Gale, William G., “Inoculate the Budget from Health Care Reform,”, 05/08/12

“The medium- and long-term deficits that will result from debt-financed health care spending will inexorably dampen economic performance. They will sap up capital, reduce our ability to grow, burden future generations with debt, and perhaps even influence the military and diplomatic stance of the country. We cannot, and indeed should not, wait for effective health care reform to rein in the budget deficit. Health reform is a process; it will take time to get it right as we learn about what works and what doesn’t. We won’t get it right on the first shot.

As we work to restrain health care cost growth, we must, at the same time, inoculate the future deficit from the inevitable failures of health reform.

We can do this by choosing a federal health care spending level and stipulating that any spending above that amount must be financed on a current basis with a tax. For example, if federal health care spending were allowed to grow at the rate of GDP plus 0.5 percent (a rate proposed by both President Obama and Rep. Ryan), any health spending in excess of that growth rate would be financed with tax revenues in the next year.

Suppose we used a value-added tax (VAT) to finance excessive health spending; using a VAT in this way would accomplish several goals and simultaneously mitigate general concerns about the VAT. Most importantly, the deficit could be controlled; the grinding economic effects of persistent long-term deficits could be avoided even before society resolves the economically difficult and politically treacherous questions raised by trends in health costs.

In addition, the proposal would link health care spending and the means to pay for such spending. When considering whether health spending should rise, voters would have an explicit choice between higher spending and higher taxes on the one hand or lower spending and lower taxes on the other.”

Ross, Wilbur: “Implement VAT, Cut All Income Taxes to Create Jobs,” Jeff Cox,, 09/12/11

 A value-added tax (VAT) that would come with the elimination of corporate and individual income taxes is the best way to get jobs rolling in the U.S., investor Wilbur Ross said.

While the plan that President Obama will present to Congress Monday has some merits, it also contains weaknesses that could make it too costly to implement, Ross said in a CNBC interview.

“We need something that is very far-reaching, very dramatic,” said Ross, the head of W.L. Ross & Co. “An idea I’ve been in favor of is to scrap all of the corporate income taxes, all of the individual income taxes, and substitute a value-added tax on all goods imported into the country and manufactured and consumed here, and then rebate it on exports.”

According to his calculations, Ross said the VAT would generate $80 billion net revenue to the government, while avoiding the pitfalls of Obama’s $447 billion plan.



Selling a Tax Increase, What Would Reagan Do?

President Obama could end the Congressional budget stalemate by going to the people directly, as President Reagan did in his first term.  At that time, President Reagan needed to break a deadlock on his tax reform proposal.  The solution was to go on prime-time TV and appeal to the public to send postcards in support to their Congressional representatives.  Granted, a tax cut is an easy sell, and a tax increase a hard one, but the idea is to provide needed cover to Republicans (and some Democrats) to compromise on raising taxes.

Technology favors this approach today, as much easier emails would replace postcards, and the volume of response would surely be higher than Reagan’s successful appeal.  A website would be created to offer direct links to the email addresses of Congress by zip code with pre-formatted messages, e.g., “I support the return to Clinton-level taxes on January 1, 2013. I am willing to pay my fair share to reduce our deficit and debt.”  A web blast could complement a TV appeal.

Polls also favor this approach.  A review of 2011 polls on taxes compiled by Bruce Bartlett reveals that Americans will support President Obama’s call for increased taxes:

(Bruce Bartlett’s blog:

“Americans Support Higher Taxes. Really.,” June 29, 2011

Contrary to Republican dogma, polls show that the American people strongly support higher taxes to reduce the deficit and improve income inequality. Following are 19 different polls since the first of the year that say so.

A June 9 Washington Post/ABC News poll found that 61 percent of people believe higher taxes will be necessary to reduce the deficit.

A June 7 Pew poll found strong support for tax increases to reduce the deficit; 67 percent of people favor raising the wage cap for Social Security taxes, 66 percent raising income tax rates on those making more than $250,000, and 62 percent favor limiting tax deductions for large corporations. A plurality of people would also limit the mortgage interest deduction.

A May 26 Lake Research poll of Colorado voters found that they support higher taxes on the rich to shore-up Social Security’s finances by a 44 percent to 25 percent margin.

A May 13 Bloomberg poll found that only one third of people believe it is possible to substantially reduce the budget deficit without higher taxes; two thirds do not.

A May 12 Ipsos/Reuters poll found that three-fifths of people would support higher taxes to reduce the deficit.

A May 4 Quinnipiac poll found that people favor raising taxes on those making more than $250,000 to reduce the deficit by a 69 percent to 28 percent margin.

An April 29 Gallup poll found that only 20 percent of people believe the budget deficit should be reduced only by cutting spending; 76 percent say that higher taxes must play a role.

An April 25 USC/Los Angeles Times poll of Californians found that by about a 2-to-1 margin voters favor raising taxes to deal with the state’s budget problems over cutting spending alone.

An April 22 New York Times/CBS News poll found that 72 percent of people favor raising taxes on the rich to reduce the deficit. It also found that 66 percent of people believe tax increases will be necessary to reduce the deficit versus 19 percent who believe spending cuts alone are sufficient.

An April 20 Washington Post/ABC News poll found that by a 2-to-1 margin people favor a combination of higher taxes and spending cuts over spending cuts alone to reduce the deficit. It also found that 72 percent of people favor raising taxes on the rich to reduce the deficit and it is far and away the most popular deficit reduction measure.

An April 20 Public Religion Research Institute poll found that by a 2-to-1 margin, people believe that the wealthy should pay more taxes than the poor or middle class. Also, 62 percent of people believe that growing inequality of wealth is a serious problem.

An April 18 McClatchy-Marist poll found that voters support higher taxes on the rich to reduce the deficit by a 2-to-1 margin, including 45 percent of self-identified Tea Party members.

An April 18 Gallup poll found that 67 percent of people do not believe that corporations pay their fair share of taxes, and 59 percent believe that the rich do not pay their fair share.

On April 1, Tulchin Research released a poll showing that voters in California overwhelmingly support higher taxes on the rich to deal with the state’s budgetary problems.

A March 15 ABC News/Washington Post poll found that only 31 percent of voters support the Republican policy of only cutting spending to reduce the deficit; 64 percent believe higher taxes will also be necessary.

A March 2 NBC News/Wall Street Journal poll found that 81 percent of people would support a surtax on millionaires to help reduce the budget deficit, and 68 percent would support eliminating the Bush tax cuts for those earning more than $250,000.

A February 15 CBS News poll found that only 49 percent of people believe that reducing the deficit will require cuts in programs that benefit them; 41 percent do not. Also, only 37 percent of people believe that reducing the deficit will require higher taxes on them; 59 percent do not.

A January 20 CBS News/New York Times poll found that close to two-thirds of people would rather raise taxes than cut benefits for Social Security or Medicare in order to stabilize their finances. The poll also found that if taxes must be raised, 33 percent would favor a national sales tax, 32 percent would support restricting the mortgage interest deduction, 12 percent would raise the gasoline taxes, and 10 percent would tax health care benefits.

On January 3, a 60 Minutes/Vanity Fair poll found that 61 percent of people would rather raise taxes on the rich to balance the budget than cut defense, Social Security or Medicare.

The economic risk of failure to reach a compromise agreement within two to three weeks warrants the political risk of appealing to the public to provide the cover for opponents to tax increases.  The overwhelming odds are it would succeed.

NYTimes: Nation’s Mood at Lowest Level, 04/22/11

The NYTimes reports polling that reveals we are a depressed nation.  With good reason.  We are worried about getting jobs, worried about the decline in our net worth with the decline in real estate values, worried over our three wars, worried about the country going broke.  And, we are worried because we are conflicted about what to do.  According to the NYTimes/CBS poll, 70% say the U.S. is on the wrong track and 63% oppose raising the debt limit, but 61% say Medicare is worth the cost.

Deficit spending is at frightening levels, and yet according to the bipartisan Committee for a Responsible Federal Budget the Republican plan will increase the debt by 40% ($5.5 trillion) over the next ten years.   That is a smaller debt increase than the Obama plan (50%, or $7 trillion), but still a huge, unsustainable increase.  Our leaders are not realistic and neither are the people they represent.

Americans want their Medicare and Social Security benefits, but do not want to pay for them.  The recent Washington Post/ABC poll shows that 65% prefer Medicare to continue as the current defined benefit program over Rep. Ryan’s defined premium voucher concept; and, 60% of the remaining 35% who favor the Ryan voucher concept would oppose it if it means paying more to get increases in benefits; that translates to 80% who would oppose the Ryan voucher plan if it will cost more. Catch-22.

Allowing the Bush income tax cuts to expire on those earning over $250,000 would raise only $56 billion in 2013 (only .4% of the current $14 trillion debt).  This step should be taken, but the scope of the problem is so huge that there must be more paid by all taxpayers.  The best way to do this would be with a value added tax, which is guaranteed to be very unpopular.

No one wants a tax increase, and no one wants a new tax base either.  Wherefore, even though a VAT makes more sense than income taxes for a variety of reasons, there is no current political support for a VAT.  So, is there any way to market the concept?  Yes.  Begin with a revenue neutral VAT replacement, in part, of both the corporate income tax and the payroll tax.  Then, when future increases will come – and they must come after all politically possible tax cuts are made and after the tax cuts on the $250,000 are allowed to expire in 2013 – the VAT option will be in place to use instead of raising income taxes.

Peter Orszag Interview (with Jeff Madrick at Hamptons Institute, East Hampton, NY), 04/16/11

Notes taken by SA,, at interview on subject, “America’s Fiscal Fitness: Where do we go from here?”

This interview was to have been conducted by Steve Kroft, who was replaced by Jeff Madrick.  The interview lasted about 40 minutes and was then opened to questions from the audience.  The questioning began with regard to the pending issue of the debt ceiling.

Following were Mr. Orszag’s major comments.

Not binding the debt ceiling would be “catastrophic,” and, therefore, he expects it to happen.  However, there is no chance that there will be an agreement until emergency measures are pressured by the financial markets.  Explaining his point, he emphasized it was “unfortunate that we didn’t go over a cliff on the budget agreement”; he expects that the deadline for the budget ceiling will not be met, and that by July a temporary disturbance can be expected in financial markets.  There is a real risk that a shift in the financial markets could come quickly, but it will take a crisis for Congress to act.

He gave a back-handed compliment to the Ryan plan, in that it is bold and offers some details, but he labeled it  a “huge” political gift to the Democrats.  Repeating CBO’s commentary earlier in the week, the heart of Ryan’s deductions affects Medicare, changing it to a consumer directed plan and raising costs to beneficiaries in 2030 by more than $6,000.  He affirmed that CBO is not a biased arm of government.

The Obama plan presents a stark difference from the Ryan plan, which difference he cited as a “manifestation of polarization.”  The Ryan plan, he says, lacks a basic theory on how to constrain healthcare costs, and the cuts hit the poor.  Cost containment of healthcare benefits must deal with the highest cost cases, which come disproportionately from the end of life years.  “To call the Ryan plan ‘radical’ is not an overstatement.”  Ryan’s plan moves Medicaid to block grants to the states without indexing, and will put a strain on the states.

Fundamentally, we do not have the tolerance for the tax increases needed to pay for the benefits we expect.  Ryan would make the tax code significantly less progressive.

With our bad fiscal situation we should cancel the Bush tax cuts for the middle-class as well as for the top income earners.

Referencing the increasing political polarization of the country, he noted a recent demographic study showing that our population is shifting to Republican or Democrat leaning neighborhoods, not mixed.

Regarding economic outlook, he is of the camp that believes we need more stimulus now and a plan for deficit reduction in two to three years when the fragile economy stabilizes.  He predicts that the spending reductions just passed will result in the cost of 1/4-1/2% GDP.  Our revenue base is inadequate, causing an infrastructure deficit.  We face a permanent unemployment risk, he said, from the loss of skills among the unemployed.

The deficit for 2015 is projected at 5% of GDP, but the margin of error is 5%, so that means it could be in the 0-10% range. Growth, of course, would be important, but dismissing tax cuts as the answer, he said that there is no empirical evidence for the Laffer curve. Bowles-Simpson is laying the groundwork for general construct in deficit reduction.

While the situation is anxious, there are still no other plausible safe havens besides the U.S., which is keeping turbulence at bay.  He expects that a “sharp” depreciation of the dollar is more likely than Fed action to increase interest rates.  He said we are taking a risk with investor confidence without having developed a fiscal path.

Answering questions on healthcare costs, he said that patients should not be able to sue physicians if doctors are following best-practice protocols.  Asked (by SA, VATinfo) why the OMB did not support Dr. Ezekiel Emanuel’s plan − for universal healthcare with a dedicated VAT paying for insurance vouchers to be used in an exchange, he said that a VAT was not politically viable.  But, he acknowledged that the Emanuel plan, like the Ryan plan, was consumer driven and might therefore help to curtail costs.

As to Social Security, he said the fix was not hard, and taking this step would show our ability to deal with a problem, which would be a confidence builder.  He opined that it is not politically plausible that the Ryan plan’s private Social Security accounts could happen. Raising the Social Security tax base by increasing the wage cap has more Congressional support than any other fix.

Mr. Orszag also noted that Social Security is becoming less progressive, as there is a disparity in longevity based upon wealth, and there is a correlation between longevity and medical costs.  But, he is confident that the Obama healthcare bill will deliver efficiencies from learning best practices.  Expressing concern about the growing cost of prescription drugs, he noted that pharmaceutical spending has decreased in Medicare due to the greater use of generic drugs.

Catching up to Mr. Orszag after the interview to ask him about Gov. Daniels’ sweeping tax overhaul vision, SA queried if OMB has vetted the concept, and he responded “no.”

Geithner: No “Enthusiasm” Expected for VAT

No surprise.  Tim Geithner expects that there would not be any “enthusiasm” for a VAT at this time.  Today’s political scene, dominated as it is by demagoguery is perfect for knee-jerk opposition to any new ideas.  America is supposed to be the wellspring of creativity, but not when it comes to government finance.  The problem is there is no political leader in the forefront promoting sweeping tax reform, even if it would make the U.S. more competitive in world trade, even if it would stimulate business, even if it would fairly collect from multi-national corps that now park profits in lower-taxed countries, even if it would make tax loopholes vestigial remnants of a corrupt tax code, even if it would eliminate absurd complexity.

The one leader who might emerge to make a difference, Gov. Mitch Daniels of Indiana, is still in the background, not having made a commitment to run for president.  However, he has a vision of sweeping tax overhaul that would be good for the economy.  It replaces the entire tax system with a value-added tax plus a flat income tax with a high threshold to achieve balance and fairness.  He spoke of this vision for a new, smart, competitive tax system while accepting the Herman Kahn Award at the Hudson Institute last year.  The press, if it would play an investigative role in examining tax reform would do well to interview him on the subject.  After all, among Daniels’ credentials are experience as head of OMB, and corporate management, as well as govenorship.