A Path to Fiscal Responsibility

Eli,

Tim Geithner is making the rounds of the Sunday talks shows and has a curious phrase to describe the benefits of the President's tax and spend plan: The plan will put the government on "a path to fiscal responsibility."

The plan puts us on the path, just the path, to fiscal responsibility. I see no other conclusion than Geithner recognizes our current budget is fiscally irresponsible and the President's plan is, while pointing towards, on the path to, fiscal responsibility, is also fiscally irresponsible. I'm glad Geithner finally recognizes this basic fact.

Federal Government Outlays and Receipts ($ in Millions)

Source: Monthly Treasury Statement

www.fms.treas.gov/mts/index.html

Bill

The Money's In The Middle Class

Bill,

Your vision of tax justice points out that out with great elegance. At the upper end of the earning spectrum, those who receive a disproportionate share of the nation's wealth also pay a disproportionate   share of its tax. The idea that that increasing top marginal tax rates will significantly improve the nation's fiscal imbalance is a fantasy. You could, in fact, raise marginal rates to 100% and that still wouldn't come close to moving the ledger from red to black.

And your adjuration also rings true that unless entitlement spending is reined in, the inexorable step will be that those in "the $50,000 to $200,000 [interval] will be targeted next". Americans will eventually have to either accept less from the government or decide they are willing are willing to pay for it. It doesn't help that neither political party is willing to point out this inconvenient truth to its constituents.  But most Americans will have an easier time (eventually) accepting this reality if they do not believe the game is rigged in favor of the rich.

Eli

Politically Driven Healthcare, or Healthcare for the Loudest

Eli,

Every time, and I mean every single time, you speak of the inefficiencies and mis-spending that takes place under our current health care system I shake my head (in despair) and ask given your views on those items how you could possibly be in favor of the Affordable Care Act. How could you possibly be a proponent of IPAB. How could you possibly think that a politically driven healthcare system, called ACA, will be better than the prior politically driven healthcare system that resulted in these poor spending decisions you keep bemoaning. You continue to assert the best way to change the Federal Government's unsustainable spending trajectory on Medicare and Medicaid, and the price distortions that creates in the private market is: DO MORE OF IT.

Your latest complaint against healthcare spending focuses on the possible lack of utility of mammograms. Let's assume mammograms, as the New England Journal of Medicine study quoted in the Times claims, are essentially useless. How does that poor decision get changed in the current health care system and under ACA? For ACA, I suppose your answer is, "A panel of smart people will be appointed, the IPAB, to make these decisions." I think you are dreaming. Medicare payment decisions, which then drive a lot of the practices adopted by the private insurance market, like mammograms for women, or prostate cancer screens for men, are driven by the the politics of the loudest. Scream loud enough and long enough and the Federal government and private pay insurance companies cave and offer "free" screenings for these types of cancer. The latest example of this is contraception. Sandra Fluke hasn't figured out Walgreen's sells condoms so we must create "free" access to contraception. Right now we have healthcare goodies for the loudest. The IPAB institutionalizes this.

I don't know who makes mammogram screening equipment. I suspect it is GE. What are the incentives for GE? Obviously, lobby CMS (today's version of IPAB) to reimburse providers for mammograms. Lobby providers to urge CMS to reimburse mammograms. The consumer is completely separated from any of these decisions.

I know you don't like to even consider the possibility that the lack of consumer involvement in healthcare is the reason healthcare spending is too much (whatever that means) but is seems pretty plain to me. And every time, and I mean every single time, you bring up one of these vignettes  I'm completely befuddled why it isn't plain to you as well.

Bill  

Tax Justice

Eli,

You speak of tax justice. I just don't see what evidence you have to support a sense of injustice.

The IRS publishes handy spreadsheets on the taxes it collects, one of which called Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 2001-2010, shows various tax return items segmented into the AGI (adjusted gross income) brackets.

The chart below shows total AGI per different size of AGI. For instance, the total amount of Adjusted Gross Income for tax returns showing AGI between $100,000 and $200,000 is $1.9 trillion.  For AGI over $200,000 total AGI is $2.2 trillion, or 27% of total AGI. For AGI between $50,000 and $200,000 the total AGI is $4.0 trillion, or 50% of total AGI.

Adjusted Gross Income by Size of AGI

$ in 000

Source: IRS

AGI isn't taxable income. The next chart shows personal exemptions and deductions categorized by the same AGI brakets.

Personal Exemptions and Deductions by size of AGI

$ in 000

Source: IRS

Those with AGI $200,000 and more take about 11% of the total personal exemptions and deductions. Those with AGI between $50,000 and $200,000 take 41%, or $1.2 trillion, of the total $3.0 trillion in exemptions and deductions.

The $200,000 and above AGI groups have about 33% of taxable income, a larger share than it has of AGI. But that's because it takes fewer, as a percent of the total, exemptions and personal deductions than the lower income groups. This next graph shows how taxable income skews more to the higher income brackets. Again, it's because they take less exemptions and deductions as a percent of the total.

Taxable Income by Size of AGI

$ in 000

Source: IRS

More taxable income, multiplied by higher tax rates gets more taxes paid as a percent of the total.

Total Income Taxes Paid by Size of AGI

$ in 000

Source: IRS

You can see how this results in tax rates as a percent of AGI in the following graph. I'm guessing the rates go down in the top two brackets because of a large amount on investment income. I think it's a good guess, but a guess nonetheless. 

Total Income Tax Paid/AGI by Size of AGI

Source: IRS

So tell me. Where is the injustice you want to correct? 

There's a more important point. The money is in the middle class, $50,000 to $200,000. The more well-off have greater resources to move income and avoid taxes, those in the $50,000 to $200,000 will be targeted next. Is that justice also?

Bill

Taxes And Incentives

Bill

Your ongoing tutorial on the relation between taxation and incentives is deeply appreciated. There's no question that we all respond to the incentives created by tax policy. A good part of the time, (whether one agrees with the incentive created or not), that seems to be the point of tax policy. I certainly wouldn't buy mini bonds, or fund my kids Roth IRAs if it weren't. Now I imagine you see that as part of the problem. The government's efforts to guide the economy, to reward some behaviors and punish others creates inefficiencies that the marketplace, left to its own devices would resolve.

Whatever my sympathies (and here my fiscal conservatism is ascendant), I think the Democrats are overreaching in their current brinkmanship over the taxation and spending cuts. Victors, it seems, always do. I like the idea of a cap on deductions as a way of limiting those incentives without wading into the minefield of deciding which specific deductions to cut. I am equally sympathetic to having a minimum tax for upper upper income earners. You might call that envy. Others, including myself, would call it justice. The Dems however seem determined to once again avoid the hard choices on entitlements, especially Medicare, that got us into this mess in the 1st place.

Eli

The Other Reason We Spent Too Much on Healtcare

Bill

The Republicans aren't the only ones having trouble accepting science. Lots of us are equally guilty. The accumulated evidence in multiple venues examining various populations over long periods of time suggests that  screening mammography for all comers increases cancer incidence rates (because lots of small tumors are detected earlier) but does not reduce overall breast cancer mortality. Ditto for chemical screening for prostate cancer. Yet routine mammography is still hailed as some sort of magical bullet, and any evidence to the contrary is regarded as the work of evildoers.

Despite the revolution in evidence based medicine that has predominated for much of my career, magical thinking still persists. Just because something makes sense doesn't mean that it will turn out to be so. More is not always better. I still remember the dean's opening remarks my first day of  medical school. About 90% of patients, he reminded us, will get better on their own. An unfortunate 5% will worsen despite all efforts to help them. The real business of learning to be a doctor revolves around the 5% or so for whom one's skill will make the difference. After 25 years in the business I'd say that figure comes pretty close to the mark.

The country does 80 million CT scans a year. We only have 300 million people. One in four Americans doesn't need a CT scan

Eli

Costco and Incentives

Eli,

Imagine that. Costco anticipates potential change in tax rates.

Bill

Costco special dividend to beat fiscal cliff

Costco special dividend to beat fiscal cliff
Costco will pay $3 billion in a special dividend next month.

NEW YORK (CNNMoney) -- Costco Wholesale, the warehouse merchant, announced Wednesday that it will pay a special $3 billion dividend before year's end, saving shareholders from a big bite should taxes rise due to the fiscal cliff.

The company said the $7-a-share payment is possible due to its strong balance sheet and its good access to capital. The payment will be in addition to the regular 27.5 cent a share dividend that will be paid on Nov. 30.

The special dividend will be paid Dec. 18 to shareholders of record on Dec. 10. That will allow investors to pay the lower 15% tax rate currently in effect on dividends. With taxes set to rise on Jan. 1 as part of the fiscal cliff, the rate paid on the dividend could more than double for many high income taxpayers.

Related: Companies speeding up dividend payments

Numerous companies, including Costco rival Wal-Mart Stores (WMT, Fortune 500), have moved dividend payments normally made in January into December. But in Wal-Mart's case, it was the regular dividend being moved, not a special dividend being added.
Shares of Costco (COST, Fortune 500) rose 4.7% in premarket trading on the news.

Related: Record Black Friday shopping

The company also announced strong sales for November and the just completed quarter, periods that included the Black Friday weekend that kicks off the holiday shopping period.

Sales at stores open at least a year, a closely watched retail measure known as same-store sales, rose 6% at its U.S. stores for both the four-week and the 12-week periods ended Nov. 25, when the effect of higher gas prices were excluded. Total sales rose 9% to $8.15 billion in the four weeks ending Nov 25.

The National Retail Federation estimates that total U.S. shopping during the four-day holiday weekend rose 13% from a year ago, to a record $59.1 billion.

First Published: November 28, 2012: 7:50 AM ET