July 26, 2012
This post is in response to a recent segment on NPR’s Planet Money in which a panel of economists, which included Dean Baker, made recommendations for a dream presidential economic platform. Dean writes that disagreements between the five economists on the panel should be noted, as the resulting fake presidential candidate “will have to do a bit more work to get my vote, even if I did help to design the platform.”
I do feel there were some important aspects of these issues that listeners may not fully appreciate that I would like to lay out.
First, while I fully endorse the view expressed in the segment that a tax deduction for employer provided health care makes no sense abstractly, there is a historical basis for this deduction that makes it difficult to change. Workers, and especially unionized workers, have often explicitly given up higher wages for better health care benefits. If they were to lose employer provided health care benefits, there is no guarantee that their wages would rise by a corresponding amount. While all good economists believe that there is trade-off between wages and benefits, that does not mean that the trade-off is always one-to-one and immediate.
I would be worried that if we were to eliminate the health care deduction in an environment like the current one, in which high unemployment has badly weakened workers’ bargaining power, it would result in a net reduction in workers’ compensation. In my view, that can’t be a good thing at a time where we have already seen such a large upward redistribution of income.
I also do not share the concern, expressed by some of the other economists on the panel, that overly generous health insurance plans lead people to consume too much health care. I think the waste that results from an improper incentive structure for patients is trivial compared to the waste that results from other distortions in the health care system such as patent monopolies on prescription drugs and medical equipment.
In short, while I think it’s a great idea to get employers out of the business of providing their workers with health care insurance, I think we have to be very careful how we go about doing this. In the real world, ending the deduction the wrong way could do more harm than good.
The real world also interferes with the idea of getting rid of the corporate income tax. As Robert Frank and I both suggested in the segment, the idea should be to tax the wealthy people who are getting large incomes from the corporation (either as shareholders or top executives), not to tax the corporation itself.
However as a practical matter, I don’t see much likelihood of the sort of increase in individual income taxes on the wealthy that would come close to offsetting the impact of lost corporate income taxes. For example, if we could raise the marginal tax rate on those earning above $250,000 to 45 percent, and for those earning above $1,000,000 to 60 percent (with no special treatment for dividends or capital gains), then we might be in the ballpark of offsetting the elimination of the corporate income tax.
Unfortunately, I don’t see anyone about to include tax rates of this size in their presidential platform. In the absence of a large increase in individual taxes on high-income households, I would not want to see the corporate income tax eliminated, since again it would imply a large upward redistribution of income.
I should also mention another important issue with tax-free corporations in the wake of the Citizens United ruling. My naïve economists’ view of corporations is that they are an entity created by the government for the purpose of promoting wealth creation. As a legal entity created by the government, it never occurred to me that corporations could have rights like individuals. (I am distinguishing a corporation as a legal entity with special privileges, like limited liability, from a collection of individuals who decide to join together for a specific purpose, which could be political.)
However, the Supreme Court disagrees with my view of corporations, insisting that corporations have the same free speech rights as individuals. In this context, those who control corporations are allowed the special privilege of giving pre-tax dollars for political causes.
This is a serious asymmetry. If those of us who don’t control a corporation want to give $100 or $1,000 to a candidate, we must first pay tax on our income and then pay this money from our after-tax income. However, Citizens United means that those who control corporations can effectively give tax-deductible contributions to the political candidates or causes of their choice. The corporate income tax does not fix this problem, but eliminating the corporate income tax under these circumstances would shift even more income and power to those who control corporations.
In shifting from income and payroll taxes to consumption taxes you had noted my objection to a consumption tax as too complicated. The issue here is that we would have to know people’s initial wealth to determine their consumption over the course of a year. For most of us this would not be difficult, we might have a house, a couple of bank accounts, a 401(k) and a few other odds and ends.
However, it would be very difficult for the government to have a good assessment of rich people’s initial wealth. In addition to whatever financial assets they have, wealthy people also are likely to own expensive jewelry, rare paintings, and expensive furniture. Unless we know how much of this wealth they possess, they can consume by selling some of these assets and have their consumption altogether escape taxation.
If someone had a good plan for auditing the personal assets of the wealthy then a progressive consumption tax would be feasible. However in the absence of en effective wealth audit, a consumption tax would likely be a big giveaway to the wealthy.
Finally, I would have objected to eliminating the payroll tax since the Social Security and Medicare are effectively insurance programs run through the government. While they do not have to be based (especially Social Security) on what people pay into the program; that is how they were established. We could change the mechanism of funding to just say that everything comes from general revenue, but I would certainly not try to make that change lightly. People do feel that they paid for their benefits, which is in fact to a very large extent true.
To make an analogy, the flood insurance that the federal government provides in many areas could also be financed through general revenue. This could certainly be more progressive than the current mechanism of financing, even if not necessarily more efficient. However, just as there is an argument that the people who benefit from flood insurance should pay for it, there is also an argument that the people who benefit from Social Security should be the ones who pay for it.
In a different political environment this link between those who pay and those who benefit can perhaps be broken and still leave us with a strong program that enjoys solid political support. In the current political environment I would not assume that this is the case. For that reason, I would be very reluctant to give up the payroll tax as a means to finance Social Security and Medicare.
Those are my complaints against the Planet Money candidate’s platform for now. He/she will have to do a bit more work to get my vote, even if I did help to design the platform.
This post originally appeared on NPR’s Planet Money.
