Opt-Out is a Cop-Out

For weeks leading up to the Senate Finance vote on the Baucus Bill – that still has not been given Legislative language (thus not a bill) – the White House and leading Democrats courted the vote of Sen. Olympia Snowe (R-ME). Now Senate Majority Leader Harry Reid (D-NV), who is fighting for his political future, announced Monday that the merged bill in the Senate will have an "opt-out" public option. The very type of option that Olympia Snowe and Senate "Blue Dog" Democrats are dead set against having as an option. The move by Sen. Reid may put him in the crosshairs of the White House as the Obama Administration has used a lot of political capital to make health care reform appear to be bi-partisan.

President Obama has been campaigning and fundraising for a number of Democrats embattled for political life in the past weeks. Will the move by Sen. Reid put his biggest political chip in jeopardy by putting in a public option? Only time will tell. Having an "Opt-Out" option will negate a slew of lawsuits, well that is if State's get a backbone, as forcing States to offer further expansion of Medicare is an affront on State Rights. As I have said before in previous blog entries, health care reform is needed to curb the escalating premiums and bring cost savings within the industry itself.

The goal of President Obama is to reduce costs and increase competition. The trouble with the public option is that it does neither. To increase competition, open the borders of the states to allow insurance companies to offer coverage across state lines. Roughly 1600 insurance options exist within the borders of the United States yet the majority of states have between 2 and 5 options. Looking to Economics 101 for an answer is required. Economics 101 sales, provided the price is at equilibrium, an increase in supply, while keeping demand the same, the price will drop. So, why are that so many politicians disregard this model of Economics?

The other goal is to reduce cost. Doctors must carry expensive insurance to shield themselves from lawsuits. The malpractice insurance does not discriminate. Surgeons, specialists, and family practioneers all must carry it to protect themselves. Tort reform is required. Without Tort reform doctors will need to earn more and more money to cover the cost of malpractice insurance. So, why doesn't the Democrat led Congress include Tort reform within their health care reform platform?

We can create legislation that will not cost $.01 but Congress lacks the courage to do so while achieving the goals of health care reform. So, why doesn't Congress do it?

Capital Gains Revenue optimized at 20% tax rate

Yesterday in my entry, Baucus Bill Increases tax on All Americans, a friend of mine on Facebook said that my assertion of "historically speaking, when taxes are raised, i.e. capital gains, the government realizes less revenue" was wrong because "simple logic tells us that is not true increasing taxes brings in more revenue that is EXACTLY what it does by definition." My friend pointed those on Facebook, myself included, to www.cbpp.org/cms/index.cfm?fa=view&id=1286
website. The website states that "to raise revenue over the long run, capital gains tax cuts would need to have extraordinary huge, positive effects on savings, investment, and economic growth that virtually no respected expert or institution believes they have." The site further warns that "Especially when capital gains cut is temporary, like the 2003 tax cut that Gibson cited, investors have a strong incentive to sell stocks and other assets in order to realize their capital gains before the capital gains rate increases. This can cause a short-term increase in capital gains tax revenues, as happened after the 2003 tax cut."

In a Joint Economic Committee Study, chaired by Jim Saxton, in June of 1997, concluded that "The analysis that follows unambiguously concludes that the current capital gains tax rate is too high. Analysis of data from previous changes in the capital gains tax rates indicates that a reduction in the capital gains tax rate from 28 percent to 20 percent will result in a substantial increase in capital gains tax revenue in the short run. In the long run, revenue may either increase or decrease slightly. If there are any revenue losses in the long run, they will be exceedingly small because revenue reductions due to the lower rate will be offset by revenue enhancements resulting from increase capital gains realizations. A lower capital gains tax rate will both (1) release capital resources that many investors continue to hold in order to delay or avoid a tax liability and (2) reduce an impediment to the purchase and sale of capital assets. Both of these factors will improve the efficiency of capital markets and benefit the entire economy" (http://www.house.gov/jec/fiscal/tx-grwth/gwartney/optimal/optimal.htm).

The study goes on further to demonstrate, via a graphs, to display that lowering the capital tax rates over the 1970’s, 1980’s and 1990’s had higher revenue for the Federal government than when the tax rate was increased during the late 1980’s. The capital gains tax was cut in 1978 which saw a rise in tax revenue from $100.7B in ’’77 to $112B in ’78 and then in ’79 saw $139B in tax revenue per the Joint Economic Committee study. Then in 1986 capital gains tax was increased, that went into effect in 1987, resulted in a spike of tax revenue but, as the study points out, “When considering the long-run effect of capital gains tax rates on revenues, one cannot fail to be struck by the fact that, even though there were substantial income growth over that decade, the capital gains realization were lower in the early 1990s than during the early 1980s when capital gains tax rate was 20 percent.” The study concludes that “a lower capital gains tax rate of 20 percent would have produced about 43 percent more realized capital gains than the 28 percent rate.”

The claim that my friends source that “Capital gains tax cuts either make the nation’s daunting long-term budget problems even more severe or consume scare resources (primarily to the benefit of the most well-off) that could otherwise be used for purposes such as moving toward universal health coverage or improving the educational system.” I tried to find to see if the Joint Economic Committee Study had updated their information on capital gains tax but did not unearth one. The current capital gains tax rate is 15%. As the study pointed out, in a regression analysis, the optimal capital gains tax rate for long term investments is 20%. That being said, I can support an increase to 20% but the timing will be the question. The stock market is starting to gain steam and may fall short of 10,000 if a rate hike takes place. Unemployment is high and, although Paulsen say differently, America is in a recession. Although if Congress did raise the capital gains tax rate from 15% to 20%, maybe a similar increase in tax revenue would take place that took place back in 1986.

Baucus Bill increases taxes on all Americans

Today the Senate Finance committee will start their overhaul of the Baucus bill. At last report there are 500 plus amendments proposed to the bill. One of the hot button items in the Baucus bill to be discussing the 35% excise tax on insurers "Cadillac plans" they offer. The "Cadillac plan" is defined as policies with a yearly premium cost of $8000 for an individual and $21,000 for a family. The excise tax is expected to generate $215B over 10 years. Michael Tanner, a health policy analyst at the Cato Institute, warns, "They're assuming that everybody's going to keep offering and buying these Cadillac plans. A 35% tax is huge" (Los Angeles Times). President Obama and other Democrats have chimed the 20% gross margin that insurance companies enjoy and it is time for them to share the wealth. Are we naïve to believe that insurance companies will not pass along the 35% excise tax among all the plans they offer thus "taxing" low and middle class by increasing premiums on non-Cadillac plans.

There is optimism behind the Baucus bill as it moves the conversation forward. "While we each have outstanding concerns we wish to see addressed, Senator Baucus has taken an important and critical step forward with this legislation, which is budget neutral and reduces future health care costs," says a statement signed by Sen. Claire McCaskill (D-Mo), Sen. Olympia Snowe (R-Me), Sen. Joseph Lieberman (I-Ct), and Sen. Ben Nelson (D-Neb) (http://voices.kansascity.com/node/5937). The Congressional Budget Office (CBO) does acknowledge the plan does reduce the federal deficit in the long term through revenue generated from the excise tax on "Cadillac plans" and savings in the Medicare program.

What if the revenue from the "Cadillac plans" does not materialize? Historically speaking when taxes are raised, i.e. capital gains, the government realizes less revenue. In the case of health care, the excise tax may see the elimination of "Cadillac plans" and an increase in premiums of lesser plans to spread the tax. The increase premium is essentially a tax on Americans. Many will argue that premiums will increase regardless if nothing is done. I agree with that statement but let's not make it worse. We all agree something needs to be done to reduce premiums and other costs within the system. But to place an excise tax on plans that insurance companies are offering does nothing but raise potential revenue for the government while not lowering costs.

During his one-on-one conversation with George Stephanopoulos, President Obama was pressed that having a health care mandate on Americans is essentially a tax. The president responded that it is "not true" that mandating individuals obtain health care is a tax, but as Politico.com pointed out that the president is wrong. The Politico points out that on page 29 of the Baucus bill states "The consequence for not maintaining insurance would be an excise tax" and mentions later in the bill "The excise tax would be assessed through the tax code and applied as an additional amount of Federal tax owed." Is it okay now to call the president a "Liar"? The H.R. 3200 bill also calls for a tax "on individuals without acceptable health care coverage". Both bills would violate President Obama's campaign promise that no one making less than $250,000 will see their taxes raised by one cent.

President Obama, in his conversation with Stephanopoulos, rebutted on the excise tax and mandate tax that "the first thing we've got to understand is you've got what is effectively a tax increase taking place on American families right now. The Kaiser Family Foundation report just came out last week. Health Care premiums went up 5.5 percent last year, at a time when the rest of the economy, inflation was actually negative. So that is a huge bite out of people's pockets." True premiums have increased and will continue to increase if nothing is done but none of the bill in Congress assist in stabilizing cost let alone driving them downward. To drive costs down we need competition. The public option and/or the Co-Op option do nothing to increase competition. To really increase competition is to open the borders of the states and allow people from one area of the country to purchase health care coverage from other areas of the country.

Instead the government feels mandating that all citizens obtain coverage along with the public option and/or Co-Ops is the answer. They are dead wrong. The mandate is a tax even though the president fails to realize that. George Stephanopoulos asked President Obama "Under this mandate, the government is forcing people to spend money, fining you if you don't. How is that not a tax?" To which the president responded with "Well, hold on a second, George. Here – here's what's happening. You and I are both paying $900, on average –our families—in higher premiums because of uncompensated care. Now what I've said is that if you can't afford health insurance, you certainly shouldn't be punished for that. That's just piling on." Stephanopoulos continued to press the tax issue by breaking out the Merriam Webster's Dictionary to define tax which ticked off the president. In the end President Obama said that "I absolutely reject that notion" in reference the mandate of health care coverage is a tax even though it states it both the Baucus bill and H.R. 3200.

Now that being said will President Obama sign a bill of similar fashion after his pledge not to increase taxes on those making less than $250,000. The rest of the week will be focused on the Senate Finance Committee. It will be interesting to see how the political games are played and what the Baucus bill looks like afterwards. Many say that the health care reform is not an easy task; yet I contend certain aspects are. Why doesn't Congress not act on those aspects?