Taxes

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Medicare Cost Projections

November 10, 2009 in Medicaid/Medicare, Taxes | 2 comments

The Social Security Administration’s Office of the Actuary projects Medicare costs up to 75 years in the future. How much of your taxable income will be going to pay for Medicare in the next 10, 25, or 75 years? Take a look at this chart.

By 2085, 12.24% of your taxable income will need to go to pay for Medicare. Not shown on this chart, is that 17.78% of your taxable income will also be needed to pay for Social Security. Thus, by 2085, 30% of worker income will go to fund these two entitlement programs.

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Federal Health Care Regulation: Taxation

November 4, 2009 in HSA, Public Policy, Taxes | 1 comment

Today we will discuss how the tax code affects health care.

  • Tax exemption of employer-provided health insurance. “In 1943, the Internal Revenue Service (ruled) that employees could exclude the value of employer-paid health insurance premiums from their taxable income. In 1954, Congress excluded by statute the value of employer-purchase health insurance from gross income.” To this day, employees essentially receive a subsidy to buy health insurance from their employers; this is because they can use pre-tax dollars to purchase employer-provided health insurance benefits.
  • Tax-deductibility of individually purchased health insurance. Individual health insurance benefits are tax deductible only if the individual itemizes deductions on their tax return. Since it is more likely wealthier individuals itemize, the benefits of this rule are more likely to accrue to the rich.
  • Deductibility of medical expenses. The IRS tax code states that individuals can deduct medcial expenses that exceed more than 7.5% of their gross income.
  • Health Savings Accounts (HSA). An HSA is a trust similar to a 401(k) where individuals can use pre-tax money to pay for medical expenses. HSAs must be linked to an high deductible health plan (HDHP) which was defined in 2006 as a plan that had a deductible not less than $1050 for the individual or $2100 for a family. Money left in an HSA account at the end of the year can be carried over to future years.
  • Flexible Spending Accounts (FSA). Individuals can deposit pre-tax dollars into a fund to pay for health care expenses. Unlike HSAs, FSAs need not be tied to a HDHP. Also, unlike HSAs, money deposited in an FSA that is not spent by years end is lost. This is why FSAs are considered “use it or lose it” accounts.

Source:

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How to pay for health reform: Taxes

July 10, 2009 in Taxes | 1 comment

The New York Times is reporting that “to pay for a sweeping overhaul of the health care system, House Democrats will propose a surtax on individuals earning $280,000 and up and couples earning more than $350,000.”  Now, taxes in and of themselves need not be distortionary.  Let us assume that your employer takes $10,000 from your paycheck currently to pay for your health insurance.  If the government would no provide you with health insurance, you would receive $10,000 in extra wages from your employer and you pay a tax of $10,000 to the government for health insurance.  In this cases, taxes are not distortionary.

This scenario of course assumes that government and private health insurance are of equal value.  If private health insurance is of higher quality, this could result in a decrease in efficiency; if government health insurance is of higher quality, this could be an efficiency improvement.

However, taxes are charged according to health insurance demand or even in a lump sum fashion.  Instead, the rich will pay more in taxes than they will receive from government health insurance benefits and the poor will pay less in taxes than they will receive in health insurance benefits.  Further, since the proposed tax is only on those individuals earning $280,000 or more, the tax will almost certainly be distortionary in some manner.  Although this progressive tax will create some distortions, it could cure others.  For instance, government health insurance could help to reduce labor market inefficiencies caused by Job Lock and Job Stretch.

I wonder how many doctors will support health reform now?   A public plan will increase their revenues as more of their patients receive insurance, but a higher percentage of their profits will be taken by the government due to the proposed surtax.  As any economist knows, life is full of tradeoffs.

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Medicare trust fund to be tapped out by 2017

May 12, 2009 in Medicaid/Medicare, Social Security, Taxes | 1 comment

Bond Markets seem to be concerned over the escalating level of U.S. Government debt.  Yields rose during the latest $14 billion auction of U.S. 30-year Treasury Bonds.  This graph shows an ominous budget deficit trend as well.  There seems to be good reason for this.  

American’s stimulus plan and entitlement programs are putting an increasing burden on American tax payers.  With the recession taking a toll on tax revenues, Social Security and Medicare funding is increasing jeopardy.  CNN reports that the “Social Security trust fund will be exhausted by 2037 — four years earlier than estimated last year… The recession also hit Medicare. The Medicare trust fund is forecast to be tapped out by 2017, or 2 years earlier than the trustees’ estimate last year.”

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How did the national debt get so big?

May 8, 2009 in Public Policy, Taxes | 3 comments

The book Cadillac Desert discusses the development of dams, aquaducts, and irrigation canals to slake the thirst of cities and farmers in the Western U.S..  While these projects did eventually deliver the water they promised, they did so at huge costs to taxpayers.  In the words of former congressmen Robert W. Edgar:

“The old-boy network comes to you,” says Edgar, who was elected to the House of Representatives in 1974, at the age of thirty-one.  ”They say, ‘You’ve got a water project in your district?  You want one? Let us take care of it for you.’  Then they come around a few months later and get their pound of flesh.  You actually risk very little by going along.  You get a lot of money thrown into your district for a project that few of your constituents oppose.  In return, you vote for a lot of projects your constituents don’t know or care about.  Not many of my constituents are going to base their vote for or against me on whether or not I supported Stonewall Jackson Dam in West Virginia.  Then everyone wonders why we’re running such big federal deficits, and they cut the social programs, which must be the culprit.”

  • Robert W. Edgar, U.S. Congressman from 1975 to 1987.

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How much is a $100m Cut from the Budget?

May 1, 2009 in Taxes | No comments

Obama Budget Cut Visualization.

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A tax on sex?

April 6, 2009 in Current Events, Taxes | No comments

Nevada is contemplating ‘slapping’ a $5 tax on sex acts in brothels.

Lottery Gambling is addictive

April 6, 2009 in Economics - General, Taxes | No comments

An NBER working paper by  Jonathan Guryan, Melissa Schettini Kearney (2009) gives strong evidence that gambling is addictive using a creative identification technique:

“We use the sale of a winning ticket in the zip code, the location of which is random conditional on sales, as an instrument for present consumption and test for a causal relationship between present and future consumption…Our data from the Texas State Lottery suggests that after 6 months, roughly half of the initial increase in lottery consumption is maintained. After 18 months, roughly 40 percent of the initial shock persists, though estimates become less precise. These estimates provide an upper bound on the degree of addictiveness in lottery gambling. They also highlight the potential effectiveness of innovations and advertising campaigns designed to increase lottery gambling.”

The authors wisely note that the welfare implications of their findings are ambiguous.  Is the increase in lottery sales due to increased addiction or learning-by-doing (i.e., it’s fun to play the lottery and I do it in moderation)?  If individuals become “…rational addicts in a Becker-Murphy sense, optimal provision and pricing would depend only on the external harm imposed, for example, on family members from the displaced consumption of other household goods.”

Further, government sponsored gambling is a way to raise money for public expenditures.  One must compare the deadweight loss from standard revenue raising measures (e.g., sales and income taxes) compared to lotteries.  I presume that the deadweight loss from raising revenue via the lottery is smaller than sales and income taxes in the absence of addictive gambling, but may be larger in the case where compulsive gambling becomes a widespread problem.

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Canadian Social Security and Well-Being

March 3, 2009 in Public Policy, Social Security, Taxes | 1 comment

Does Social Security work?  By that, I mean does giving elderly individuals a government pension increase their level of income, the amount of goods the can consume, or even their happiness?

An NBER working paper by Baker, Gruber and Milligan (2009) tries to answer this question in the Canadian setting.

Background

Currently, Canadian income transfer programs to seniors make up 2.3% of GDP, but this figure is expect to rise to 3.2% of GDP by 2030.  Unlike Social Security in the U.S., the pay-as-you-go (PAYGO) component of the Canadian Social Security System if fairly small.  Further, population growth in Canada is higher than in Europe making the old-age income transfer programs more solvent.

The Old Age Security (OAS) program is the oldest elderly income transfer program in Canada.  It was enacted in 1952.  Currently, “the monthly benefit paid to individuals who fully satisfied the residency requirement was $479.83.   This benefit is clawed back from higher income pensioners at a 15 percent rate, starting at incomes of $60,806 (2005).  Benefits are full indexed to the CPI and fully taxable under the Income Tax Act.”

The Guaranteed Income Supplement (GIS) is a means-tested income supplement for elderly individuals with low income.  Benefits are taxed back at a 50% rate.  The current enefit is between $370 and $570.  

The Canadian Pension Plan (CPP) and Quebec Pension Plan (QPP) are finance by contributions from employers and employees.  Individuals pay a 4.95% tax on earnings from $35,00 to $41,100 and benefits are based on a measure of average earnings over the individual’s working life.  Participants can claim benefits at age 60, but the benefit level is increased by 0.5% per month if the benefits are claimed at an older age.

Data

 The authors aim to investigate how changes in the programs described above affect the income, consumption and happiness level of individuals in different birth cohorts. These measures are taken from survey data from Statistics Canada.  Income data comes from the Survey of Consumer Finances (1971-1997) and the Survey of Labor and Income Dynamics (1998-2002).  Consumption data comes from the Family Expenditure Survey (1969-1996) and the Survey of Household Spending (1997-2002).  Happiness is measured by the General Social Survey.

  • For more details on the Canadian Social Security System, see my post from 4 July 2006.

Methodology

If there are time trends in elderly income and consumption, how does one identify the impact of the Canadian Social Security?  The authors use changes in Canadian Social Security legislation to identify this impact.  The regression methodology has 3 specifications:

  1. Regress actual retirement benefits on the dependent variables (income, consumption and happiness).
  2. Partial Simulation. In this approach, the authors hold constant the earnings, capital income, and family status of the individual, but allow the retirement age to vary.  Benefits are based on a fixed earnings histories across all birth cohorts, not actual earnings.
  3. Full Simulation.  In this case, earnings, capital income, family status, and retirement age are held constant and the authors calculate simulated benefits levels based on an average earnings histories and retirement ages across all cohorts.

Results

In general, the authors find that a higher Social Security benefit increases elderly income.  In the full simulation and when simulated benefits are used as an instrument for actual benefits, Social Security income benefits increase elderly income benefits dollar-for-dollar.  Further, elderly income poverty decreased significantly when more generous benefits were enacted; the authors claim that 96% of the reduction in elderly poverty is due to these added benefits.  However, in the partial simulation methodology, the authors find that a $1 increase in benefits leads to only a $0.55 cent increase in elderly income, thus indicating significant crowd-out.  

For consumption, the authors also find that more generous income benefits increase elderly consumption levels, but not dollar for dollar.  A $1 increase in benefits leads to a $0.66-$0.80 increase in consumption, thus indicating some crowd-out.  Unlike for the case of elderly income poverty, more generous Social Security benefits did not affect consumption poverty.  Thus, it may be the case that poor elderly individuals have other sources of consumption (e.g., purchase by family members, unreported income gifts from family members, unreported labor income) that may offset lower government supplied income benefits. 

“For the very happy question, we see no sign of a statistically significant relationship between benefits and being very happy.  On the other hand, there is some evidence of a decrease in reports of being unhappy or very unhappy with higher benefits in the reduced form results, but not in the IV results.”

Healthcare Economist’s Take

This paper indicates that more generous income benefits do increase income and consumption for the elderly.  Social Security benefits create more crowd-out in the case of consumption than income.  It is likely that consumption is a better indicator of well-being, especially since elderly savings is very low (i.e., the elderly are generally spending down their assets than building them up).  While income poverty declined due to these income benefits, consumption poverty did not.  Overall, I would say that these program do help increase elderly well-being, but likely not dollar for dollar.  As the authors note, this paper only looks at the benefits of Social Security without taking into account the costs of raising a significant amount of revenue to pay for these government program.

I will not comment on the happiness measure.  Although many people may think it is the government’s job to make individuals happier, I believe that happiness is determined on an individual level and often based on things the government can’t control (e.g., do you get along with your spouse, has their been a death in the family).  Further, happiness is often measured by comparing your emotional feelings against some status quo.  Thus, a poor family would be very happy to have their income increased to $80,000, but a millionaire would be very disappointed.  

I think this paper makes an important contribution showing that government old age income benefits do increase income and consumption, even if there is some crowd out on the consumption side.  The question for me is less whether or not there should be some government benefit, but more about how generous it should be and whether it should serve only the poor or all elderly.

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California raises state sales tax 1%

February 24, 2009 in Current Events, Taxes | No comments

Two weeks ago I did a piece looking at the cost of living in different states.  One major dimension of the cost of living is state sales and incomes taxes.  With the recent economic downturn, it looks like I’ll have to update my numbers.

California currently has the highest sales tax of any state (7.25%).  Due to the current budget crisis, it will increase the sales tax by 1 percentage point to 8.25%.  This means that in my current home of San Diego, the sales tax will rise to 8.75%.  In my future home of San Francisco the sales tax will be 9.5%.

Ouch!

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