Jeffrey Miron examines both major political parties’ entrenched positions and finds them wanting:
The problem with the Democratic position is that it regards redistribution, rather than economic productivity, as the prime goal of government policy. The Democrats therefore want to address the deficit with higher taxes on “the rich,” not expenditure cuts.
This approach, however, cannot remotely address the long-term debt outlook; the available revenue from the wealthy is far too small. And higher taxes discourage economic growth, making deficits worse. Thus whatever the morality of soaking the rich, it will not work.
and
For Republicans, the crucial mistake is their refusal to distinguish between the tax revenue that comes from higher rates and that which comes from fixing tax loopholes that inappropriately privilege certain consumption or production.
The Republicans are correct that raising tax rates is a terrible idea. By discouraging savings, work and investment, higher rates dampen economic productivity in the long run. By reducing disposable income and corporate profits, they reduce consumption and investment in the short run. And higher rates will not raise as much revenue as initial forecasts.
But closing tax loopholes — lowering tax expenditure — is a terrific idea. Many tax expenditures distort economic decision-making and therefore slow economic growth. Crucial examples include the home-mortgage interest deduction and the preferential treatment of employer-provided health insurance. Thus Republican skepticism about explicit expenditure should apply equally to tax expenditure, regardless of the revenue implications.
He also points to the elephant in the room:
Likewise, Democrats refuse to accept that Medicare is the primary driver of the U.S. fiscal nightmare. This expenditure is growing much faster than the GDP has any chance of growing over the long haul. Unless a deal slows the growth of Medicare, nothing else matters.
A good approach to scaling back Medicare would be a substantially higher deductible. Imagine, for example, that every beneficiary paid an extra $2,000 out of pocket each year. This is affordable for most families, especially those a few years from retirement.
This one change in policy would save at least $100 billion a year.
I’m less sanguine on this approach to solving our healthcare system woes than Dr. Miron apparently is. The strategy hinges on the notion that healthcare providers are willing to take pay cuts, that they have no recourse, and that rate increases will be resisted by Congress. I believe that the buzz word used to describe this view is “time inconsistency”. It’s worth a try, though.
Hat tip: Amba
Absolutely, which is why in my more anarcho-capitalist moments I’m quite in favor of tossing all of them in the rubbish bin.
The irony is that $100 billion a year is about what the Democrat’s “tax the rich” strategy would generate in revenue, which he poo-poo’s as insufficient. So he doesn’t have any answers either.
BTW, thought some of you may be interested in this from Walter Russel Mead (and be sure to read the essay he discusses as well).
Although his rhetoric is a bit over the top in his pummeling of progressives, I think his criticisms are mostly accurate. The thing is, though, that the same criticism could be leveled at the GoP and their worship of the private sector and the promotion of business interests.
I think at a fundamental level we have a crisis of legitimacy in this country – with government, with the business community and most of the elite institutions in this country.
I’m not sure that “doesn’t have any answers” really covers it. I think it’s more a case of even the solutions that are now seen as extreme are inadequate to deal with the situation. We’re facing basic structural failure in a lot of areas. You fix those by changing the structures not by applying patches.
“A good approach to scaling back Medicare would be a substantially higher deductible. Imagine, for example, that every beneficiary paid an extra $2,000 out of pocket each year. This is affordable for most families, especially those a few years from retirement.”
Not sure what his notion of affordable is given:
I’d suggest we also look at wealth as well. Many people have incomes drop when they retire, but have substantial wealth they plan on drawing down during retirement.
wha? Means test on current wealth and further discourage saving? Sounds like a very bad idea. I’d suggest we look at what they SHOULD have been able to save. If they have to have a lower cost, crappier version of Medicare because they didn’t save, so be it.
“Likewise, Democrats refuse to accept that Medicare is the primary driver of the U.S. fiscal nightmare.”
Miron needs to get out more. Every left of center policy wonk I read, I do read and write a bit on health policy so this may be selective, acknowledges, hell insists, that Medicare is the problem. From my POV it looks as though it is the right that thinks non-defense discretionary spending is the problem. Wouldnt Medicare Part D and its lack of funding indicate that the right does not see Medicare as primary?
The results of a higher deductible are unclear. We know that people do not discriminate well in what to drop when they have high deductibles. It may actually result in higher costs. I think that value based insurance would be a better way to go.
Steve
Yes, as I recall both parties can MediScare rather well.
What else do you think you will means test on? A guy has $10 million in wealth. He pulls in $300,000 in income off of it. Now you means test on his income alone and he shifts things around so he now has no income, and bingo he’s back to full benefits.
Right which explains Pelosi and crew issuing their ultimatum to Obama. I’m sure the policy wonks are quite aware of the problem. The policy decision makers on the other hand, while aware of the problem, are too damned cowardly to do anything about it.
HTH.
No, you means test on what he should have been able to save, i.e. lifetime earnings. If he has 10 million, it’s likely his lifetime earnings were also quite high. Otherwise you’ve got a big marginal tax rate on saving. Why kill myself saving when I could just spend now and get full benefits later?
You may notice this is effectively raising the top marginal tax rate because it discourages high earnings. So you could just raise marginal tax rates on the rich and give everyone the same benefit for the same net result.
I think this is better than your suggestion though, which would punish people who didn’t make a ton of money, but managed to save a good portion of it for their retirement.
Maybe if you offset means testing in retirement with higher Roth IRA limits for lower earners I could be persuaded.
You are essentially means testing on savings. You are implying that high earnings means an ability to fund one’s retirement better than somebody with low life time earnings.