Tuesday, October 16, 2007

Long run health care costs and tax cuts 

In the details of the move by several GOP representatives, including Rep. Michele Bachmann, to eliminate the alternative minimum tax, I found the graph to your left. It shows the share of tax revenues expected to be paid to the federal government between 2000 and 2050 under current law. My first reaction was "that cannot be right." But looking at the last CBO report, it appears to be so.

Digging around a bit leads me to these two paragraphs from the report:
The future rates of growth for the government�s major health care programs �Medicare and Medicaid�will be the primary determinant of the nation�s long-term fiscal balance. They are also a primary source of budgetary uncertainty. Over the past four decades, per-beneficiary costs under Medicare and Medicaid have increased about 2.5 percentage points faster per year than has per capita GDP. Should those costs continue to increase at that rate, federal spending on those two programs alone would rise from 4.6 percent of GDP in 2007 to about 20 percent by 2050 (see Figure 1-3). That percentage represents about the same share of the economy that the entire federal budget does today. Even if health care costs grow 2.0 percentage points above per capita GDP�a rate consistent with that experienced in Medicare and Medicaid over the past 15 years�the share of GDP absorbed by the two major health care programs would reach 17 percent of the economy by the middle of the century. (At a rate of growth of 1.0 percent above per capita GDP, the share of those programs would be about 11 percent of GDP by 2050.) (p. 19)

If tax revenues as a share of GDP remain at historical levels (about 18.2 percent of GDP), additional spending for Medicare, Medicaid, and Social Security will eventually cause future budget deficits to become unsustainable. Even if revenues follow the path projected under current law and rise to about 24 percent of GDP by 2050, budgetary pressures would increase significantly. As a result, substantial reductions in the projected growth of spending, a sizable increase in taxes as a percentage of the economy, or some combination of changes in policies for spending and revenues is likely to be necessary to achieve fiscal stability in the coming decades. Such policy changes would certainly have some effect on the economy, but those effects would probably be less than the costs of allowing deficits to grow to unsustainable levels. (p. 22)
So the projection in the graph isn't really what the current law is, but an assumption based on assuming the choice made is to increase taxes. In that sense, it's hard to really label that graph "current law". But the point remains quite clear -- unless and until we get a hold of health care spending in the economy in some way, even if to simply have it grow at no greater a rate than do prices as a whole, we have a very serious and disturbing pattern of future budget deficits facing us. The short-run issues with a potential recession ahead are troubling enough. This is much larger.

As to the Taxpayer Choice Act, then, you can expect people to say both we cannot afford it and that it gives too many benefits to the rich. Greg Mankiw shows that personal taxes as a share of GDP have been falling. Indexing AMT would be much cheaper than an outright repeal, and the latter will be pointed up for saving most of the money against the rich. (That's all well and good, but even the smaller amounts for the merely-well-off may be enough to cause their budgets serious strain.)

The "taxpayer choice" part of TCA would give taxpayers a one-time choice to switch to a simplified tax system (with an option to switch back once in a lifetime, or to change due to changes in family circumstances like death, divorce or marriage.) The simplified plan is a 10%-25% two-bracket tax system with a cutoff of $100,000 for married couples. The standard deduction would be $25,000 for married couples. (Single and married filing separate taxpayers get half of those amounts.) The personal exemption would be set at $3,500 per family member. Looking at my own tax form, I would have saved almost 20% of my tax bill under this plan (plus the $69.95 I spend on TurboTax, plus about six hours of time filling out forms. I'd still have the damn Schedule C.) Given that it's a choice, we can only assume there would be income tax lost here as well. Both measures, to be revenue neutral, would require either a spending cut or a tax increase somewhere else.

It does not have a real chance of passage in my view, but it highlights two points, neither having to do with the alternative minimum tax: We have a complicated tax system that could well stand simplification; and we have a long-term spending problem that must be fixed.

UPDATE: More comment on the Taxpayers Choice Act from the Skeptical Optimist.

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