On March 9 the Tax Policy Center (TPC) released a preliminary analysis of the tax reform proposal contained in Rep. Paul Ryan’s (R-WI) Roadmap for America’s Future fiscal plan. The TPC analysis helps Ryan advance the tax reform ball considerably, but it also raises issues some of which need to be addressed by Congressman Ryan (R-WI), the author of the plan, and some by the TPC.
Perhaps most important of all is that the TPC analysis, along with a slew of commentary both favorable and unfavorable from other sources, confirms that the Ryan plan is a very serious, substantive foray into tax reform. The Ryan plan provides an intellectually sound, coherent and fundamental path to tax reform, and is part of a broader plan to resolve our long-term fiscal crisis. If it were otherwise, the tax reform component would be ignored.
The Ryan tax reform plan, which reforms both individual and business taxes to move toward lower tax rate systems, is intended to be revenue neutral over ten years when compared to a current policy revenue baseline; the TPC analysis suggests the plan is close to its target. It may even be closer than the TPC analysis suggests because of a pair of foibles in the TPC approach as well as simple differences in estimating methodologies.
What About the Economy?
The TPC analysis is a good first step, but critically leaves out some important information on economic effects. By way of analogy, imagine the Congressional Budget Office providing an analysis of health care reform and ignoring any references to the consequences for health care costs or whether the ranks of the uninsured would rise or fall. Policymakers want to know if the legislation would “bend the curve” and that it substantially reduces the ranks of the uninsured. Analysis lacking this information would obviously be woefully incomplete.
The TPC has done much the same by ignoring the stronger economy that would follow from enactment of the Ryan plan. As with health care reform and the uninsured, a fundamental motivation for tax reform is to improve economic performance, yet the TPC acknowledges its analysis is essentially static. Revenue forecasts aside, this is a substantial shortcoming of the TPC analysis that will hopefully be remedied in their follow-on work.
Foibles to Resolve
One foible in the TPC analysis is that it combines a rigorous methodology for assessing the revenue effects from the tax on individuals with a back of the envelope approach to estimating tax revenues from the new Business Consumption Tax (BCT) tax contained in the Ryan plan. If TPC does not have the tools for a rigorous assessment of the BCT, then so be it, but TPC should clearly indicate the difference in approaches and admit that its revenue forecast of the BCT carries an unusually high degree of uncertainty.
Another foible in the TPC analysis deals with the treatment of pass-through entities such as sole proprietorships. This is a difficult area and the TPC analysis usefully highlights an issue in the plan its designers may want to revisit. However, TPC arbitrarily assumes small business owners will take all their income in tax-exempt dividends rather than taxable wages. To be sure, this is a troubled area in the existing tax code, but the TPC assumption is most unreasonable, and creates an obvious downward bias in the total revenue estimate.
Finally, the TPC is known for its distributional analysis and it refers to distributional effects in its analysis. But where are the tables?
During last month’s Blair House health care summit, President Barack Obama was forced to change the subject after Rep. Paul Ryan(R-WI) Blair House thoroughly refuted the President’s claim that his health care plan would reduce the deficit. It took over a week for the White House to respond to Ryan, but last Thursday they finally produced this blog post by OMB director Peter Orszag followed by a Washington Post op-ed Friday titled: Health reform that won’t break the bank. Ethics and Public Policy Center fellow James Capretta responded to the White House that same day at NRO:
Orszag and DeParle start by agreeing with Ryan that delaying the start date of an entitlement expansion is a tried-and-true budget gimmick, designed to push the full cost of the additional spending outside of the “budget window” covered by a cost estimate.
But, not to worry, they say. In this instance, it’s not a gimmick because the deficit reduction from their plan just keeps growing over time. They claim the president’s health plan would produce deficit reduction of $100 billion over ten years and $1 trillion in the second decade.
Of course, there’s another reason besides balancing revenue and spending to push the start of an entitlement back, and that’s to make the ten-year cost look much smaller than it really is. Recall that the president promised in his address to Congress last September to deliver a bill that costs only “$900 billion” over a decade. The new entitlements the Democrats want to create would cost much, much more than $90 billion per year. In fact, the Congressional Budget Office (CBO) says they will cost about $200 billion per year by 2019. And so, to get the media to now say his plan costs only “$1 trillion” (what’s $100 billion among friends!), the administration delays the coverage expansion provisions until 2014. Never mind that the president also says the uninsured can’t wait a day longer for the legislation. Once enacted, he would make them wait — for four years.
As Ryan noted, however, once the program did get up and running, costs would soar. The Senate Budget Committee Republican staff estimates the Senate bill’s cost at $2.3 trillion over ten years when fully implemented.
In their Post op-ed, Orszag and DeParle do not even attempt to address the many other points Ryan made which expose the dubious assumptions and sleight of hand behind their deficit-cutting claims.
For instance, the health-reform bill is filled to the brim with Medicare changes, but the one Medicare provision the president and the Democrats want to pass separately from the health bill is the so-called “doc fix,” which would repeal a cut in Medicare physician fees at a cost of $371 billion over ten years. Of course, splitting their agenda into two or three bills doesn’t change the total cost. When the “doc fix” is properly included in a tally of what the president is pushing, all of the supposed deficit reduction vanishes.
Then there’s the double-counting that Ryan exposed. The president’s plan starts up yet another entitlement program, providing long-term care insurance. Enrollees have to pay premiums for a number of years before they qualify for any benefits. Consequently, at startup, there’s a surplus of premium collections — $73 billion over ten years, according to CBO — because no one qualifies for the benefits yet. The president and his team count these savings against the cost of health reform — even though the money will be needed later to pay out long-term-care insurance claims. When this gimmick is taken out of the accounting, the president’s health proposal goes even deeper into the red.
Over the long-run, the administration’s claim of large-scale deficit reduction hinges on the dubious assumption that future elected officials will demonstrate more political courage than those in office today.
For most of last year, the president said that he would “bend the cost-curve” in large part by imposing a new tax on “high-cost” insurance plans. The tax would hit more and more middle-class beneficiaries each year because the threshold for determining what constitutes a “high-cost” plan would grow much more slowly than medical costs. In fact, after a number of years, virtually all Americans would be in plans at or above the “high-cost” threshold.
House Democrats and their union allies despise this tax. Last week, the president caved in to their pressure and pushed the start date of the tax back to 2018, well past the point when he will have left office. Even so, Orszag and DeParle still claim credit for the massive revenue hike that would occur in a second decade of implementation. They want us to believe we can finance a permanent, expensive, and rapidly growing new entitlement program with a tax the president himself was never willing to collect.
In Medicare, Orszag and DeParle like to highlight so-called “delivery system reforms” the administration has touted. In the main, these are extremely small-scale initiatives and pilot programs. CBO says they will amount to virtually no savings. The big Medicare cuts in the president’s plan come from across-the-board payment-rate reductions. In particular, the president wants to cut the inflation update for hospitals, nursing homes, and others by half a percentage point every year, in perpetuity. On paper, this change produces huge long-run savings. But it does nothing to control the underlying cost of treating patients. It just pays everyone less, without regard to patient need or quality of care. The chief actuary of the program has said repeatedly that these cuts are completely unrealistic for these very reasons. If implemented, he expects they would drive one in five facilities into serious financial distress. And yet Orszag and DeParle want us to believe these savings can be counted to finance the president’s massive entitlement promises.
And massive they are. CBO says the coverage expansion provisions in the Senate-passed bill would cost about $200 billion by 2019, and that cost would rise 8 percent every year thereafter.
But even these estimates understate the true cost of Obamacare. The president’s plan, like the House and Senate bills, would extend generous new insurance subsidies to low- and moderate-wage workers getting insurance through the new “exchanges.” Workers in job-based plans would get no additional help. That means two workers with identical incomes would be treated very differently. Gene Steuerle of the Urban Institute has estimated that, in 2016, a worker with job-based coverage and a $60,000 income would get $4,500 less than someone with the same income but health insurance through the exchange. This kind of inequitable treatment would never last: one way or another, the entitlement would get extended to everyone in the targeted income range, sending the overall costs of the program soaring.
The president started off last year by saying he wanted to “bend the cost-curve” even as he broadened coverage. But after a year of partisan political and legislative maneuvering, all that’s left is a massive entitlement expansion. The new costs would get piled on top of the unreformed and unaffordable entitlements already on the books. It’s a budgetary disaster in the making.