 25% bracket would have its income tax before credits increase by .25 * 12,000 = $3,000. However, the family would be getting a $5,000 CREDIT that trumps the $3,000 extra in taxes from the elimination of the exclusion. Even… in the 35% bracket, the family having $12,000 in insurance would come out ahead.

End of story? Not quite.

In the quibble department, Prante assumes that the federal income tax exclusion can be repealed without state tax consequences. To the extent state income definitions follow the feds, state taxes would take away several hundred more dollars of the credit.

The big question is whether today’s $12,000 employer-sponsored plan would still be available for no more than $12,000. That depends on factors such as the employer exercising its “option” to continue to offer a group plan, and healthy members of the group resisting the incentives that the McCain plan provides to defect to the high-deductible insurance/HSA combination.

While McCain promotes the “option” of retaining existing coverage, the McCain plan’s incentives exacerbate “adverse selection death spiral” problems that particularly affect small groups under current policies. That is, increasing the price of insurance coverage on the margin would encourage the healthy and/or lucky-feeling to exit relatively expensive group plans, with the tax credit intended to encourage substituting the combination of a high-deductible individual plan and accompanying HSA. This leaves the comprehensive plans’ members sicker, or at least lossier, and drives up prices for remaining participants. (Repeat until the high price collapses the plan.) The Buchmueller et al. review of the McCain plan in Health Affairs mentions but does not quantify the potential effects of breaking up existing risk pools.

For employees sent to the individual market because employers drop group coverage, Buchmueller et al. suggest that insurance expenditures would increase markedly. They indicate that the typical $12,000 group policy for a family would cost roughly $2,000 more to obtain in the individual market (and note that many plans in the individual market have lower prices but much lower coverage).

In Prante’s calculation, the $12,000 policy costs someone in the 25% bracket $9000 after income tax. The $14,000 equivalent individual policy with the McCain family-level tax credit costs $9000 after income tax. So we’ve already exhausted the purported net benefit of the McCain tax credit for a family that wants to keep its coverage but is knocked out of the employer-sponsored group market. But the situation is actually worse than that, because shifting $9000 in compensation from benefits, which apparently the McCain plan would still exempt from payroll taxes, to wages subjects the compensation in lieu of benefits to payroll tax as well. This can increase taxes up to $1377 (at 15.3%) in this example, depending on where the hypothetical family’s wages stand with respect to the Social Security contribution and benefit base (currently $102,000).

Having recently seen the Tax Foundation concerned about Obama policies that would raise tax rates a few percentage points on high earners, it would be remiss of me to point out that the combined tax rates on wages paid in lieu of health benefits would be just as high for middle-class taxpayers under McCain’s health plan. That’s 25% for federal income tax, 5% or so for state taxes, and 15.3% for payroll taxes, 45.3% altogether, for compensation that current law and Obama policies would tax at 0%! (A new Tax Foundation issue brief on the subject which otherwise mostly invents a big number for the McCain plan’s reduction in the uninsured does at least acknowledge this in passing.) Since the McCain plan would, in the estimation of Buchmueller et al., shift millions of workers and their dependents to the individual market (representing 5 to about 15 percent of individuals covered under employer-sponsored plans; references in the article), the prospect of tax increases under the McCain plan is by no means vanishingly rare. Indeed, shifting people to the individual market is basically a feature of the plan, and not a bug — a part of the program is to de-link employment and health insurance and that’s a legitimate policy goal.

This also leaves the question of just why conservative health reformers think we need to impose what amounts (vs. current policy) to a Pigovian tax on health insurance. In the companion piece on the Obama plan by Antos et al. also in Health Affairs, there’s talk of “perverse incentives” under the current system but not a lot of beef beyond econ 101-style handwaving:

The following analysis reflects the authors’ concern that Senator Obama’s failure to address the perverse incentives in the U.S. health system will exacerbate the cost problem he has argued must be solved if we are to achieve anything close to universal coverage. Tax subsidies that promote first-dollar coverage have led consumers, health care providers, and suppliers to act as if any service that might yield some value, no matter how small, should be covered. Subsidized third-party payment has helped drive up health spending and, as demonstrated by the Dartmouth Atlas, sometimes has even led to poorer health outcomes. Realistic expectations about cost, value, and the outcomes that health care is likely to provide must be better understood by all parties.

An upshot of recent health-care cost-shifting between employers and employees is that “first-dollar” coverage is now rare. I’ve had true first-dollar coverage in the distant past, ain’t got it now, and couldn’t have it for a premium that would keep my small employer-sponsored group together. A main idea behind copayments and coinsurance is to avoid some obvious free-as-in-beer-goods problems by not covering the first dollar.

Moreover, they totally beg a central economic efficiency question: given the disconnection between health care prices and marginal costs, it’s far obvious that allocative efficiency is better served by exposing consumers to something like the list prices of routine services as opposed to the co-payments or co-insurance. (Exercises: What’s the marginal cost of a $150-list-price office visit where you spend 5 minutes with a nurse and 5 minutes with the doctor? Of a $1000 CT scan? The $200 month’s supply of an on-patent drug?) Explanation of benefits forms provide routine evidence that much or most of the price of various health-care services is markup.**

Of course, dynamic efficiency considerations mean that incremental cost constraints must be satisfied somehow — marginal cost prices wouldn’t be compensatory for the doctors, clinics, and hospitals. But efficiency-improving pricing arrangments that better align prices with marginal costs such as “two-part tariffs” (where customers pay a fixed charge plus variable usage-based charges; see e.g. your electric, gas, or [limited-usage] phone bill) can look a lot more like traditional insurance with what Antos et al. characterize as “modest” cost sharing than a high-deductible health plan plus an HSA. On this front, the conservative reform approach involves an unforgivable conflation of price and cost.***

Nor do some of the “perversions” sound all that perverse as features of private or social insurance. On Obama’s proposal to establish a federal reinsurance pool, Antos et al. write:

Even though employers would welcome the subsidy, the reinsurance does not reduce health care use or cost. Instead, the policy just shifts some of the cost to the federal budget and could even increase health care spending. Insurers and providers might be encouraged to provide more services to patients who were above the catastrophic threshold since the federal government was sharing in the cost.

The proposal could also lead to anomalous results. One neonatal intensive care stay could lead to federal catastrophic payments for an employer with younger employees (and lower health costs per employee), while an employer with older workers and much higher per employee costs might receive no subsidy for the costs of managing chronic conditions.

This is just about 180-degrees backwards. True, risk-spreading does not in itself reduce the cost of health care, but it does reduce the cost of health insurance, and reducing the cost of insurance helps promote efficient (multi-part) pricing of health care. Moreover, million-dollar NICU trips and the like are exactly the sort of losses for which reinsurance is appropriate. In the absence of adequate reinsurance, catastrophic losses are a death-spiral trigger, since especially small groups end up with huge premium increases leading to collapse of the plans one way or another. As for covering chronic conditions such as aging, the factoid that most of us would like to grow old and healthy, and be well-cared-for in the alternative, suggests a role for intergenerational transfer mechanisms for equitable distribution of the costs.

It might be argued that the reinsurance services could be provided privately, but what I’ve heard from people involved with such matters at local health insurers is that health care reinsurance isn’t a candidate for Marginal Revolution’s ‘markets in everything’ series.

Hoisted from our archives, here’s Kash from 2004 addressing the question of whether the reinsurance pool (also a Kerry proposal) would increase costs:

How would this national reinsurance pool help our nation’s health care problem? In a couple of ways. First and most obviously, it would simply reduce the cost to health insurers of providing health insurance, resulting in lower premiums. Part of this cost would be shifted to taxpayers, but as we shall see, the cost to taxpayers will be less than the savings reaped by people buying health insurance…

Think of it this way. Since the claims for one seriously ill person can easily reach $100,000 or more in a year (while most people’s claims are probably just in the hundreds of dollars), it’s much harder for an insurance company to predict what the aggregate health care costs will be of a group of 10 people compared to a group of 1,000 people. The law of large numbers means that you can pretty much rely on population averages when trying to guess how much health care the large group will need over the year; but for the small group, you either have to spend a lot of time and energy evaluating each of the 10 individuals to estimate each one’s likely health care needs for the coming year, or else you have to just take a chance. And insurance companies hate just taking chances.

The best estimates that I have seen by an economist of the effects of this reinsurance proposal are those by Kenneth Thorpe, professor at Emory’s school of public health. He estimates that the Kerry plan would reduce the variance of firms’ insurance claims by about 50 percent. This in turn will have two effects. It means that it will become dramatically cheaper for small firms to provide health insurance to their employees. Combined with the plan’s requirement that all participating firms offer health insurance to all employees, Thorpe estimates that about 3 million currently uninsured people will start receiving health insurance. This in turn will help to reduce the country’s overall health care costs by allowing more preventative care and early detection of health problems.

That is, since insurance costs depend on the variance of the losses, insufficient reinsurance implies higher risk premia paid to insurers, and those premia are big.

So McCain policies would raise taxes on lots of middle-class workers and dramatically increase marginal tax rates on some middle-class earnings regardless of the net benefits (something conservatives wring their hands over in other contexts), not obviously in service of aligning health care prices and marginal costs and without features that promote efficient risk-sharing. That’s changiness we shouldn’t believe in, my friends.

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* For a family; individuals would get $2500. Observe that there’s a family insurance penalty in the plan, as family plan premiums are commonly more than double individual premiums.

** E.g., the negotiated price between my health plan and the UW hospital for my son’s emergency appendectomy last year was roughly 1/3 of list.

*** Yes, people use “cost” when they mean “price” colloquially all the time; the problem is not considering price/cost ratios carefully when arguing that one price promotes economic efficiency better than another.

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The Right-Wing Anti-Tax Machine Doesn’t Have to Buy the Cow…

EconomistMom recently defended, after a fashion, Alex Brill and Alan Viard’s notorious article claiming that the Obama tax plan would raise effective marginal tax rates on middle-class taxpayers. They’re making a mountain out of a molehill, she concludes, even incidentally distorting the Obama tax plans along the way, but to her knowledge (of the two of them) wouldn’t be deliberately dishonest. More below the fold.

Before you say “born yesterday,” she’s almost surely right at the very least in the sense that if you’re running the in-house publication of a conservative think-tank, you need only run down (say) the list of the economist supporters the McCain economic “plan” — yes, even the subset who actually read it! — to find people who earnestly believe that lack of incentives to make money is a serious problem for the U.S. economy and willing to write something up to that effect. The economists are then pure (if deluded) and the upshot, for the policy entrepreneurs, is perhaps even better than hiring obvious hacks. Among other things, real economists like Jonah Gelbach will engage those issues.

As a comments-hoisting aside, the Brill and Viard piece highlights a cost of conducting progressive policy through tax expenditures. I don’t think even center-leftists of the Obama camp are necessarily opposed to public provision of the services they’re trying to fund through the tax system, but to some extent they’ve pre-compromised on packaging them as delectable tax cuts to make them appeal to conservatives. At my old place, I’d argued that liberal think-tankers need to take a lesson from the Heritage Foundations of the world and advocate the policies they really want:

I agree with TCT [Madison’s late progressive newspaper] that CAP needs to eat its spinach [in the Popeye sense]. It comes across like a center-left-center quasi-counterbalance to the only moderately wingnutty American Enterprise Institute rather than what it arguably needs to be, which is the Heritage Foundation of the left.

The lack of boldness cited by TCT is particularly evident in a misplaced fetish of pragmatism. Why misguided? Sure, CAP policy proposals would constitute a distinct improvement over Bushism, but their chance of getting any of them enacted with Republicans in charge of the executive and legislative branches is effectively zero [this was written in 2005, but things have changed surprisingly little]. And CAP policy proposals are not likely to fire people up to elect Democrats.

There is consequently no cost to thinking bigger (abstracting from CAP’s funding sources), and in fact there are likely to be massive longer-term benefits in that incubating actual progressive ideas is an entrée to building a political coalition for their enactment… [R]ushing, or at least appearing to rush, into the vacuum left by right-running Republicans fractures the progressive vote.

And for all that, the wingnuts pay liberals back for their efforts at compromise by complaining that those tax cuts just make the tax code more complicated and screw up “incentives.”

Meanwhile the marginal rate business seems to be a meme on the other side of the fence, as Greg Mankiw heh-indeeds a Tax Foundation blog post suggesting that the top effective Federal personal tax rate would increase roughly 10-12 percentage points under Obama tax proposals. (See?) Sez Bob Carroll:

Note: These calculations work as follows: (1) 37.9 percent equals the current 35 percent top income tax rate plus the current 2.9 percent Medicare tax rate; and (2) 48 to 50 percent equals Obama’s 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemption and certain itemized deductions.

Is this calculation ingenuous and totally correct? No, it is not. Sort of like Brill and Viard, Carroll is calculating what will tend to be top inframarginal rates applying to portions of the income of the very well-to-do. They don’t do much to characterize of the general tenor of the Obama tax plans as they’d affect the median voter — other than, maybe, the feature of shifting more of the tax burden back to the rich (apparently Prof. Mankiw cares personally about those rates).

First, a regularity of upper-income tax returns is that much or most of the income comes from non-wage sources that aren’t subject to the payroll tax. According to the latest (2006) tax filing statistics, taxable returns with Adjusted Gross Income (AGI) between $500,000 and $1 million — the lower-middle class, per John McCain — reported on average $678,000 in AGI and $591,000 of taxable income, of which wages and salaries averaged only $320,000. All that non-employment income would be taxed at no more than the statutory rate for ordinary income — so the difference there is the 35% Bush-era rate vs. the 39.6% Clinton-era rate. Suggesting that the Clinton-era rates don’t provide sufficient incentives for the near-rich and rich to make more money is silly.

Another issue pertains to adding 4.5 percentage points for the exemption and deduction phaseouts to Obama’s rate. The statutory phaseout rates are 2.8% for personal exemptions and 3% for itemized deductions, or 5.8%. Nevertheless, Carroll is not being generous by charging Obama’s plans with 4.5% instead of 5.8%. For one thing, the personal exemption is, except for weird cases — married taxpayers with adjusted gross income in a narrow band around $360,000 and next to nothing in itemized deductions — already phased out before you get to the top bracket. So the effective net hit is no more than 3%, and probably a lot less if not zero. That’s because in this income range, the ordinary income tax interacts strongly with the Alternative Minimum Tax (AMT), with AMT taking away deductions given back by the phaseout of the phaseout. (If you want to view that last sentence as an argument for tax re-simplification, I wouldn’t argue.) It’s worth remembering that increased AMT incidence was a feature of the 2001 tax cuts from the perspective of reducing the law’s apparent revenue reduction and gulling the theoretically fiscally conservative into voting for them.

More broadly, this focuses attention where it should not be, which is to say the plight of the rich — who don’t especially need help (beyond generally sound economic policies) staying rich or getting richer. Though it does seem, fortunately, that the Obama campaign has figured out that they have an issue there.

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The myth of the argument is in the conflation

By: Divorced one like Bush

I am responding to a post put up at Crooks and Liars: The McCain campaign small business myth.

It presents that the myth is found in the number of small businesses in existance and what percentage of them earns $250,000 or more. I love C and L, but this is just totally missing the ship (notice I did not say boat).

The lie to the McCain position on Obama’s tax plan is not in the number of small business in existence or in the number of small business making over $250,000/yr.

The lie to the McCain position is in the conflating of business income with personal income. An S corp or a solo proprietorship business or any other similar configuration that is paying income tax on $250,000 is paying income tax on that money not because the business made that income and is keeping it because the business had plans for it. No, no, nooooooooo. It is the owner of the income generator that made that income and they made it as personal income. It is the amount of money remaining AFTER the business did it’s complete business thing for the year. It is the money remaining AFTER the business spent on expanding jobs, or buying more equipment, or marketing, or adding new facilities, or expanding to China, or hedging its energy costs or PAYING IT’s BUSINESS RELATED TAXES. It is the money that the owner of the income generator walked out the door with at the end of the year and then proceeded to use on their personal needs like: food, housing, transportation, oil futures, corn futures, GE, Haliburton stocks, boats, collectable cars, art, entertainment, lawn care, maid services, tuitions, security systems, etc.

In fact, anyone who has started a business has experienced that moment when their accountant calls them up and says: “You owe income taxes.” The rest of the conversation goes something like this: But, but, but, but, but…how can I owe taxes when I have no money left? “Well” responds your accountant, “did you buy food?”. Why yes I did, but I have nothing left. “Then the money you bought food with is the income your business paid you and now you owe Uncle Sam”. At that moment your stomach is getting ready to pay Uncle Sam as your legs are giving out. Later on, when you are humming along and you are taking $250,000 out of your S corp because you had no more expenses the true nature of you spirituality shows through. Either you think your taxes are too high, or you understand the benefits of paying taxes but think that spending more than the rest of the world combined on military is crazy.

Why the pundit’s on the Obama side have not pointed this conflation out, I do not know. Do they not believe in education? But, focusing on the number of businesses when the issue is personal income only allows the presentation on taxation and income to continue in the same vein as it has been continuing since Reagan. It is a continuation of the same argument that has allowed us to accept that Walmart cheap is the same as more money in your pay check; or that the increased cost of your benefits are the same as more money in your paycheck; or that the rising share of income going to pay all your taxes owed is the results of some waste and greed and civil service unions and teacher unions and not the results of less income earned from your labor; or taking a pension fund away is OK because it was not money earned but money gifted.

Yes, I’m an S corp, I was a sole proprietorship and the other business is an S corp.

If we don’t stop watching the shells we will never win the game of find the pea.

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