President Bush has threatened to veto the bill, which did not pass the House by the two-thirds majority needed to override a veto. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care as a result of an SCHIP expansion would be those who would otherwise not have health insurance.
Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal. He has argued that, in comparison, the President's tax proposals to expand health care have benefits much more concentrated among those who already have health insurance.
Citizens for Tax Justice has noted that cigarette taxes (whether on the federal or state level) are regressive, meaning they take a larger proportion of income from a poor family than from a wealthy family, but they may nevertheless be the most viable option for funding an important health care initiative at this time.
It's true that if two smokers, one poor and one wealthy, are smoking the same amount and paying the same tax of one dollar a pack, that one dollar equals a larger percentage of total income for the poor smoker than for the wealthy smoker. It's always better to fund important programs with progressive taxes, but the health care crisis among low- and middle-income families requires compromise. Unlike President Bush, Democrats and many Republicans in Congress have shown that they are willing to make such a compromise.
The Grain of Truth in the Treasury Report's Warning Over Social Security
On Monday the Treasury released an issue brief that will be the first of several on Social Security's funding problems. The report explains that, using the assumptions of the Social Security Board of Trustees, the program will not be able to fully pay the benefits that are scheduled starting in 2041. Under law, benefits must at that point be reduced to a level matching revenues in the program, which would be about 25 percent below the full benefit levels scheduled.
Balance Issue Overstated
It's worth pointing out that the assumptions used to make these projections are considered unreasonably pessimistic by many economists. It's also important to remember that benefits rise with wages, which usually rise faster than inflation. As a result, even if the pessimistic economic assumptions were borne out, the benefits scheduled to be paid in 2041, even after the 25 percent reduction, would still be larger in real terms than those benefits paid today.
Which is not to say such a cut in scheduled benefits would be acceptable, since the program is meant to replace a reasonable portion of wages. But the claims by the administration that the program is in grave danger seem overstated. Several measures, such as increasing the payroll tax by a couple percentage points or raising the cap on wages subject to the payroll tax, could ensure that the there is enough money flowing into the program for the next 75 years.
The report tries to make the argument that we must look further than 75 years and ensure that the program is in balance over an "indefinite future" -- which is hard to swallow to say the least. The fact that the program is currently scheduled, even using pessimistic assumptions, to be in balance until 2041 probably makes it more secure than most federal programs in the minds of many Americans.
Several members of Congress have rightly argued that the report is just one of several attempts by the Administration to convince the public that Social Security cannot function without some radical overhaul, which usually involves private accounts that have nothing to do with making the program solvent.
But There Is a Problem if Social Security Surpluses Are Not Saved
But there is a problem that deserves our attention. For several decades leading up to 2041, a portion of Social Security benefits will be paid out of the Social Security trust funds, which are basically accounting mechanisms to keep track of the surplus Social Security taxes that have been paid into the program since the 1980s. If the Social Security surpluses are not immediately spent by the government but are instead used to pay down the debt, that can make it much easier for the government to pay Social Security benefits later on as the baby boomers retire in large numbers. But this has only happened during the late 1990s, during the Clinton Administration. At other times, the Social Security surpluses have been used to fund other government spending and tax cuts.
This raises an important question. As Citizens for Tax Justice explained in a 2006 report on Social Security funding options, Social Security could be brought into balance -- on paper -- by raising or eliminating the cap on wages subject to Social Security payroll taxes, by increasing the payroll taxes or by broadening the definition of income subject to Social Security taxes. But if future presidents and Congresses cannot restrain themselves from spending the surpluses, it's not clear that the program will truly be any more secure.
This issue will be addressed in the next issue brief from the Treasury on Social Security. The authors end this edition by telling us that "Many analysts believe Social Security surpluses do not result in smaller levels of publicly held debt, but instead result in some combination of higher spending or lower taxes in the non-Social Security budget." Perhaps an earlier version included the words "when a President named Reagan or Bush occupies the White House."
Democratic Presidential Candidates Address Fiscal Issues in Debates
Democratic Presidential candidates participated in debates on September 20 and September 26 that addressed taxes, Social Security, health care, and other issues.
Health Care
The candidates seem to vary in how they claim their health care reform plans would be paid for. Even if his numbers don't always add up, former Senator John Edwards is relatively honest about his plans. He cited his proposal to eliminate the Bush tax breaks for those making over $200,000 and raising the rate for capital gains to 27 percent.
Senator Hillary Clinton seemed to suggest on the 20th that increasing efficiency with electronic records and other reforms can raise billions of dollars and pay for her plan to provide families the same health insurance options that federal employees have as well as tax credits for those who cannot otherwise afford to buy these plans. New Mexico Governor Bill Richardson said he disagrees with John Edwards and that no new taxes are needed. But then he said he would "eliminate the two percent" by which we think he means ending the tax breaks for the wealthiest two percent (which sounds an awful lot like what John Edwards wants to do actually) as well as raise $77 billion by cutting corporate welfare.
Social Security
On Social Security, Richardson is slightly less confused. On the 26th, he pointed to the fact that the program may not really be in grave danger because the assumptions used to make the oft-cited projections of insolvency are overly pessimistic. The other candidates seemed more convinced that Social Security really does face a crisis. Senators Christopher Dodd and Joe Biden said the cap on wages subject to Social Security taxes should be raised, while Senator Barack Obama (who was present on the 26th but not the 20th) would rather remove the cap entirely so that all earnings are subject to Social Security taxes.
Clinton won't say what she would do for Social Security exactly. On both nights, Edwards put forth the peculiar idea of creating a donut hole in Social Security taxes. The first $97,500 of earnings would be subject to the tax as is the case currently, then earnings between that amount and $200,000 would not be, and then all earnings over $200,000 would be subject to the tax.
Besides the question of whether Congress can actually constrain itself from spending Social Security surpluses as discussed above, these proposals also raise the question of whether or not support for the program would erode to any significant degree if the funding mechanism was made this progressive. The wealthy people who would be affected by these proposals see a much smaller fraction of their wages replaced by Social Security benefits than low- and middle-income people. On the other hand, it's not clear that support for Social Security is really linked to how it's funded.
Tax Incentives
The candidates also vary in the extent to which they're willing to use the tax code to affect behavior. Senators Dodd and Gravel favor a tax on carbon to reduce emissions that contribute to global warming. Governor Richardson favors using the tax code to encourage everything from higher wages to technology companies to unionization. We would argue that Governor Richardson's proposals stray a bit from the function and purpose of the tax code, which is to fund government services.
Senate Finance Committee Examines Tax Strategy Used by Offshore Insurers
American insurance companies came to the Hill Wednesday to complain about
a tax-avoidance strategy that they say is giving Bermuda-based
insurance companies an unfair competitive advantage. The general idea
is that an insurance company can locate or relocate in Bermuda, which
has a tax treaty with the United States allowing premiums paid to Bermuda-based
insurers by U.S. customers to be free of U.S. tax, except for a 1 percent
excise tax. The company's U.S. affiliate sells insurance to U.S. customers
and then buys reinsurance (which is common for insurers) from the parent
in Bermuda, so that income from premiums is effectively shifted to Bermuda where it can
be invested tax-free.
In
reality the affiliates are operating as one company just shifting money
around on paper. The strategy apparently requires very little in the way
of actual employees of facilities physically located in Bermuda.
A
U.S.-based insurer will generally pay the corporate tax rate of 35
percent on its income, and thus is put at a competitive disadvantage relative
to the Bermuda-based insurer. The strategy available to the Bermuda-based
insurers should be eliminated for moral reasons, but thankfully there are some powerful U.S.-based insurers that
have found it in their own interest to
start lobbying for reform.
While some members of the Finance Committee have expressed concern and an interest in a legislative solution, no proposal has been made public yet. The Bermuda-based companies have formed their own lobbying coalition to block reform.
