On deficits:
The deficits projected for the next decade and beyond are unprecedented.According to an assessment released in March by the Congressional Budget Office(CBO), the president's budget implies that deficits will average 5.2% of GDP over the next decade and will be 5.5% of GDP in 2019...The starting point for controlling those future deficits is for Congress to abandon the administration's health-care plan—a plan that will cost more than $1trillion....Without the president's proposals, the budget office forecasts a 2019 deficit of only 2% of GDP.On ObamaCare:
The CBO's deficit projections are based on the optimistic assumptions that the economy will grow at a healthy 3% pace with no recessions during the next decade; that there will be no new spending programs after this year's budget;and that the rising national debt will increase the rate of interest on government bonds by less than 1%. More realistic assumptions would imply a 2019 deficit of more than 8% of GDP and a government debt of more than 100% of GDP.
Such enormous deficits would crowd out productivity-enhancing investments in new equipment and software as the government borrows funds otherwise available to private investors. The result would be slower economic growth and a lower standard of living.
The CBO estimates that the House committee versions of the Obama health plan would add more than $1 trillion to federal deficits over the next decade. But the actual costs would be much higher.
For starters, $1 trillion of extra debt-financed spending would cause the government to pay about $300 billion of extra interest in the next decade. Moreover, the CBO's method of estimating the cost of such a program doesn't recognize the incentives it creates for households and firms to change their behavior.
The House health-care bill gives a large subsidy to millions of families with incomes up to three times the poverty level (i.e., up to $66,000 now for a family of four) if they buy their insurance through one of the newly created "insurance exchanges," but not if they get their insurance from their employer. The CBO's cost estimate understates the number who would receive the subsidy because it ignores the incentive for many firms to drop employer-provided coverage. It also ignores the strong incentive that individuals would have to reduce reportable cash incomes to qualify for higher subsidy rates. The total cost of ObamaCare over the next decade likely would be closer to $2 trillion than to $1 trillion.
The administration's claim that the health-care plan would be "self-financing" is both false and irrelevant. It is false because it would only be self-financing if one counts a variety of President Obama's proposed tax increases—and even those would produce much less revenue than is assumed in the budget calculations. The claim is irrelevant because those tax increases have nothing to do with health care and could be used instead to reduce other projected deficits.
On the Possibility of a Value Added Tax:
Given the perceived need for significant additional tax revenue to shrink future fiscal deficits, there is now talk in Washington of introducing a value-added tax (VAT), the kind of national sales tax that European governments use to finance their welfare states. That would be a triply bad idea. Although it is a tax on spending, a VAT effectively raises marginal tax rates. Like the income tax, it reduces the reward for work and entrepreneurship by adding a tax to the prices of all goods and services. A VAT would also be grossly unfair to those whose lifetime savings would now be subject to a new tax when they start to spend those savings.Feldstein's a straight shooter, and he knows government. The most shocking thing I think he has ever written is the above on a VAT:
A VAT would open the door to an explosion of new spending programs. That's because, no matter how low the initial rate, the tax rate would be drawn inevitably to European rates of more than 15%—on top of existing income and payroll taxes.
...no matter how low the initial rate, the tax rate would be drawn inevitably to European rates of more than 15%—on top of existing income and payroll taxes
RE: "...no matter how low the initial rate, the tax rate would be drawn inevitably to European rates of more than 15%—on top of existing income and payroll taxes.."
ReplyDeletethere is no imperative forcing one to conclude that the rate would be "drawn invariably" to EU levels. In the Canadian case, the original 7% goods and servcies tax ( a VAT by another name) actually has declined to 5% since it was introduced in the late 1980s.
The OECD has done studies which demonstrate rather conclusively that a VAT tax is a better approach on equity and productive grounds for business.
>>The OECD has done studies which demonstrate rather conclusively that a VAT tax is a better approach on equity and productive grounds for business.<<
ReplyDeleteExcept that we're not discussing REPLACING the income tax with a VAT or other consumption-based tax - we're talking about ADDING a VAT to the income tax. This is just fuel for more spending and bigger gov't, as Feldstein suggests.
The VAT is a consumption tax; it is not an income tax.
ReplyDelete