To resolve the fiscal cliff the government raised $600 billion of revenue over 10 years by allowing the Bush tax cuts for the wealthy to expire and the employee portion of the Social Security tax was raised from 4.2 percent of wages back to the historic level of 6.2 percent of wages. Sequestration, the across the board discretionary spending reductions totaling $1.2 trillion, required under the Budget Control Act of 2011, was deferred.
The debt ceiling has now replaced the fiscal cliff as the catalyst for action. The Republican position is that we avoided the fiscal cliff because we dealt with taxes and the debt ceiling debate is now about spending reduction and entitlement reform. The Democratic position is that Speaker of the House John Boehner offered $800 billion in new revenue through tax reform and new revenues must be part of the new bargain; that economic growth and investment in education and infrastructure must be provided for in the new budget and that budget will not be balanced on the backs of middle class Americans.
The federal government is currently running a $1.1 trillion annual deficit and discretionary spending, inclusive of defense, is $1.2 trillion. Non-discretionary spending, most of it linked to entitlements, consumes the entire revenue base. Sequestration represents a 10 percent cut to discretionary programs; much too draconian for either party to accept.
We can solve this problem with a redefinition. Our current tax code provides preferences: the deductibility of employer-sponsored health care premiums, the mortgage interest deduction for primary residences, charitable deductions, etc, that currently totals another $1.1 trillion. In reality, these preferences are spending through the tax code. Through tax reform, fiscal discretion expands to $2.2 trillion per year of discretionary spending and on this number partisans might be able to deal.
Health care spending is the key to entitlement reform and the preference for employer-sponsored insurance premiums, at $184 billion per year, is a huge chunk of spending through the tax code. In “The Price of Politics”, Bob Woodward quotes Paul Ryan (R-Wis.), in explaining his committee member decision to vote against Simpson-Bowles, as saying that elimination of the employer-sponsored health care deduction would eviscerate the employer-sponsored health care market. By Ryan’s reasoning, everyone would be shoved into Obamacare and the government would then find itself in an open-ended commitment of providing for a population that could possibly exceed 100 million people. Second, Simpson-Bowles did not address the increasing costs of Medicare and Medicaid.
We must be sympathetic to Ryan’s concerns: the more that we move the health care system away from a private to a public payer model, the lesser the likelihood of correcting the deficiencies of our current health care delivery system. But ultimately, tax reform is about fairness. The burden of socializing the cost of those with pre-existing and critical conditions should not be borne by the individuals who do not get their health insurance through their employers. That is what we have now.
On his second point, Ryan is not correct. The Affordable Care Act (aka “Obamacare”) provides for an Independent Payment Advisory Board which is charged with identifying which treatments are cost effective and which are not. A comparable program is in place in Germany and has successfully curtailed procedures and limited the government’s healthcare costs.
The government can no longer provide the Medicare and Medicaid populations with unconstrained access to medical care at unlimited costs. The use of procedural review is the first step to cost containment.
The Medicare population believes that it has earned its entitlement. In reality, each of us will consume three times more value from the system than we have paid into the system. The reason is that the program does not encourage the recipient to consider either price or utilization of service in our consumption behavior. The same can be said of our private insurance programs.
Both political parties recognize that we have a health care spending problem. Both entitlement reform and the elimination of employer-sponsored health care premium deductibility must be on the table if we are to achieve the panacea of short-term economic growth and long-term fiscal prudence.