Cost estimates put out by the Congressional Budget Office of the healthcare plans being pushed by Democratic leaders in Congress have indicated that the plans are going to cost taxpayers much more than the plans’ sponsors have said. Even taking into account the new taxes on the "rich" that some Democrats have proposed, the CBO projects that the plan favored by House Democratic leaders would substantially increase the deficit in the future.
Not surprisingly, Republicans have enthusiastically used the CBO numbers in their attacks on the Obama/Democratic plans. I have been uncomfortable using CBO numbers in this way (even though I did mention the CBO here) because I remember how critical many of us were of various CBO projections when George W. Bush was President. I figured that if I felt CBO numbers were wrong when a Republican was President, it seemed a little opportunistic to take their numbers as absolute truth now.
An editorial in last Thursday’s Wall Street Journal, however, reminded me why Republicans and conservatives objected to CBO numbers during George W. Bush’s presidency: When the CBO would calculate the effect of a change in tax rates, the CBO would use something called "static revenue analysis". What this means is that, in determining the effect of a change in tax rates, the CBO just applies the different tax rate to the same amount of taxable income; i.e., they assume that income stays the same, only the tax rate changes.
Conservatives and Republicans complained about this approach because they felt (correctly in my opinion) that reducing tax rates would generate more taxable income. A tax cut might not actually increase the amount of taxes the government collects, but the decrease would be less than the CBO projected.
According to the Journal, the CBO is still using static revenue analysis. But now, when it reviews the effects of the tax increases included in the various Democratic health plans, the mistakes go the other way. Just as the CBO did not take into account how people would react to a tax rate decrease, they do not consider how people will react to a tax rate increase. To determine how much money the government will get from a tax rate increase, the CBO just takes the same amount of income and applies the higher tax rate to it.
Except it does not work that way, especially with the tax rate increases that are being proposed by some Democratic leaders. Not only do they want to allow the Bush tax cuts to expire for the "rich," but they also want to add a surtax on the rich to pay for the new health plans. This will be a substantial increase, and regardless of whether you think it is right or not, it is silly to assume that people will not react to it. They will. They may decide to work a little less and make a little less money. Instead of selling stocks and paying taxes on the capital gains now, they may wait and sell them later. And most of all, they will have their tax accountants working overtime to figure out ways to change taxable income into nontaxable income. The tax rate may go up, but the amount of income that is taxed will go down. The result will be that tax collections will be less than the CBO projects, which means that the deficit increases from the Democratic healthcare plans would be even more than CBO projects.
If healthcare is in crisis, we need to do something. But we don’t need to do something so quickly that we wind up making a bad situation even worse by acting without thinking.
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