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POLITICO | July 22, 2013
In the quarter century since Congress last reformed the Tax Code, back in 1986, it seems Washington has worked overtime to create the most inefficient and ineffective globally anti-competitive tax system humankind could dream up.
It’s time to start over — time to start with a blank slate.
The 1986 reforms accomplished a great deal to simplify the Tax Code and promote economic growth by eliminating tax preferences and using the resulting funds to lower the top rate to 28 percent. Unfortunately, those deductions, exclusions and other preferences have returned over the years in the form of approximately $1.3 trillion worth of annual backdoor spending that now litters the Tax Code.
This hidden spending complicates tax filing, distorts economic decision making and slows economic growth. It also means that despite a top individual rate of 39.6 percent, deficits are still far too high. The current Tax Code is badly broken.
The conventional wisdom holds that real reform — reform that reduces or eliminates tax preferences to cut tax rates, simplify the Tax Code, promote economic growth and help to control the national debt — is impossible as long as powerful interests continue to promote the status quo.
But conventional wisdom was turned on its head recently when the two leaders of the Senate tax-writing committee called for starting tax reform with a “blank slate.”
The bold proposal from Chairman Max Baucus and ranking member Orrin Hatch begins by eliminating each and every tax preference. Starting from scratch, as Sens. Baucus and Hatch propose, provides the single best chance to accomplish fundamental tax reform, which could be one of the best ways to get the economy moving.
On the Fiscal Commission (known colloquially as Simpson-Bowles), our decision to take a similar approach — we called it the “zero plan” — was a turning point that truly broke the partisan logjam. At the time, we found eliminating all tax preferences would allow the top individual rate to be reduced to 23 percent and the top corporate rate to 26 percent, while still dedicating some of the revenue to reducing the deficit.
This was a true game changer that made it possible for us to put forward tax reform that accomplished the Republican goal of substantially reducing rates and the Democratic goal of raising new revenue.
Importantly, starting from scratch doesn’t mean that all tax preferences will be eliminated. Instead, it puts the onus on advocates of tax preferences to justify their existence and it requires policymakers to pay for those add-backs with higher rates. We believe most will not pass the cost-benefit analysis and will either be eliminated or phased out. Those deemed to serve important public policy purposes can be added back more efficiently and cost-effectively — for example, by using credits instead of deductions.
On the Fiscal Commission, we put forward an illustrative tax plan that added back a number of tax expenditures in a scaled-back, better targeted form, and achieved a top rate of 28 percent. Former Congressional Budget Office and OMB Director Alice Rivlin and former Sen. Pete Domenici have their own tax plan that includes similar rate reduction. Both plans would increase the progressivity of the Tax Code and, importantly, both would help raise new revenue to help pay down the deficit.
With $1.3 trillion of annual tax preferences, there are plenty of funds available to lower rates, restore worthwhile tax preferences and contribute to deficit reduction. And if we design the reform right, it also can do wonders for economic growth.
Of course, tax reform can’t do all the work on its own. Any successful effort to truly unlock the U.S. economy’s potential must bring our rapidly expanding national debt under control, which means slowing the growth of our unsustainable entitlement programs to match revenues from tax reform, along with other cuts in spending.
Combining tax reform with a broader package, one that also replaces the mindless sequester cuts with larger and smarter spending cuts and entitlement reforms, would represent a tremendous accomplishment.
Agreeing on such a package will not be easy. But the efforts and leadership of Sens. Baucus and Hatch, along with the hard work Ways and Means Committee Chairman Dave Camp has done in the House laying the foundation for reform, make it seem more possible than it has in some time.
Starting with a blank slate doesn’t allow us to avoid the hard choices. But it does make them just a little bit easier. It lets us build the Tax Code we want, rather than chip away from the Tax Code we have. If members of Congress and the administration rise to the challenge, this country’s future will be a whole lot brighter.
CQ Researcher | July 18, 2013
Should we measure inflation as accurately as possible? Of course we should, particularly when the fiscal implications of measuring inaccurately are so large. The so-called chained Consumer Price Index (CPI), a far more accurate inflation index than the one used now, would better reflect retirees’ actual spending patterns and the cost increases they encounter. Economists from the left, right and center broadly agree on that, and their view is affirmed by the nonpartisan Congressional Budget Office (CBO) and the Bureau of Labor Statistics. Adopting this improved measure would also generate more tax revenue, slow government spending growth and strengthen the Social Security system.
So how can anyone oppose this change? Some special interest groups do so for their own financial benefit, while others argue that seniors face faster price growth or the most vulnerable would be hurt by this change.
Yet alternative measures that purport to show seniors spending more are highly flawed — including in the ways they measure housing and health care — to the point that the CBO has concluded, “It is unclear...whether the cost of living actually grows at a faster rate for the elderly than for younger people.”
Even if a better measure were produced for measuring cost increases affecting only retirees, adopting it would raise serious fairness concerns. Should the one-third of Social Security beneficiaries who are not retirees receive smaller cost-of-living adjustments so seniors can receive larger ones? Should New Yorkers, with their high cost of living, receive a higher percentage than Detroiters? Should each government program get its own index or only those backed by powerful interest groups?
As for the most vulnerable, it makes little sense to measure inflation incorrectly for everyone in order to retain a desired windfall for the neediest. Doing so would cut taxes for the top 1 percent by $1,000 each in order to keep an average $20 tax cut for the lowest fifth. Instead, desired tax relief and benefit enhancements for the most vulnerable should be achieved through targeted reforms designed specifically to strengthen those populations.
Ultimately, the best thing we can do for the most vulnerable in society — at least within Social Security — is to make the program sustainable and solvent and avoid the 23 percent across-the-board benefit cut currently scheduled for when the program’s funds dry up. If we can’t even measure inflation correctly, how can we hope to make the hard choices necessary to keep Social Security funded for future generations?
Brookings | July 8, 2013
Barring a miracle, budget bargains, either grand or petty, are not in the cards this year. The Congress would prefer to fight. It is happily at war with itself over immigration, student loan interest rates, the farm bill, energy policy and the like. The president has abandoned his charm offensive, and is chasing other butterflies.
With no other candidates in sight, it is not surprising that tax reform has re-emerged as the major economic issue in Washington.
In the Senate, Finance Chairman Baucus and his Republican counterpart, Sen. Hatch, announced that they would soon begin work on a tax bill. The Senators intend to start clean, with a bill stripped bare of all tax preferences. Senate Finance Committee members were warned that they would have to amend that bill with any preferences they wished to restore or add.
Ways & Means Chairman Camp is still working assiduously to build consensus in his Committee. The members are well prepared, and thoroughly briefed, but there is no bill yet. Camp’s start may well be quite like that of Baucus and Hatch.
The “fresh start” approach is a splendid idea, one that was suggested in the Simpson-Bowles report. Both Bowles and Simpson have come out strongly in support the Senate process. Other tax reform advocates have similarly blessed the announced process.
However, huge obstacles remain. No process, however inspired, can overcome the fact that tax reform is still an essential part of a budget bargain. Each party’s sharply conflicting budget visions are dependent on tax reform. The Democrats need tax reform to fund their “investments” and control their deficits. The Republicans need it for tax cuts to stimulate growth.
Those differences mean that a stand-alone tax reform bill is almost impossible. Tax reform is too big a part of the budget to move by itself. It must be a part of the budget bargain. A good start is welcome because, at best, tax reform is a difficult and time-consuming effort. But, it will remain inextricably linked to a budget agreement. If there is no budget agreement, there will be no tax reform.
Therefore, it is folly for tax reformers to get over-enthusiastic now. Sens. Baucus and Hatch, and Rep. Camp, ought to be commended for bravery, and encouraged. They have a couple of years of hard work ahead of them with a high risk of failure.
A budget bargain requires negotiation and compromise on macro-accounts. Thereafter, the details can be thrashed out by the various committees. Tax reform has the same negotiation requirements, but, in addition, each petty little micro-detail has to be worked out in advance of passage. The devil is said to lurk in the details, and tax reform is the epitome of detail.
Perhaps an even greater problem is timing. A budget agreement and tax reform need to march together. If a tax bill is perfected long before a budget agreement is made, it will be subjected to a furious attack from all the losers in the preference game. No bill, however cleverly constructed, can withstand the full fury of a strong lobby scorned.
Tax reform’s last lap around the track was in 1986. Then, legislative leaders of both parties were guilty of conspicuous cooperation in the quest for tax reform. They, and the president, perceived that the bill was good for the country and for both political parties. That attitude won’t appear again at either end of Pennsylvania Avenue until there is some budget agreement.
There is none now. Funding the government for FY ‘14 will be by Continuing Resolution(s). The debt ceiling, which has to be settled this fall, could be a major crisis and another train wreck for the economy. House Republicans, who lost that debate in 2011, still see value in the debt ceiling even though the President has declared it “non-negotiable.” Even budget “hawks” are beginning to despair that this is not the year for budget compromise.
So let the Finance and Ways and Means Committees begin the tax reform process with the good wishes of tax reform advocates. Just don’t expect the exercise to be crowned with success until Congress is ready to deal with the larger budget issue.
The Government We Deserve | July 3, 2013
No one quite knows what exactly Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) mean when they say they will rely upon a “blank slate” as the starting point for tax reform discussions. But done carefully and with political artistry, taking advantage of their unique power, Baucus and Hatch could revolutionize how members of Congress negotiate the future of taxes.
But it’s all in the practice, not the theory. Done right, the strategy could reenergize the tax reform debate. Done wrong, it will be just another dead-end.
The idea of reforming the tax system from a “zero base” or building up from a blank slate is hardly new. And lawmakers always talk about everything being on the table. The challenge is in making it happen.
Baucus and Hatch must accomplish two goals. First, they must shift the burden of proof from those who favor reform to those who would retain the status quo. Second, they must force members to pay for their favored subsidy, denying them the opportunity to pretend it is free.
As a veteran of the Tax Reform Act of 1986, I always emphasize the crucial role of process. Sure, serendipity smiles or frowns unexpectedly on any endeavor, but the ’86 effort took off when Treasury, President Reagan, House Ways & Means Chair Dan Rostenkowski (D-IL), and Finance Committee chair Bob Packwood (R-OR) all put forward proposals that started with specific rate cuts and removal of many tax preferences.
Their plans were all somewhat different, but each changed the burden of proof. Lobbyists won many later battles, but now they were forced to explain why they needed to retain special preferences when others would not be so favored. Moreover, given a fixed revenue target, restored preferences had to be paid for. Lawmakers had to acknowledge that the price of adding back tax preferences was a higher tax rate.
Baucus, ideally with the support of Hatch, can put forward a “chairman’s mark” from which committee members can debate amendments. As both senators have suggested, that mark can be a relatively clean slate. Further, Baucus can require that amendments must not add to the deficit or change his revenue target, effectively requiring members to offer what are called “pay-fors.”
Normally, members debate items one at a time. Each adds a new subsidy without worrying about who pays for it—perhaps those currently too young to vote or the yet-unborn.
In dark times, politicians try to reduce the deficit by figuring out what tax increases or spending cuts will restore order to the budget. But identifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.
But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.
This process not only gives new life to a broad rewrite of the tax code but also makes it much easier to reform specific provisions. For instance, tax subsidies for homeownership, charity, and education can be much more effective and provide more bang per buck out of each dollar of federal subsidy. But politicians largely ignore such ideas because they create losers who scream loudly. Thus, the default for elected officials who fear negative advertising and loss of campaign contributions is to do nothing to improve these tax subsidies.
But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline. Of course, as we learned in 1986, this argument grows stronger as the probability of tax reform grows. Can Baucus and Hatch change the burden of proof and force members to pay with higher rates for the subsidies they want to keep? They can certainly lead their committee and Congress in that direction, but only by specifying precisely a chairman’s mark that sets revenue and rates while slashing tax preferences.
If they do, Baucus and Hatch may force fellow senators to acknowledge that every subsidy must be paid for. And that, in turn, will open a window to design alternative tax subsidies that are fairer and more efficient. This sort of process revolution could remake policy in ways that extend well beyond tax reform.
The New York Times | June 28, 2013
Few goals in Washington have more bipartisan support, at least in theory, than cleaning up the tax code. Republicans and Democrats say they want a system that is simpler, fairer and more efficient. Put simply, they want a system with fewer special tax breaks and lower rates.
Yet one of the best ideas for advancing all of those goals – and also heading off catastrophic climate change — isn’t even on the table. I refer to a carbon tax, which would impose a price on emissions of carbon dioxide and other greenhouse gases.
Most climate experts concur that dangerous climate change is occurring at a more rapid rate than expected. They also agree that the deterioration in the earth’s climate is primarily a result of carbon emissions from fossil fuel consumption by humans. If you dispute the overwhelming scientific consensus about man-made climate change and the role of fossil fuel emissions, you should probably stop reading now. Evidence is unlikely to affect your opinions.
But if you accept this consensus, you should know that economists across the political spectrum agree that a carbon tax is the most effective way to discourage carbon consumption and lower the risks of catastrophic climate changes.
I am convinced by the environmental case for a carbon tax. But I want to make a broader argument: a carbon tax could be an engine for tax simplification, deficit reduction, less government regulation and even increased competitiveness.
To be sure, the environmental urgency alone is compelling. In May, atmospheric concentrations of carbon dioxide reached nearly 400 parts per million. When concentrations were last that high – more than three million years ago — humans had not yet appeared, the world was warmer by 3 to 4 degrees Celsius, and sea levels were 80 feet above where they are today.
United Nations negotiators have set a limit of 450 parts per million to prevent costly and irreversible changes in the earth’s climate. At current emission trends, the world will cross this limit in a matter of decades.
The anecdotal evidence of climate change is everywhere: melting Arctic ice, new migration patterns for plants and animals and extreme weather events including record droughts, heat waves, epic floods and super storms. The frequency, intensity and costs of such events are increasing at an alarming rate. Climate scientists have moved from the view that such events are consistent with climate change to the view that climate change significantly increases the odds of their occurrence.
Economists have long contended that a carbon tax is the most effective and simplest way to reduce carbon emissions. Conservative supporters include Gregory Mankiw, a former economic adviser to President George W. Bush, and George P. Shultz, who was secretary of state under President Reagan. Economic centrists include Alan Blinder of Princeton and Robert Frank of Cornell University. Further to the left are the Nobel laureate Joseph Stiglitz and Robert Reich, former secretary of labor. James Hansen, NASA’s former top climate scientist, is also a vocal champion of carbon taxes. So is former Vice President Al Gore, who has advocated carbon taxes for the last 35 years as the policy most likely to be successful in combating carbon emissions.
The beauty of a carbon tax is its market-based simplicity. Economists since Adam Smith have insisted that prices are by far the most efficient way to guide the decisions of producers and consumers. Carbon emissions have an “unpriced” societal cost in terms of their deleterious effects on the earth’s climate. A tax on carbon would reflect these costs and send a powerful price signal that would discourage carbon emissions.
Producers and consumers would adjust their behavior in response to this signal in ways that are most efficient for them. And these efficient micro decisions would support efficient societal outcomes.
There’s much debate about what the proper “social cost of carbon” might be, but there is no debate that carbon emissions are seriously underpriced. Any tax on carbon would be an important step in the right direction, and it could be gradually increased to give consumers and producers time to modify their decisions.
Without a tax, the government has to rely on second-best regulations to limit carbon emissions. Facing Congressional inaction and staunch opposition to a carbon tax, this week President Obama proposed regulations on carbon pollution standards for new and existing power plants using his executive authority under the Clean Air Act.
A carbon tax is also a cheaper and often more efficient way to reduce carbon emissions than subsidies for alternative fuels. Generous subsidies for biofuels have cost billions of dollars; by reducing the price of gasoline they may have perversely increased rather than decreased carbon emissions.
Other subsidies, like the production tax credit, have been successful at ramping up research, development and deployment of alternative energy technologies in recent years. Such subsidies would be even more effective in combination with a carbon tax that would make fossil fuels less price-competitive and would stimulate research on renewable and energy-saving technologies.
The Congressional Budget Office estimates that even a modest carbon tax could reduce both greenhouse emissions and the federal budget deficit. A tax of $20 per ton of carbon dioxide, which would translate to about 15 cents per gallon of gasoline, would reduce emissions by 8 percent and generate up to $1.2 trillion in tax revenues over 10 years.
None of this is controversial to economists. As Professor Mankiw remarked a few years ago, the basic argument for a carbon tax “is so straightforward as to be obvious.”
Politically, of course, it’s anything but obvious. Republicans and Democrats fear that a carbon tax would antagonize voters by raising the prices of products with fossil fuel content for everyone who uses them. Republicans worry that a carbon tax would be a source of government revenue to feed “big government spending.” Democrats worry that a carbon tax would be regressive.
Both objections are easy to address. The revenues from a carbon tax do not have to be used for more government spending; the tax’s burden on low-income families can be offset by targeted income support measures, like those used in other countries to offset the regressive effects of value-added taxes.
Adele Morris at the Brookings Institution estimates that diverting just 15 percent of the revenues from a $16-per-ton carbon tax would provide enough money to keep low-income households whole. The remaining money could be used to finance a substantial reduction in corporate tax rates and reduce deficits by $815 billion over 20 years. Government spending would not increase.
Put another way, a carbon tax can be a central pillar of tax reform and sound fiscal policy. If a carbon tax were used in part to replace other forms of taxation, it would be a major force for tax simplification. It may seem like a “liberal” initiative, because its core purpose is to slow climate change. But a carbon tax also bears a strong resemblance to the kind of flat, broad-based tax on consumption favored by many conservatives.
Opponents of a carbon tax, and of climate-change legislation in general, often assert that it would put the United States at a competitive disadvantage. They usually point to China, the world’s biggest emitter of greenhouse gases (the United States is in second place and not far behind).
The competitiveness objection to a carbon tax is crumbling fast, however. This year, China announced plans for a carbon tax. Many European countries with which the United States competes, including Germany, an export powerhouse, already have carbon taxes in addition to very high gasoline taxes.
In May, the World Bank reported that countries that either have carbon taxes or are scheduled to impose them account for 21 percent of global greenhouse emissions. If you add China, Brazil and other countries that are actively considering carbon taxes, the share goes up to more than 50 percent.
In his speech, President Obama said the United States must lead international efforts to combat climate change, calling for a global free trade in environmental goods and services and renewed negotiations on a global agreement to reduce carbon. The United States could breathe new life into these negotiations by announcing its commitment to a carbon tax harmonized with those of other nations.
A well-designed carbon tax is probably the single best tool for fighting catastrophic climate change and safeguarding the earth for future generations. It can also be a key component of tax reform and deficit reduction, both of which would enhance the nation’s competitiveness. Much of the world is already heading for a carbon tax: the United States should get out in front and lead the way. As Mr. Gore recently blogged, “A tax on carbon is an idea whose time has come.”
New England Journal of Medicine | June 27, 2013
Despite high national spending, health care in the United States is uneven in quality and often wasteful, uncoordinated, and inefficient. Leaders on both sides of the political aisle, and in the health and economic policy communities, recognize the urgency of improving the quality and effectiveness of care while slowing the growth of spending. Far too often, however, attempts to address our national health and budget issues have been fragmented and unproductive, frequently owing to partisan disagreements over how to approach these highly sensitive issues.
We, the four leaders of the Bipartisan Policy Center Health Care Cost Containment Initiative, came together to bridge this divide — to start a constructive dialogue on strengthening the U.S. health care system. A strong health care system, a stable federal budget, and a productive economy are complementary, not competing, priorities. On April 18, 2013, we released a report entitled “A Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment” (see the Supplementary Appendix, available with the full text of this article at NEJM.org), which describes a comprehensive, coordinated set of recommendations to improve quality, reduce waste, and control cost. We think that solely budget-driven efforts to achieve health care savings will fail; public and private health care savings must be an outgrowth of health reform, not the underlying reason for it. We believe our policy analysis and recommendations reflect this principle, as well as a growing convergence of thinking across a wide spectrum of stakeholders.
In the long term, we envision health care that is value-driven and coordinated through organized systems, rather than volume-driven and fragmented. These systems will be developed and will evolve through a process of innovation and improvement that is based on collaborative structures of care delivery and payment with accountability, coordination, competition, and patient choice. The tools and incentives built into these systems will ensure that patients receive high-quality, coordinated care across multiple settings. They will avoid unnecessary or redundant treatments and services, engage patients in decisions about their care, and pay physicians for the services that patients need and want — including increased time consulting with their doctors. Our recommendations seek to align efforts in the public and private sectors to promote high-quality, coordinated systems of care. Our Medicare reforms include steps toward greater coordination in care delivery and payment, such as shared savings, bundled payments, and competitively bid, capitated health plans.
We are convinced that reforming the U.S. health care system to prioritize quality and value over volume will not only improve health outcomes and the patient experience but also constrain cost and produce systemwide savings. If enacted, our policies would reduce the federal deficit by an estimated $560 billion over the next 10 years, including nearly $300 billion in Medicare savings, which includes the cost of a permanent fix to the sustainable growth rate (SGR) formula for physician payments and the cost of increased assistance to low-income beneficiaries.
Our initiative is unique in that we have brought bipartisanship to the table, dedicating nearly a year to reasoned negotiations to break through the partisan rhetoric surrounding health care. We sought policy options around which both sides of the political aisle could realistically coalesce, and we prioritized political and economic realities over discrete options that achieve budget savings in the near term. We have been encouraged by the responses to these recommendations from representatives of both political parties.
We would engage both beneficiaries and providers with incentives to pursue a more coordinated, accountable, and sustainable health care system. These recommendations span four broad categories: improve and enhance Medicare to create incentives for quality and care coordination; reform tax policy and clarify consolidation rules to encourage greater efficiency and competition; prioritize quality, prevention, and wellness; and encourage and empower states to improve care and constrain costs by means of delivery, payment, workforce, and liability reform. The recommendations described below are highlights from the report but are not an exhaustive list of all the issues addressed in our report.
Improve and Enhance Medicare
Recommendation: Promote quality and value through an improved version of accountable care organizations — Medicare Networks — that encourage providers to meet the full spectrum of their patients' needs. Replace the SGR formula for physician reimbursement and offer all Medicare providers strong financial incentives to participate in new payment models.
Our policies would engage beneficiaries in choosing the coverage that best suits their needs. In addition to fee-for-service Medicare and Medicare Advantage, providers within traditional Medicare would be able to form Medicare Networks. Beneficiaries could choose to enroll in a Medicare Network and would receive a premium discount if they did so. They and their providers could share in savings that result from greater quality and efficiency of care. We believe that these organized systems would provide patients and families with better, more coordinated care while reducing overall spending growth.
Beneficiaries would also be free to remain in an improved fee-for-service Medicare. Our report identifies inefficiencies, misaligned incentives, and fragmented care delivery in the current fee-for-service reimbursement system that have both undermined quality and increased costs. Fee-for-service Medicare would be modernized by means of a greater commitment to competitive bidding, bundling, and other reforms that make provider health systems more accountable and affordable.
To encourage providers to move from fee-for-service Medicare to Medicare Networks, we offer carrot-and-stick incentives. Full payment updates (based on the Medicare Economic Index, which reflects the cost of medical practice) would be available to providers who form or join Medicare Networks. Payment rates would be frozen at current levels for physicians who remain in fee-for-service Medicare and temporarily frozen for other providers who remain in the fee-for-service program. The SGR formula for physician reimbursement would be eliminated. For geographic areas of the nation that could not set up alternative delivery systems, the secretary of health and human services would be authorized to ensure adequate reimbursement levels to fee-for-service providers.
Recommendation: Establish a standardized minimum benefit for Medicare Advantage plans — including all services covered by traditional Medicare, a cost-sharing limit to protect against catastrophic expenses, and slightly lower cost sharing for services than in traditional Medicare — and pay plans with the use of a competitive-pricing system.
We also propose to bring market forces to bear on Medicare Advantage by implementing a competitive-bidding structure. Today, many Medicare Advantage plans compete for beneficiaries by offering extra benefits, leading to higher costs. We propose a more rational system, in which Medicare Advantage plans would bid on a standardized Medicare benefit package and compete on the basis of price. Thus, beneficiaries would be able to make clear comparisons and choose the plan that offers the best value. This system would be phased in over time and include transitional protections for beneficiaries. Competitively bid payments to plans would take effect only in regions where the payments are lower than those under current law. Therefore, this policy will guarantee savings for the Medicare trust funds in regions where the new competitively bid price takes effect. Initially, a portion of the savings would be allocated to finance a reduction in beneficiary cost sharing. To help beneficiaries navigate plan selection, we propose a user-friendly, up-to-date Medicare Open Enrollment website.
Recommendation: In 2016, improve and strengthen the traditional Medicare benefit structure for Parts A and B by simplifying existing deductibles and providing protection against catastrophic costs. At the same time, restrict first-dollar supplemental coverage, increase support for low-income beneficiaries, and reduce subsidies to higher-income beneficiaries.
We propose to improve the Medicare benefit by providing long-overdue protection against catastrophic costs. We also would offer a modernized cost-sharing design, including a single annual deductible and predictable copayments. Our proposal would ensure that beneficiaries could visit a doctor for a reasonable copayment, even before meeting a deductible. In addition, we would prohibit first-dollar supplemental coverage that leads to greater use of services without necessarily producing better outcomes. We pursue further balance by providing new, substantial cost-sharing support to approximately 8 million low-income beneficiaries while reducing federal subsidies for higher-income persons.
Reform Tax Policy and Clarify Consolidation Rules
Recommendation: Replace the “Cadillac tax” on high-cost health insurance plans with a limit on the income-tax exclusion for employer-sponsored health insurance.
We propose to target the limited financial resources of our nation on health care coverage and services that are valuable. The nation cannot achieve affordable care with an open-ended, overly generous subsidy for the purchase of private health insurance that predominantly benefits higher-income persons. The tax exclusion for employer-sponsored health insurance makes providing health benefits cheaper than paying cash wages, thereby encouraging high-cost benefit designs and blunting incentives to deliver care more efficiently. We propose to reform and rationalize the current tax exclusion for employer-sponsored health insurance and make it less regressive. We recommend replacing the flawed Cadillac tax on high-cost health insurance plans with a limit on the income-tax exclusion for employer-sponsored health benefits in 2015 at the 80th percentile of employer-sponsored–plan premiums. We also support replacing the current excise tax on fully insured plans with a paid-claims tax, to remove the current distortion that favors self-insured plans and to encourage all plans to adopt alternatives to fee-for-service payment.
Recommendation: Streamline and clarify the application of existing federal legal and regulatory guidance for private-sector entities seeking to form integrated, coordinated systems of care delivery.
Another strategy for aligning incentives to support high-quality, coordinated care delivery and payment is to ensure that private-sector payers and providers who want to form integrated delivery systems have clear guidance on how to do so without violating antitrust or fraud and abuse laws. We believe that guidance should be provided in this area and that there should be strong enforcement against consolidation that leads to anticompetitive behavior and to increases in cost.
Prioritize Quality, Prevention, and Wellness
Recommendation: Prioritize, consolidate, and improve the use of quality measures by consumers and practitioners.
Effective quality metrics are essential to accountability in organized systems of care. Quality-performance metrics must be precise and clinically relevant to create incentives for better delivery, to show providers how their performance relates to that of their peers, and to facilitate the real-time design and implementation of strategies to improve quality and safety. Quality metrics must also provide the meaningful data needed for patients and families to make informed choices. Although providers have pursued quality-metric design, evaluation, and reporting, as well as the identification of different quality metrics, the quality-reporting roles and responsibilities of organizations such as health plans and accrediting bodies are ill defined, leading to confusion and inefficiency. We would strengthen the quality-reporting system and the validity of available metrics by identifying redundant or inefficient metrics and by promulgating minimum requirements that are clinically relevant and useful to providers and also understandable and accessible to consumers.
Recommendation: Advance our understanding of the potential cost savings of prevention programs, by means of support for research and innovation on effective strategies to address costly chronic conditions.
We recommend exploring the potential of prevention in improving health and containing cost, as well as eliminating barriers to the wider implementation of preventive approaches, such as workplace wellness programs, that are found to be effective. Helpful strategies include support for better collection, analysis, and dissemination of data from prevention programs, and incentives that will engage small businesses in comprehensive worksite health promotion.
Encourage and Empower States
Recommendation: Adopt a broad strategy to deliver Medicare and Medicaid services to persons with dual eligibility through a single program.
The Medicaid program provides coverage to approximately 60 million low-income Americans, including pregnant women, low-income parents, children, and persons with disabilities. Approximately 9 million persons are dually eligible for both Medicare and Medicaid coverage. Persons with dual eligibility constitute a diverse population with many complex care needs. Historically, distinct federal law, regulation, program administration, and financing for Medicare and Medicaid have constrained opportunities to better integrate care between the two programs. We recommend that state and federal leaders work toward a more streamlined and coordinated approach to deliver care to persons with dual eligibility. In addition, we recommend several ways to strengthen demonstration projects that are currently under way for persons with dual eligibility.
Recommendation: Offer a federally funded financial incentive to states that enact reforms to the scope of practice for health professionals, medical liability systems, and insurance laws.
We support resources and incentives, rather than top-down mandates, to engage state leaders in supporting coordinated and accountable models of health care delivery and payment. To this end, we recommend policies to strengthen the primary care workforce and make greater use of nonphysician practitioners, to create safe harbors for physicians to improve the medical liability system and reduce the practice of defensive medicine, to address consolidation in the financing and delivery systems, and to promote price and quality transparency for consumers, families, and businesses.
We believe that the vision and recommendations articulated in our bipartisan report, if enacted together, would help to put our national health care system, as well as our economic outlook, on a more sustainable, healthful path for the future.
Project Syndicate | June 26, 2013
How to tax the income of multinational corporations (MNCs) was an unlikely headline topic at the recent G-8 summit in Ireland. It will be a key agenda item at the upcoming G-20 summit in Russia as well. Given these companies’ significance to national and global economic performance, world leaders’ focus on the arcane intricacies of corporate taxation is easy to understand – perhaps nowhere more so than in the United States.
As the US embarks on the difficult path of corporate tax reform, it should heed the United Kingdom’s example. Even as it champions multilateral cooperation to ensure that MNCs pay their “fair” share, the British government has slashed its corporate rate, exempted the active foreign income of British MNCs from the national corporate tax, and enacted a “patent box” that stipulates a 10% tax rate on qualified patent income.
As a result of years of cuts in corporate tax rates by other countries, the US now has the highest rate among the advanced economies. Reducing the top US federal rate, currently at 35%, to a more competitive level – the OECD average is around 25% – would encourage investment and job creation in the US by both domestic and foreign MNCs.
Paying for a rate cut by eliminating various corporate credits and deductions would simplify the code and trim the cost of compliance. It would also enhance efficiency by curbing tax-based distortions in companies’ investment decisions (what and where) and their choices concerning how to finance investments and which organizational forms to adopt. The Obama administration and Congressional leaders from both parties agree that a cut in the corporate tax rate should be revenue-neutral.
Other advanced industrial countries have paid for corporate rate reductions partly by restricting depreciation and other deductions. Despite lower tax rates, corporate tax revenues have not declined in these countries and represent a larger share of GDP than they do in the US.
In addition to reducing its corporate tax rate, the US needs to reform the way it taxes its MNCs’ foreign earnings. All other G-8 countries (and most OECD countries) boost their MNCs’ competitiveness by taxing only their domestic income, exempting most of their foreign earnings from domestic taxation (an approach known as a territorial system). The US, by contrast, taxes its MNCs’ worldwide income, with taxes paid elsewhere credited against their US tax liability to avoid double taxation.
The worldwide system puts US-based MNCs at a competitive disadvantage. They must pay the high US corporate rate on profits earned by their affiliates in low-tax foreign locations, while foreign MNCs headquartered in territorial systems pay only the local tax rate on such profits.
Current US law blunts this disadvantage by allowing US companies to defer paying US tax on profits earned abroad by foreign affiliates until they are repatriated to their US owners. As a consequence of both the high US tax rate and deferral, US-based MNCs have a strong incentive to keep their foreign earnings abroad. Indeed, their non-US affiliates currently hold an estimated $2 trillion in accumulated foreign earnings.
These earnings are “locked out” and unavailable to finance investment and job creation in the US, without incurring significant additional US taxes. Moreover, US companies incur efficiency costs from the suboptimal use of deferred earnings and higher levels of debt, as well as the burden of maintaining worldwide tax strategies. And these costs, estimated at 1-5% of deferred earnings, have been rising rapidly in recent years, in line with the growing share of foreign markets in US-based MNCs’ revenues.
A territorial system would address the competitiveness disadvantages, the “lock-out” effect, and the inefficiencies of the US’s worldwide approach. But it would not reduce incentives for US corporations to shift their reported profits to low-tax jurisdictions; on the contrary, such incentives would be even stronger in a pure territorial system. Given increasing globalization of business activity; the rising importance of intangible capital that is difficult to price and easy to move (for example, patents and brands); competitive cuts in national corporate tax rates; and the spread of tax havens, income shifting and the resulting tax-base erosion have become a major policy concern throughout the OECD.
In response, other developed economies have used a variety of techniques to create “hybrid” territorial systems aimed at countering tax-base erosion. Such systems include transfer-pricing rules based on OECD guidelines (used by the US as well), limits on interest deductibility, and domestic taxation of some kinds of income earned in low-tax locations where companies report large earnings but carry out little real economic activity.
As part of comprehensive corporate tax reform that includes a revenue-neutral rate cut, the US Congress is currently considering a hybrid territorial reform and evaluating several measures to counter tax-base erosion and income shifting, including those used by other advanced countries. Republican Congressman David Camp, who is leading the legislative effort in the House of Representatives, has proposed an innovative alternative that rests on the “destination principle”: MNCs’ taxable earnings should be based largely on where their products are sold, rather than on where the companies are headquartered, where their production and financing occur, or where their profits are reported.
Camp’s proposal would significantly reduce incentives to move manufacturing abroad for tax reasons. By contrast, both America’s worldwide system and other countries’ hybrid territorial systems rely on an “origin or source principle” that bases taxation largely on where input costs and production activities are located.
The US last reformed its business tax code in 1986, when it had one of the lowest corporate tax rates in the world and the competitive dynamics of the global economy were very different. It is time for another comprehensive corporate tax reform, one that reduces the tax rate, broadens the tax base, and adopts a hybrid territorial approach with effective base-erosion safeguards.