Higher rates or fewer tax breaks ... what’s worse?
By Alan Fram
Associated Press
WASHINGTON (AP) — In the fiscal cliff wars, a pivotal battle is raging between Democrats demanding to raise revenue by boosting tax rates on the nation’s highest earners and Republicans insisting on eliminating deductions and other tax breaks instead. Which is better for the economy? Analysts say it depends.
Economists generally agree that a simpler tax code with lower rates and fewer deductions, exemptions and credits would help the economy. With fewer tax preferences, people would be more likely to seek the best investments for their money instead of the most lucrative tax breaks. And lower rates would leave them more money to spend. Both would add oomph to the economy.
But ask whether the higher tax rates that President Barack Obama wants would hurt the economy more than curbing deductions, as Republicans assert, and the picture is less clear. While many economists say the economy theoretically would work more efficiently if the tax code provided fewer preferences, many said it would depend on which deductions lawmakers curb — a complicated exercise in a world where one person’s wasteful loophole may be viewed by others as an economic lifeline.
For example, one of the biggest tax breaks is the widely popular deduction for interest on home mortgages below $1 million. Because of it, the government this year will take in $87 billion less than it would if the deduction didn’t exist.
That deduction allows many to buy homes they otherwise couldn’t afford and is strenuously defended by the housing industry. But critics say it does little to help lower-income people while it encourages others to go into debt for costlier homes than they need — an activity they say taxpayers should not subsidize.
“I’d definitely go for cutting deductions first, especially if I have the opportunity to make the choices about which deductions go,” said Alan Auerbach, director of the Robert Burch Center for Tax Policy and Public Finance at the University of California, Berkeley.
The clash is a key part of negotiations for a deal to avert big tax increases and spending cuts due to begin in January — the fiscal cliff — unless Obama and Congress reach an accord on some other way to rein in the government’s ballooning debt.
Obama wants to raise $1.6 trillion in revenue over the next 10 years, partly by letting decade-old tax cuts on the country’s highest earners expire at the end of the year.
He would continue those Bush-era tax cuts for everyone except individuals earning more than $200,000 and couples making above $250,000. The highest rates on top-paid Americans would rise from 33 percent and 35 percent today to 36 percent and 39.6 percent.
House Speaker John Boehner, R-Ohio, has offered $800 billion in new revenues to be raised by reducing or eliminating unspecified tax breaks on upper-income people.
There are more than 100 tax breaks with a cumulative price tag estimated at $1.1 trillion yearly. They range from huge breaks like the deduction for charitable contributions and the income exclusion for employer-provided health insurance to obscure tax incentives for capturing carbon dioxide emissions or maintaining railroad tracks.
The nonpartisan Congressional Budget Office said in a report last month that raising tax rates would dampen people’s incentive to work and reduce the nation’s labor supply. Raising the same amount of revenue by eliminating tax breaks would probably be less negative, but the impact would depend on which deductions were erased, the budget office said.
A separate study by the same agency and in the same month, however, suggested that the economic harm from letting tax rates rise for top earners would be relatively negligible.
That report estimated that extending the George W. Bush-era tax breaks for everyone would mean the economy would grow by 1.4 percent more than if all the tax cuts are allowed to expire. Extending the tax breaks for all but the top earners as Obama wants would produce economic growth of 1.3 percent, just 0.1 percent less. In a nearly $16 trillion economy, that one-tenth of 1 percent equals $16 billion.
While higher tax rates can discourage investment, “whether or not we actually see significant changes in behavior from small changes in tax rates is another story,” said Joe Rosenberg, research associate at the bipartisan Tax Policy Center, which analyzes tax policy. “We do see some, but the magnitude is probably fairly small.”
Part of the dispute is grounded in politics. Obama made raising rates on the wealthy a keystone of his re-election campaign. For two decades, Republicans have made opposition to higher tax rates their party’s mantra. Neither side is eager to surrender.
The present faceoff is also a tactical duel ahead of an even larger war over revamping the entire tax code that could come next year. Both sides know that if tax rates on the wealthy rise now, it will be harder to push them back down later.
In addition, the battle underscores ideological differences in the two parties’ constituencies.
Republicans say raising tax rates on high-income Americans discourages investments that would produce new jobs.
For Democrats, imposing higher tax rates on people making the most money is a fair way to make them contribute to deficit reduction.
Because various tax breaks have such powerful defenders — for example, charities, churches and colleges — it’s politically difficult to limit them. The subsequent search for revenue could expose the middle class to higher taxes, Democrats say.
During the presidential campaign, Republican nominee Mitt Romney suggested limiting itemized deductions to a dollar cap, such as $25,000. The nonpartisan Tax Policy Center estimates that capping deductions at $25,000 would raise $1.3 trillion. But 29 percent of it would come from those earning under $200,000, whose taxes both parties say they don’t want to increase.
Trade-offs in raising Medicare eligibility age
By Ricardo Alonso-Zaldivar
Associated Press
WASHINGTON (AP) — Americans are living longer, and Republicans want to raise the Medicare eligibility age as part of any deal to reduce the government’s huge deficits.
But what sounds like a prudent sacrifice for an aging society that must watch its budget could have some surprising consequences, including higher premiums for people on Medicare.
Unlike tax hikes, which spawn hard partisan divisions, increasing the Medicare age could help ease a budget compromise because President Barack Obama has previously been willing to consider it. A worried AARP, the seniors’ lobby, is already running ads knocking down the idea as a quick fix that would cause long-term problems. House Democratic Leader Nancy Pelosi, D-Calif., doesn’t like it either.
But for Republicans seeking more than just tweaks to benefit programs, raising the current eligibility age of 65 has become a top priority, a symbol of their drive to rein in government. If Obama and the GOP can’t agree soon on a budget outline, it may trigger tax increases and spending cuts that would threaten a fragile economic recovery.
Increasing the eligibility age to 67 would reduce Medicare spending by about 5 percent annually, compounding into hundreds of billions of dollars over time. But things aren’t that simple.
“This is a policy change that seems straightforward, but has surprising ripple effects,” said Tricia Neuman, a leading Medicare expert with the nonpartisan Kaiser Family Foundation. “It’s a simple thing to describe, and the justification is that people are living longer, but I don’t think people have thought through the indirect effects.”
Among the cost shifts identified in a Kaiser study:
—Higher monthly premiums for seniors on Medicare. Their costs would go up because keeping younger, healthier 65- and 66-year-olds out of Medicare’s insurance pool would raise costs for the rest. The increase would be about 3 percent when the higher eligibility age is fully phased in.
—Higher premiums for private coverage under Obama’s health overhaul. That’s because older adults would stick with private insurance for two extra years before moving into Medicare. Compared with younger adults, they are more expensive to insure.
—An increase in employer costs because older workers would try to stay on company insurance plans.
—Higher out-of-pocket health care costs for two out of three older adults whose entry into Medicare would be delayed.
The Congressional Budget Office has also projected an increase in the number of uninsured. That possibility becomes more real with populous states like Texas saying they won’t accept the Medicaid expansion in Obama’s health overhaul, which would provide coverage to low-income adults. Then there’s the impact on people with physically demanding jobs, for whom extending their working years may be difficult.
Still, the idea isn’t going away.
Polls show that many Americans are willing to consider raising the age at which people become eligible for Medicare benefits as part of a plan to reduce deficits, even if on the whole it’s still unpopular.
A new Associated Press-GfK poll found that four in 10 back gradually raising the eligibility age, while 48 percent oppose that plan.
Those under age 30 were most supportive, while a clear majority of those between the ages of 30 and 64 were opposed. Seniors were split. Surprisingly, there were no significant differences by political party. Overall, foes of the idea were more adamant, with strong opponents outnumbering strong supporters by 2-1.
U.S. life expectancy has risen by about eight years since Medicare was created in 1965. During the 1980s, Republican President Ronald Reagan and Democratic congressional leaders agreed to gradually increase the age for receiving full Social Security benefits from 65 to 67. But they didn’t touch Medicare eligibility.
Since then, some policy experts have advocated aligning the Medicare and Social Security eligibility ages through a gradual phase-in that would spare those close to retirement.
The idea gained new life when Republicans won the House in 2010, and Budget Chairman Paul Ryan, R-Wis., embraced it. Obama indicated he was open to it during budget talks with
Republicans in 2011. But the president quickly retreated, and now says he’s not willing to consider cutting Medicare unless Congress agrees to raise taxes on the wealthy.
The No. 2 Democrat in the House, Maryland Rep. Steny Hoyer, says raising the eligibility age and other cuts “clearly are on the table,” although he doesn’t see much chance for them if Republicans don’t yield on taxes.
For his part, House Speaker John Boehner, R-Ohio, has relented from pursuing other major changes to Medicare, such as privatization. But when it comes to the eligibility age, he is still pushing.
“It’s a structural change but it doesn’t require you to adopt a whole new model,” said Scott Gottlieb, a health policy expert with the business-oriented American Enterprise Institute. “It can be enacted quickly so you get the savings, and it can be phased in so you don’t affect people about to retire.”
AARP and other groups representing older adults are mobilizing against it.
“We are prepared to oppose this one pretty strongly,” said AARP legislative policy director David Certner. “It’s a pretty big deal.”
Raising the eligibility age is not the only Medicare cut in play. Hospitals and other service providers could see reductions in payments, drug companies may owe new rebates to the government and upper-income seniors would face higher monthly premiums. The total package could reach around $400 billion over 10 years.
