How Obama Will Pay for Health Care

We are now beginning to see the early rough confines of the plans Barack Obama and the congressional Democrats have to pay for the massive new health care entitlement they envision; and for the rescue of Medicare, which otherwise would bankrupt the nation on its current path.

These financial undertakings are going to be attempted after having already expanded health care entitlements with the SCHIPS that was recently passed; and the Medicaid expansion under the stimulus bill.  And we need to remain mindful that we are simultaneously seeing huge bailouts of financial industries, the automobile industry and certain mortgage holders; the horrendous spending in the stimulus bill;  and other massive expansions of the welfare state.  With apologies to the late Everett Dirksen, a trillion here, a trillion there, and sooner or later it adds up to real money. 

In any case, how are we going to pay for all Obama wants to do with health care?  Here are some pieces of information now coming into focus:

1. We are going to see the income tax rate for those with incomes above $250,000 rise to 39.6%.

2. Upper income Medicare beneficiaries would have to pay more for prescription drug coverage.

3. Itemized deductions are going to be reduced for higher income taxpayers for things like charitable deductions, local taxes and the like.

4. And ultimately, it seems likely there will be higher payroll taxes as well.  This will likely include all taxpayers; but will disproportionately affect those with higher income once again, because there will be an enormous temptation to eliminate any income cap on payroll taxes.

The sum total of all these changes to pay for health care is that taxes will likely be increased on most Americans; and there will be very steep net tax increases on Americans with incomes greater than $250,000.  The problem, of course, is that these tax increases will be much greater than what Obama disclosed during the presidential debates, when most Americans were paying attention.  The net effect is a massive redistribution of income.

Obama did not disclose what his tax policies would be because he wanted to win the election.  But he also felt the need to obscure his tendencies toward socialistic approaches.

Many of the people who will be paying sharply higher taxes are not really "rich".  Instead, they are upper middle class.  They are working people, and small business owners, who create jobs and give generously to charity.  Some might not have huge amounts of assets.  And many already pay a hefty burden in combined federal, state and local taxes, which causes their real net income to be much less than it might otherwise appear.  Weakening this class of Americans economically by redistributing their income might be politically tempting, but will ultimately backfire, because less jobs will be created by small business-- the dynamic incubator of new job creation in the modern economy-- and less will be saved and invested. The stock market seems to agree with my assessment. It has done very poorly since Obama has had the opportunity to announce all his plans.

And taking even 100% of the income of higher income taxpayers will not be sufficient to eradicate all the deficits caused by the current bailouts, and all the current and future spending.  It will not pay for all the health care schemes we are witnessing.

On Tuesday night, Barack Obama invoked themes of responsibility repeatedly to persuade those listening to his speech.  But in fact, his plans for health care and the welfare state suggest to me he should be claiming the converse:

Comments

[Stormy]

Roch would dismiss this as Obama was sincere with his campaign rhetoric (he really, really was), but since he took office, he now sees and understands the realities of our dire, yes, catastrophic situation. Simply, President Obama is now a pragmatic. He just hopes that no one will remember what he promised on the campaign trail.

By the way, whatever happened to this promise, directed to his Chief of Staff?

"I intend to freeze the salaries of senior members of the White House staff, to the extent permitted by law. I direct you to report back to me within 30 days with recommendations for actions to implement this freeze."

[Fred Gregory]

What will two asprins cost in our new Weimar Republic ?

http://www.youtube.com/watch?v=hfSDPY5rYZE

[Roch101]

Gee guys, I know your getting on up there and all, but are you really losing your hearing already? We all heard Obama say during the campaign that he was going to raise taxes on families making more than $250,00 a year. Pretending that Obama is a deceiver now that he is implementing that policy is itself deception.

The article Joe links to refutes some of the very scare tactics he asserts. Obama's proposal would lower income taxes on families making under $150,00/year by $800 annually. It would also adjust the Alternative Minimum Tax to keep it from ensnaring additional families as it would do without changes.

A family making $250,000 will see their gross income tax liability increase by $3273.00 per year, from about $73,245 to about $76,519.

[Joe Guarino]

Roch, that does not include the effect of reducing deductions, increasing Medicare premiums, and later increases in payroll taxes which the Times author acknowledges will be necessary. Obama did not talk about those things very prominently during the campaign. The only thing Obama emphasized was rolling back the Bush tax cuts for those over $250,000. And the flip side is that his tax increases will not be enough to remedy the problems he is creating.

[Joe Guarino]

Fred, hyperinflation is a real concern.

And Stormy, the American people are getting something that is a bit different than the appearance that was being created during the campaign.

[Roch101]

"Roch, that does not include the effect of reducing deductions, increasing Medicare premiums, and later increases in payroll taxes which the Times author acknowledges will be necessary."

Deductions? Granted. Like I said, gross liability.

Medicare? How many people on Medicare are paying income tax?

Increase in payroll taxes? That's going to be a tough sell because, despite your assertion above, those taxes are regressive and hit lower income workers harder than higher wage earners, but let's wait and see if that actually gets proposed before tossing them out as a certainty to prop up a weak case, shall we?

[Joe Guarino]

With respect to the Medicare premiums being increased on beneficiaries, that would impact the wealthy-- those with substantial assets significant enough to cause them to have a higher income-- or those with higher incomes that work beyond the age of Medicare entitlement. Not a majority, by any means, but still an effect.

If benefits and eligibility are going to remain unchanged, with the incipient demographic explosion, payroll taxes are going to have to go up, or the nation will become even less viable economically. How Obama chooses to structure it is up to debate.

But we are running out of time from the standpoint of kicking it further down the field. It is a choice of either reducing benefits or increasing payroll taxes or watching the nation's economy further implode. He said on his campaign website he would advocate increasing payroll taxes on higher wage earners by eliminating the cap at which these people are taxed-- but he did not really discuss it verbally during the debates.

[Stormy]

Okay, let's get real. How does Obama propose paying for this vast increase in national debt, and possible increase in entitlements, if taxes are not increased not only on the "rich", but on everyone that has income? If you taxed 100% of the income of the "rich", you wouldn't be able to payoff the national debt and incurred liabilities of this nation, which is estimated to be in excess of $50 trillions now.

We should not ignore the lessons of Hubert Hoover who increased taxes during what was a recession, and put us into a depression for 10 years, with the able assistance of FDR's New Deal spending.

[Joe Guarino]

I agree, Stormy. Another important point is that markets act and react based on the predictability of good conditions into the future. That implies stability as well as good policy. We have neither right now.

[Fred Gregory]

Stormy,

You win Jeopardy with the correct answer.

http://online.wsj.com/article/SB123561551065378405.html?mod=djemEditorialPage

WSJ

The 2% Illusion
Take everything they earn, and it still won't be enough.

"President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it."

"Note that federal income taxes are already "progressive" with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He'd also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won't come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need"

"Mr. Obama is very good at portraying his agenda as nothing more than center-left pragmatism. But pragmatists don't ignore the data. And the reality is that the only way to pay for Mr. Obama's ambitions is to reach ever deeper into the pockets of the American middle class."

[Stormy]

Roch would say that Obmama is just being a pragmatic, a radical pragmatic, to be sure, but still a pragmatic:

A Radical Presidency
By DANIEL HENNINGER, Wall Street Journal

When Barack Obama delivered his 44-minute acceptance speech in August among the majestic columns of Denver, it was apparent his would be an expansive presidency. Some wondered whether his solutions for a very long list of problems was too ambitious. On Tuesday, before Congress, he made clear across 52 minutes that the economic downturn would not deflect him from his Denver vision.

Instead, the economic crisis, as it did for Franklin D. Roosevelt, will serve as a stepping stone to a radical shift in the relationship between the people and their government. It will bind Americans to their government in ways not experienced since the New Deal. This tectonic shift, if successful, will be equal to the forces of public authority set in motion by Lyndon Johnson's Great Society. The Obama presidency is going to be a radical presidency.

Barack Obama is proposing that the U.S. alter the relationship between the national government and private sector that was put in place by Ronald Reagan and largely continued by the presidencies of Bill Clinton and the Bushes. Then, the private sector led the economy. Now Washington will chart its course.

Mr. Obama was clear about his intention. "Our economy did not fall into this decline overnight," he said. Instead, an "era" has "failed" to think about the nation's long-term future. With the urgency of a prophet, he says the "day of reckoning has arrived." The president said his purpose is not to "only revive this economy."

In fact, people would probably coronate Mr. Obama if he merely revived the Dow Jones Industrial Average. The Dow's fall since the Sept. 14 collapse of Lehman Brothers and sale of Merrill Lynch to Bank of America has eviscerated the net wealth of Americans across all incomes. Many are in the most dispirited state in their lifetimes.

Yesterday, the post-Obama Dow lost another percentage point. No matter. In his worldview, "short-term gains were prized over long-term prosperity." His speech did include a plan to address the market crisis. It consists of a program to support consumer and small-business loans; a mortgage refinancing mechanism; and the "full force of the government" to restart bank lending. Mr. Obama delivered that last element with a rather crude pistol-whipping of the nation's bankers and CEOs, thousands of whom have been operating their companies in a responsible, productive way.

This was just the prelude. Notwithstanding the daily nightmares of the economic crisis, now is the time to "boldly" rebuild the nation's "foundation." The U.S. budget he released today isn't just a budget. "I see it as a vision for America -- as a blueprint for our future." With it, Mr. Obama becomes the economy's Architect-in-Chief.

This blueprint will reshape energy and health. With energy, it proposes a gradual tear-down of the existing energy sector and its replacement with renewables. This vision has foundered before on the price disadvantage of noncarbon energy. Mr. Obama says he will "make" renewable energy profitable. He'll do this with a cap-and-trade system for carbon. The goal here is to "make" renewables economic by driving up the price of carbon.

The once-private auto industry, now run by federal "car czar" Steve Rattner, a reformed investment banker, is about to be ordered to produce "more efficient cars and trucks." Americans, like it or not, will buy these government-designed vehicles with government-supported car loans.

Mr. Obama believes health-care costs cause a bankruptcy "every 30 seconds" and will drive 1.5 million Americans from their homes this year. Therefore, the budget's vision on health is "historic" and a "downpayment" toward comprehensive health insurance. This "will not wait another year," he said.

He announced "tax-free universal savings accounts" as a solution to Social Security's crisis. This is a savings plan supported by federal matching contributions automatically deposited in individual accounts.

Mr. Obama acknowledged that this spending -- which in the public sector's new vocabulary is always "investment" -- will be costly. His read-my-lips moment was that no family with an income under $250,000 will pay a "single dime" in new taxes to support the construction of this new federal skyscraper. If that's still true in 2015, Mr. Obama will be walking back and forth across the Potomac River.

He told Congress he does not believe in bigger government. I don't believe that. It's becoming clear that the private sector is going to be demoted into a secondary role in the U.S. system. This isn't socialism, but it is not the system we've had since the early 1980s. It would be a reordered economic system, its direction chosen and guided by Mr. Obama and his inner circle.

Gov. Bobby Jindal's postspeech reply did not come close to recognizing the gauntlet Mr. Obama has thrown down to the opposition. Unless the GOP can discover a radical message of its own to distinguish it from the president's, it should prepare to live under Mr. Obama's radicalism for at least a generation.

[Everest]

What's remarkable is that the same Democrats leaders that recoiled at a $300 billion Bush-led deficit have almost no problem with a $1.5 TRILLION dollar Obama-led deficit...and let's say for the sake of arguement that Bush and the last Democrat-ruled Congress are evenly responsible for the TARP and exclude that from the deficit. This Congress and this President have entered unchartered water with respect to spending...an 8% increase across the board on this most recent spending bill, with nearly $8 billion in earmarks, after more than a trillion dollar "stimulus" bill weeks earlier?!?!?! I thought these liberals a few months ago were telling us we had to start making tough choices...? I suppose those tough choices are for US to make - like say, whether to pay my light bill, or my insurance this month...

I would agree with Roch on one point - Obama is doing almost exactly what he said he would do during the campaign. Those of us that followed what little detail he offered should be able to see that with ease. It's hard to believe though, that even his most ardent supporters can approve of $2 Trillion deficits until we're sure the economy is coming back...Roch, any opinion on the spending?

[bubba]

"Medicare? How many people on Medicare are paying income tax?"

Without knowing the actual percentages, a good guess would would be around 30% of all Medicare beneficiaries. This is based on my experience in Medicare programs.

The "base amount" income(generally, half the SS benefits plus all other income)for non-taxable SS benefits is 25k single, 32k married filing jointly.

http://www.irs.gov/publications/p915/ar02.html#en_US_publink100097889

[Joe Guarino]

Thanks for providing further information, Bubba, about income tax and Medicare beneficiaries. I am not sure at what income level Obama would begin increasing their premiums.

Everest, I agree the deficits are of major concern. Unfortunately, Obama has not even begun to address them, and arguably is making them much worse.

At some point, a consensus may develop that he is no longer worthy of worship and adoration. Perhaps.

[Roch101]

"We should not ignore the lessons of Hubert Hoover who increased taxes during what was a recession, and put us into a depression for 10 years, with the able assistance of FDR's New Deal spending." - Stormy

Where do you get your "history" from? Trust me, despite the recent accolades here, Rush and Hannity are entertainers, not educators.

[Roch101]

"Roch, any opinion on the spending?" -- Everest

I'll judge it by the results.

[Stormy]

Sorry, Roch, but I attended public school, and we know that they don't really teach history, so I gotta get it from somewhere credible. But, why don't you tell us the real truth about the Great Depression and the factors that led up to it? We do know that it was really WW II that brought us out of Depression, not the New Deal, regardless of what some would like us to believe.

[Bill Knight]

Hold on to your hats, or the seat of your pants. Social security and medicare taxes (FICA) together increase annually between $4,000 and $5,000. The rates (Social Security, 6.2%; Medicare, 1.45%) have remained constant for many years. The Social Security wage base has increased each year, leading to constant tax increases. The Medicare wage cap is non-existent so that all wages are subject to tax at 1.45%. These amounts are deducted from an individual's paycheck; the employer kicks in a matching amount. The self-employment tax is 15.3% (twice the FICA rate); in 2009 the maximum SE tax will be $12,648 in Social Security Tax, plus Medicare tax at 2.9% that has no ceiling cap.

A hard working small business entrepreneur will be faced with a 28% - 35% federal income tax on profit, roughly 7% state income tax, and the FICA tax. Add in federal and state unemployment tax on employee wages, plus city and county property tax on business assets - no wonder we need a higher individual tax rate to stimulate employers to do more!

Having worked as a tax professional for all of my working life I can attest to the fact that many individuals on Medicare pay income tax. I count myself in that category even though I'm several years into retirement.

Government is limited to imposing tax and spend what it collects. Tax revenues will automatically increase when economic activity increases. Government can spend and spend, but it can't create revenue: only private enterprise operating without undue government interference can create true national wealth. Governemt's task is to find ways to reduce it's burgeoning appetite for spending money.

[Bill Knight]

The first paragraph should have said the Social Security wage BASE increases $4,000 to $5,000 annually. The result is unchanged: a pot full of tax paid.

[Joe Guarino]

Thanks for your clarifications, Bill, and I would add to your discussion, of course, personal property taxes and sales taxes, which small business owners have to pay just like everyone else. So the upshot of your entire discussion is that a seemingly high income is no longer very high. And that is BEFORE Obama's tax increases.

Now, what will Obama do to increase payroll taxes to meet the demographic time bomb caused by Medicare and Social Security? It would seem he will likely try to rig the system so that higher wage earners pay more once again.

But with his awful deficits and the aforementioned demographic time bomb, he will need to tax folks at lower income levels as well because he will not cut spending in a meaningful way.

Of course, if hyperinflation ensues, that might help the Medicare/Social Security problem solve itself. Perhaps that is a design in the back of the minds of some of the architects of the current approaches.

[Everest]

So Roch, the fact that he proposes $650 billion in expenses for a health care plan he doesn't outline is okay with you...? Or that nearly $1 TRILLION of his "cuts/savings" comes from assuming the IRAQ war costs of today continue through 2019...(which is ridiculous by anyone's standards)? Or another $650 billion in revenue comes from a cap and trade program that hasn't even been proposed in Congress? Or that his revenue projections depend on his forcast that the economy will grow by 5.5% in 2011 and more than 6% in 2012...? I may disagree with almost everything you believe Roch, but you're smarter than the above spending/revenue forecast....this is not some term paper, or graduate school project, this is the federal budget for God's sake!!! And if he wasn't the most powerful man in the world, he would be a caricature...this was a sad display. And he's just getting warmed up! If any of us ran our business like this, we would be indicted immediately....unbelievable

[Brenda Bowers]

Check facts before asking a question: 73% of those on Medicare paid taxes in 2006. This from an AARP article. Of course I have never cared for the AARP but will accept this figure as I know what we make and we pay taxes (local, state and federal). BB
********************

[Brenda Bowers]

We must never forget the fact that the rich do not pay UNDO taxes. They will tolerate a fair share but when the grab for their money gets too high they simply move off shore. When they do this they take a large chunk of the money needed for investment with them. But for the super-rich it simply doesn't really matter as they can go anywhere in the world to make money or simply sit on their laurels since money just naturally makes more money.

To prove this point just check out how many of the super-rich have fled the European countries with their socialist programs and high taxes.

So when the top 5% who pay the bulk of the taxes move away who do you think will pick up the slack? You better believe it will be the small business man who now provides the jobs for most of the workers in the country! I would like to hear what some of Greensboro's small business owners have to say about this plan of Obama's, or do they really believe his tripe?

Of course when the small business owner gets hit hard he will lay off workers and cut back in order to try to stay alive. He doesn't have the funds to cut and run off shore like the very rich. What will happen to the economy then?

Prediction from an opinionated old broad: we hain't seen nothin' yet! Hard times they are a comin'! BB

[Joe Guarino]

Brenda and Everest, I am afraid the American people are going to have quite a ride.

[Stormy]

Everest,

"Or that nearly $1 TRILLION of his "cuts/savings" comes from assuming the IRAQ war costs of today continue through 2019...(which is ridiculous by anyone's standards)?"

Yeah, and Obama announced today (to us and the world) that combat operations in Iraq would end on 8/31/09, with a draw-down of 145,000 soldiers. So, we are going to need $1 trillion until 2019? I suppose so according to Obama's shaky math. Why doesn't he just go ahead and disband the military; he can save many billions each year that way. We can really become a European socialist country then.

Does anyone else feel like there isn't anyone at the helm of this ship of state and, we are headed into a field of icebergs?

[Joe Guarino]

Stormy, I feel there is someone at the helm of the ship of state. And I feel like he is driving us directly toward the icebergs; but he is under the impression he is headed toward a certain utopia instead.

[Fred Gregory]

Roch,

For your benefit....

LA Times

FDR's policies prolonged Depression by 7 years, UCLA economists calculate
By Meg Sullivan| 8/10/2004 12:23:12 PM

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.

"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."

Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.

The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."