Glenn Hubbard's op-ed in the April 17, 2006 Wall Street Journal at A16 admits that the increasingly worrisome deficits of the Bush Administration will require either tax increases or reductions in safety net supports we provide to the elderly, the poor, the orphaned and the sick. Needless to say, he doesn't support tax increases.
He uses the Tax Foundation's concept of "tax freedom day" in the very way that the Tax Foundation says it was not intended to be used--to talk about the "day this year that taxpayers on average stop working to pay their tax obligations and begin earning for their own spending." Having raised the specter before ordinary Americans of having less control of their "own" money, he suggests that the nation cannot afford to pay for Social Security and Medicare in the future. It would mean larger government, which he claims is necessarily associated with lower growth, and lower growth would mean a lower standard of living and stifling of innovaction. (What he doesn't cover is the fact that lack of Social Security for the elderly, lack of medical care and lack of other benefits would certainly result in lower standards of living for ordinary Americans and perhaps have an even more dramatic impact on economic growth. It was, in fact, the period after World War II when we created Social Security and Medicare and brought many elderly and poor into the productive economy that this country experienced an enormous economic boom.)
Having called forth the specter of large government, Hubbard considers how to avoid it. His solution is to cut entitlement programs like Social Security and Medicare. He does not acknowledge studies, such as those discussed by Paul Krugman, that show that we could provide health care at a much cheaper cost by creating a universal single-payer system and we could save even more with a single-provider system, like Canada, the UK and almost every other developed country in the world. Instead, he wants to privatize all of these current programs with "incentives" for Health Savings Accounts, wise consumption of health care services, and "saving for the purchase of true health insurance at old age."
This prescription for Christmas future sounds like the ghosts of Christmas past. Incentives for Health Savings Accounts remove those funds from the income tax system and increase the deficit. HSAs are most likely to be employed, as discussed in other postings, by those who are healthiest and wealthiest. HSAs will not be adequate to deal with the real cause of rising health care--those who have serious illnesses that require expensive diagnostic testing, hospital stays, and modern drug and surgical treatment. Health Savings Accounts mainly provide a tax-free route of saving for wealthier individuals who would save anyway.
What about incentivizing more efficient use of health care? This market solution to health care costs simply doesn't acknowledge the way health care works. People can comparison shop, to some extent, for preventative care, although even in that case there are often only a few practitioners who are accepting patients or who are willing to treat lower-income patients and thus choices are limited. But when it comes to specialized care--from dermatology to heart or cancer treatment--it is almost impossible for ordinary people to know how to choose among providers or to have the luxury of choosing among providers. Location, population and many other factors determine who is willing to serve. Health care is not like taking a lawn mower in to be repaired. Doctors cannot tell a patient a price for treatment beforehand, and often the testing itself is terribly expensive. Patients don't have the choice of tossing out the old machine and just buying new if the repair is too expensive. And patients ought not to be forced to settle for inferior care in order to save money when their lives are at stake. The ability of a consumer in health care to "shop wisely" and lower health care costs is extraordinarily limited.
And what about "saving the purchase of true health insurance for when it is needed"? That invites a spiraling increase in the cost of health insurance. Insurance works when the risk of loss (health care needs) is spread over a large and diversified group for which one can expect that some will need care but most will not need care and some of those who need care will need expensive care but most will not. If health savings accounts were to replace insurance for young people and well people and insurance were reserved only for those who needed it because they expected higher health costs, insurance costs would skyrocket and coverage would diminish. The elderly who would depend on insurance for their needs (because they could no longer set aside HSAs and would not have sufficient in those HSAs set aside earlier to cover catastrophic needs) would find themselves left high and dry without medical care.
The better answer--universal health care with the national government as health care provider. What does that mean for tax purposes? Toss the idea of HSAs and forget about creating expensive incentives through the tax system for encouraging people to shop wisely for health care.
Having raised the specter of big government and then purportedly evicted it by cutting Social Security and Medicare down to size through privatization achieved with tax programs that provide incentives for savings, Hubbard goes on to talk about the kind of tax system that will best achieve growth. Hubbard mentioned "fairness" almost as an aside at the beginning, but it figures almost nowhere in his discussion. He claims that his concern is to focus adjustments on middle and upper income workers (whether on the spending or tax side). But his formula for tax reform would benefit most the extraordinary wealthy, and his formula for entitlement reform would put the risk of loss onto workers young and old. (He conveniently talks about "workers" throughout that section, since of course those who've inherited their wealth and receive their income from capital would not bear any of the burden under his formula.) His formula for tax reform is stated in one sentence.
Tax reform to promote growth should keep marginal tax rates low and remove (or at least sharply reduce) tax biases against saving, investment and risk-taking.
For Hubbard and others who are promoting zero taxes on the capital income of the wealthy, the income tax is always cast as having a "bias[] against saving, investment and risk-taking." Of course, they do not mention that the tax system they prefer--a consumption tax system of one sort or another--has a bias against spending, working to earn a living and taking risks as an employee without power in a system dominated by tycoons and oligarchs. An income tax doesn't favor either saving or spending, but a consumption tax favors saving. The wealthy can save most of their income, and the poor and middle class must spend most of their income. Thus, the rhetoric about the need to increase saving is also about the desire to reduce taxes on the wealthy from their current level and shift the tax burden to workers. Similarly, the statement that marginal rates should stay low is a statement against meeting our government obligations (including paying off the immense debt from the years of tax cuts) through enhanced progressivity in the tax system.
Hubbard assumes that economic growth is a per se good. Yet economic growth can take place across a broad spectrum, as it did in America in the Post-WWII years or it can take place within a very narrow band, as it has under the Bush Administration. Economic growth accompanied by increases in inequality may in fact be a bad omen for sustainability of growth, as class mobility stalls, spending by the broad base of ordinary Americans declines, and the gains from productivity are realized only by those who own the plants and not by those who work in them. Adequate safety nets like Social Security and Medicare--or, even better, a universal health care system--may be essential to sustained growth over the long term. The best tax reform to achieve that kind of broad-based growth may well be enhanced progressivity, not lower marginal tax rates.
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