Financial Review

Health Care, Taxes

Sinclair Noe — September 26, 2017

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DOW – 11 = 22,284
SPX + 0.18 = 2496
NAS + 9 = 6380
RUT + 4 = 1456
10 Y + .01 = 2.23%
OIL – .13 = 52.09
GOLD – 16.70 = 1294.60

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The Graham-Cassidy health care bill is dead. Late yesterday, the Congressional Budget Office and Joint Committee on Taxation released a report on the bill – it was not a full score, or detailed analysis but it was enough to uncover the nasty truth. The bill would have ended the subsidies in the ACA for low- and moderate-income Americans’ private insurance premiums as of 2020.

It also would have terminated the extra funding the ACA provided states that had extended Medicaid to more low-income adults. Instead, the measure would have provided states a smaller amount of money — about $240 billion less between 2020 and 2026 — in the form of block grants to spend on unspecified subsidies for health insurance and care. And the dollars would have been shifted gradually from states that had expanded Medicaid to the ones that hadn’t.

The CBO report did not have enough time to calculate how many people would lose health insurance coverage but they made a rough guesstimate that the number would be in the millions. An analysis by the Brookings Institution estimates that about 21 million people would lose coverage.

Supporters of the proposal never offered a good reason for this new approach. Saying they hoped to encourage state innovation, they ignored the decisions states had already made about healthcare policy as well as the differences in healthcare costs from state to state and city to city.

Professing to be vexed by rising premiums and Medicaid spending, they did nothing to address a key source of the problem, the rising cost of care. Claiming to protect people with preexisting conditions, their convoluted proposal would have let states lift almost all the safeguards the ACA had provided for people who are already sick.

Remember, it was Senator Cassidy, not Jimmy Kimmel who came up with the Jimmy Kimmel Test, the pledge that nobody would be denied health care because of expense. Senate leaders tried to persuade Senator Susan Collins by tossing an extra $700 million to the state of Maine. Collins said no. That means GOP leadership did not have the votes.

The bill was pulled and it is dead, until next time, whenever that will be. The Affordable Care Act still has problems but they can be fixed. With Graham-Cassidy off the table, senators should resume the bipartisan efforts to stabilize the health care markets.

Next on the agenda – tax reform. Senator John McCain is laying down the same marker on tax legislation as he did on health care, demanding regular order and support from both parties. McCain’s tax demands cut against GOP leaders’ plans to use the same fast-track procedure on taxes as they tried to use on health care. That procedure requires 50 Senate votes and allows for bypassing a potential Democratic filibuster. Because the GOP controls only 52 votes in the Senate, every vote is crucial to their agenda.

Cutting taxes on corporations and the wealthy may be an easier political lift than taking health insurance away from 20 to 30 million Americans. But there is still a math problem that must be overcome – how to cut taxes without blowing up the deficit.

The initial plan is to offset lower tax rates and even reduce the deficit by eliminating unnamed loopholes and slashing unnamed wasteful spending, and dynamic scoring, which is another way of saying they want to count their chickens before they hatch – calculating that tax cuts will pay for themselves by leading to higher economic growth – and then counting that incredible growth surge before it happens, if it happens at all.

The tax cut blueprint will be unveiled tomorrow. The nonpartisan Tax Policy Center ran some estimates, using dynamic scoring. Trump’s proposal to cut the corporate tax rate from 35% to 15% will cost $2.3 trillion in forgone tax revenues over the next 10 years.

An additional proposal would allow business income received by owners of pass-through entities, such as partnerships or LLCs, to be taxed at 15% rather than the higher rate on ordinary income earned by individuals. If this proposal excluded business income from large partnerships, it would cost $1.4 trillion over 10 years. So, the total revenue loss from a 15% cut would be at least $3.7 trillion.

Balance those cuts by limiting the existing tax preferences of business. To start, suppose all the current targeted tax breaks for specific industries could be repealed. This would include: taxing incentive fees of hedge fund managers as ordinary income, not capital gains; repealing the special deductions for domestic oil and gas production, as well as eliminating tax credits for renewable energy and low-income housing.

Best-case scenario: those raise $270 billion in tax revenues over 10 years. Suppose further we could limit deductions by businesses to 50% of the interest paid on bonds or loans for another $380 billion over 10 years.

Next, repatriate all that corporate cash sitting overseas; bring it home at a rate of just 10%, raising another $150 billion over 10 years. All those proposals raise just $800 billion compared to $3.7 billion in tax cuts, leaving a shortfall of $2.9 trillion. And that’s just the business side of the ledger.

For individual taxes, the plan calls for cutting individual rates to 35%, 25% and 10% for the relevant income brackets. Add $450 billion for the permanent repeal of the alternative minimum tax, plus $700 billion for doubling the standard deduction. These cuts together total $3.15 trillion.

Then come back with more revenue by repealing head of household filing and personal exemptions, things like mortgage interest deductions, and state and local taxes (some ideas that will be nearly impossible politically). But if it could be done, it would add about $3.35 trillion back – meaning individual taxes would be higher.

That leaves us with a $2.9 trillion shortfall on the business side, compared to a $200 billion gain on individual taxes – net shortfall of $2.7 trillion. Senate Republicans last week agreed on a budget resolution allowing a $1.5 trillion increase in the federal deficit over the next 10 years from tax legislation. That’s a difference of at least $1.2 trillion.

And we haven’t even figured in substantial increases in defense spending. To compensate, the plan is calling for GDP growth to explode 50% or more. Where would that remarkable growth come from? Nobody seems quite sure. One idea is that business will spend more on equipment, even if that equipment is automation that displaces workers across all sectors.

Another is that people will see their incomes grow substantially, despite the demographic reality that the boomer generation is retiring at a rate of 10,000 per day. Another idea is that we won’t have a recession over the next 10 years, interest rates will remain near record lows, and there will be no war.

In other words, to avoid a massive deficit, we all must start wearing rose colored glasses. Even then, the estimates say the deficit will explode between 2028 and 2038 to more than 100% of GDP.

Federal Reserve Chairwoman Janet Yellen today said the Fed will continue to gradually raise interest rates, and needs to be cautious about “moving too gradually,” citing the lag between monetary policy and economic activity. Meanwhile, fresh research from the Federal Reserve shows the gap in income and wealth between the richest and poorest households, already at historically high levels, continues to widen.

Fed Gov. Lael Brainard said the Fed’s latest survey of consumer finances, to be released Wednesday, shows the share of income held by the top 1% of households reached 24% in 2015, up from 17% in 1988. The share of wealth held by the top 1% rose to 39% in 2016, up from 30% in 1989.

Brainard said income inequality may damp consumer spending, as the wealthiest households are likely to save a much larger portion of any additional income they earn compared with lower income households.

A new poll of 2,200 adults by Morning Consult found that only 54 percent of Americans know that people born in Puerto Rico, a commonwealth of the United States, are US citizens. Americans often support cuts to foreign aid when asked to evaluate spending priorities.

The polling shows support for additional aid was strongly associated with knowledge of the citizenship status of Puerto Ricans.  More than 8 in 10 Americans who know Puerto Ricans are citizens support aid, compared with only 4 in 10 of those who do not. The island of Puerto Rico is in bad shape after Hurricane Maria.

So far, the crisis has yet to receive the kind of attention or aid that came for Texas and Florida as those states braced for the horrific storms Harvey and Irma. Puerto Rico will undoubtedly need more help in the weeks and months to come. FEMA still has several billion dollars from the aid package recently approved by Congress in the wake of Hurricane Harvey hitting Texas, but is expected to run out of recovery cash by mid-October, necessitating further funding from Congress.

The question of how Puerto Rico will recover from Maria will be answered over the course of months and years, not days and weeks. So far, Trump has been conspicuously unconcerned by the crisis in public. There is quite a bit of aid being directed to the American island, but it’s not enough for the scale of the devastation. The island is still in terrible peril, and the efforts so far won’t be close to enough to keep its population safe.