Thursday, November 19, 2009

The taxes in Reid's bill

Keith Hennessey summarizes the new taxes or tax increases that are in the Senator Reid's bill.
1. 40% excise tax on health coverage in excess of $8,500 (individuals) / $23,000 (families). Amounts are indexed for inflation by CPI-U + 1% – begins in 2013 – $149 B tax increase

2. Additional 0.5% Medicare (Hospital Insurance) tax on wages in excess of $200,000 ($250,000 for joint filers) – begins in 2013 – $54 B tax increase

3. Impose annual fee on manufacturers and importers of branded drugs – begins in 2010 – $22 B tax increase

4. Impose annual fee on manufacturers and importers of certain medical devices – begins in 2010 – $19 B tax increase

5. Impose annual fee on manufacturers and importers of certain medical devices – begins in 2010 – $60 B tax increase

6. Cut in half (to $500K) the amount of an executive’s compensation that a health plan can deduct from its corporate income taxes – begins in 2013 – $600 million tax increase

7. Impose 5% excise tax on cosmetic surgery and similar procedures – begins for surgery in 2010 – $6 B tax increase!

In total the bill would raise taxes by $370 B over ten years.
Great. Just the thing to do in a recession.

Hennessey goes on to comment on each provision. For example, the first provision is slightly different from Senator Baucus's proposal which taxed plans above $8,000 for individuals and now it's above $8,500. Is that enough of a change to make unions happy? Apparently so, because we know that Reid would never do anything to anger the lords and masters of the Democratic Party.

Here are Hennessey's comments on the 2nd provision which will raise payroll taxes for Medicare.
With this proposal, Senator Reid is leading Democrats across a major philosophical threshold. Since Social Security was created in the 30’s and Medicare in 1965, payroll tax revenues have been “dedicated” to financing these programs. While not all funding to finance Medicare comes from payroll taxes, all funding from the Medicare payroll tax finances Medicare. In other words, the 2.9% Hospital Insurance payroll tax that you and your employer pay on your wages is all supposed to offset Medicare spending. That is part of the social insurance model, in which everyone pays in a fraction of their wages, and everyone receives benefits later.

I am not a fan of the social insurance model, because it is non-transparent: most people think their individual taxes paid are being used to finance their benefits, when in fact the funds are used to subsidize other people’s benefits. But the social insurance model and dedicated payroll taxes have been a core principle of Social Security and Medicare financing since they were created, and advocates (especially on the Left) of those programs have fiercely defended this principle.

Leader Reid’s bill would use new Medicare payroll taxes to finance a new health entitlement outside of Medicare. His bill would turn Medicare payroll taxes into a general financing mechanism like the income tax. There is a slippery-slope argument against this that I would normally expect from the Left. If Republicans (or my former boss) had proposed this, I would expect AARP to come unglued and raise fears among seniors that, if this proposal becomes law, future Congresses might take payroll tax revenues and use them for highways or defense or other non-social insurance spending. I am interested to see how AARP reacts. Will they support the Reid bill as they did the House bill? (Reporters: There’s a story for you. Ask AARP.)
As for the taxes on branded drugs, medical devices, and health plans, those will simply be passed along to the customers. We any of us who use non-generic drugs or medical devices will be paying more for those items.

Senator McConnell comments,
— While Democrats will point to $127 billion in possible deficit reduction, that is made possible in part by delaying the benefits until the fifth year of the 10-year budget window. And even then, the $127 billion is LESS than the deficit that was already spent in October of this year. In other words, any possible savings over 10 years of this bill are already erased by the deficit spending of last month alone.
so don't be too impressed with that projection of deficit reduction from the CBO. It's all bogus anyway because it relies on Congress making cuts in Medicare spending that they've never, ever been able to make. As Yuval Levin reminds us,
And of course, the deficit neutrality calculation assumes things that will never happen (which, as usual, the CBO does its best to signal to readers of its analysis of the bill, even if it cannot say it outright.) It is based, for instance, on the bill’s claim that some key Medicare physician payments would be cut by 23% in 2011 and would not be restored—which will happen well after hell freezes over.

As the CBO carefully puts it: “The legislation would put into effect a number of procedures that might be difficult to maintain over a long period of time,” and “the long-term budgetary impact could be quite different if key provisions of the bill were ultimately changed or not fully implemented.” This is Washington-speak for “someone is holding a gun to my head.”
If Democrats like Ben Nelson and Kent Conrad who like to pride themselves on being deficit hawks buy this malarkey and pretend that this bill won't be raising the deficit, they are just being either disingenous or deceptive. And experienced legislators such as these senators aren't fooled by these sorts of games. They just think the voters will be fooled.

And remember, we have the pain now for many of these increases, but the benefits don't start until 2014.