AIP column: Beware the static analysis in the Baucus plan

posted at 12:55 pm on September 17, 2009 by Ed Morrissey

Over the past few years, I have written numerous times about the dangers of static tax analysis — the practice of predicting revenues from tax policy changes that assumes that tax policy has no effect whatsoever on the behavior of consumers and investors.  Static tax analysis disregards the fact that every action generates a reaction, while dynamic tax analysis attempts to predict behavior in modeling changes in tax policy.  This sounds like a dry, academic topic, but it has real-world implications, as we can see in the new health-care overhaul plan from Senator Max Baucus (D-MT).  The entire plan hinges on tax revenue that will almost certainly never appear, as I explain in my new AIP column:

Bloomberg reports that $259 billion of the estimated $859 billion in new costs over the first decade of the program would come from taxing so-called “Cadillac” or “gold-plated” health care plans:

According to a “very preliminary” estimate by the congressional Joint Committee on Taxation, Baucus’s proposal would raise $259 billion in taxes, mostly from imposing a 35 percent excise tax on insurers that offer health plans valued at more than $8,000 for individuals and $21,000 for couples.

According to the Kaiser Family Foundation, around 18% of individuals have health-care plans that exceed $5800, and 20% of families have coverage that costs more than $16,000. Those numbers make it likely that more than just the upper-crust 5% will have to pay taxes on their coverage, which breaks an oft-repeated promise from Barack Obama that 95% of Americans won’t see a tax increase in his administration.

However, that’s not the main problem with Baucus’ plan. It assumes that the market will not change after he levies a whopping 35% excise tax on “Cadillac” plans. Insurers facing that kind of disincentive, especially as sharp as a 35% excise tax, will simply stop offering those plans. Either that, or they will pass the costs on to the consumers of the plans, but consumers will balk at paying 35% more for their existing plans when less expensive plans exist.

When those plans disappear, what happens to the funding for Baucus’ overhaul?  It develops a big $259 billion hole, which will have to get filled some other way.  The most likely outcome will either be cutbacks in spending and more rationing decisions, or bigger taxes on the middle class.

In fact, Jay Rockefeller objected yesterday on the basis that the Baucus revenue plan amounted to a middle-class tax in and of itself:

It’s not every day that you hear a Democratic senator charge that a fellow Democrat is proposing to raise taxes on the middle class, but that is what happened on Tuesday when Sen. Jay Rockefeller, D-W.Va., ripped into the health-care bill developed by Sen. Max Baucus, D-Mt., the chairman of the Senate Finance Committee.

The Baucus proposal would impose, starting in 2013, a 35 percent excise tax on insurance companies for “high-cost plans” — defined as those above $8,000 for individuals and $21,000 for family plans. …

Referring to Baucus, Rockefeller said, “He should understand that (his proposal) means that virtually every single coal miner is going to have a big, big tax put on them because the tax will be put on the company and the company will immediately pass it down and lower benefits because they are self insured, most of them, because they are larger. They will pass it down, lower benefits, and probably this will mean higher premiums for coal miners who are getting very good health care benefits for a very good reason. That is, like steelworkers and others, they are doing about the most dangerous job that can be done in America.”

“So that’s not really a smart idea,” Rockefeller continued. “In fact, it’s a very dangerous idea, and I’m not even sure the coal miners in West Virginia are aware that this is what is waiting if this bill passes.”

Or, more likely, those plans will disappear.  Obama will have broken his pledge that ObamaCare will not affect those who already have insurance, as the people covered on those plans will have to scramble to find another, and possibly be forced to change doctors and clinics when they do.   Plus Obama will have broken his pledge that 95% of Americans would not see their taxes raised a single dime.

These are the traps that static tax analysis lays for those who use it.  In this case, this is so obvious that it’s questionable whether we should blame static tax analysis at all, or just the bureaucratic cluelessness of people who have no familiarity with the private sector and its normal reaction to taxation.

Be sure to read the entire column.  While you’re at AIP, catch up with the blog and other columnists.  John Gibson rightly crows about AIP’s award for Best Political Website.  Michael Barone says that job-killing policies will doom Democrats in 2010Jimmy Bise worries about whether Obama owns all our Tweets now.


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Obama promised that everyone who liked their current plan would be able to keep it.

The 18% with “cadillac” plans won’t be able to keep them, after they are taxed out of existence.

MarkTheGreat on September 17, 2009 at 1:02 PM

Republicans have tried many times, to get the CBO to start using dynamic scoring instead of static scoring when they determine the cost of bills.

Every single time, the Democrats stopped them.

MarkTheGreat on September 17, 2009 at 1:04 PM

Ah, but they already have an answer waiting in the wings, the “public option”, government operated “insurance.”

They are simply liars, every single one of them, top to bottom.

Liberalism is a mental disorder most easily recognized by an irresistible need to lie.

johnsteele on September 17, 2009 at 1:07 PM

Static analysis is used in almost every leftist sales pitch on anything… hence, the Law of Unintended Consequences.

mankai on September 17, 2009 at 1:08 PM

Plus Obama will have broken his pledge that 95% of Americans would not see their taxes raised a single dime.

SHAME

Time and again, I have corrected you on this, but here I go again:

Read my typing:
The tobacco tax increase hit millions more than just the top 5% of earners.

corona on September 17, 2009 at 1:11 PM

This plan is hated by the right and left. It will be hated by the voters when most of them realize they will pay thousands more per year for a plan not as good as what they have now (or no better).

I am not an expert on politics, but this seems a tough sell.

Mr. Joe on September 17, 2009 at 1:12 PM

Have A look at the Comments from Montanans response to Baucus Plan what is his approval rating inside his home state?

http://www.missoulian.com/news/local/article_1d7e8ca4-a2ce-11de-8da8-001cc4c03286.html?mode=comments

Dr Evil on September 17, 2009 at 1:12 PM

How Come Sebelius, promised American Indians they would be exempt?

http://buffalopost.net/?p=3009

Dr Evil on September 17, 2009 at 1:15 PM

Bachus rejected my plan for factoring increased revenues based on an excise tax levied on the new transporter device (like the ones we’ve all seen used on Star Trek) that GE is going to invent.

So, I told him he’d have to make up his own BS tax plan without my help. And this is what he comes up with. How does this guy stay in office?

BobMbx on September 17, 2009 at 1:16 PM

the company will immediately pass it down and lower benefits because they are self insured, most of them, because they are larger.

you can bet your bottom dollar that ‘self insured’ plans will be exempt from this fee. Most Union plans are ‘self insured’. That’s why the language specifically says that the tax will be on the insurance company. If you are not an insurance company, you won’t be taxed.

Baucus will have to inform him of the little loophole in the language there.

ThackerAgency on September 17, 2009 at 1:18 PM

Is everyone in the government economically illiterate, or do they actually know their proposals don’t make sense and just lie anyway?

rbj on September 17, 2009 at 1:18 PM

Not only does it increase taxes on health plans, but it imposes an increasing tax on both pharmaceutical companies and makers of medical equipment, based upon the volume of their sales.

All that will do is drive those companies to relocate offshore where wages and other overhead are significantly less. That will mean further American job losses, and less control over workplace safety.

The nation needs to somehow stop these imbeciles who want a Universal health Care program. Keep the damned government OUT of the markets and let them work as they are designed to do.

AW1 Tim on September 17, 2009 at 1:20 PM

The purpose of the tax is to kill the plans, and he’s misrepresenting it as a move to raise revenue. Surely he’s not so stupid as to think it wouldn’t cause the more expensive plans to disappear.

Baucus is lying.

So anyway, the expensive plans will be rubbed out by prohibitive taxation, and least expensive plans that younger people might buy will be outlawed because they don’t meet the requirements of a “qualified plan”

But remember, “if you like your plan, you can keep it!

forest on September 17, 2009 at 1:22 PM

you can bet your bottom dollar that ’self insured’ plans will be exempt from this fee. Most Union plans are ’self insured’. That’s why the language specifically says that the tax will be on the insurance company. If you are not an insurance company, you won’t be taxed.

Baucus will have to inform him of the little loophole in the language there.

ThackerAgency on September 17, 2009 at 1:18 PM

From my reading of the Baucus bill, they are NOT exempt. It simply shifts the tax to a fee on employers who self-insure.

AW1 Tim on September 17, 2009 at 1:22 PM

Is everyone in the government economically illiterate, or do they actually know their proposals don’t make sense and just lie anyway?

rbj on September 17, 2009 at 1:18 PM

They lie. They’re not interested in the actual effects of their stupid legislation on the people, all they want is to get their hands on the money and power. The evidence is there for all to see.

Which is why we need to drastically cut back the government to running the military, the courts and preserving civil order. Those pursuits are wasteful and corrupt enough, why feed the cancer?

mr.blacksheep on September 17, 2009 at 1:24 PM

The irony here is that the selling point of reform is that the status quo will not hold just because we do nothing. So they’re arguing against the current system using dynamic analysis and for their reforms using static analysis.

calbear on September 17, 2009 at 1:26 PM

From my reading of the Baucus bill, they are NOT exempt. It simply shifts the tax to a fee on employers who self-insure.

AW1 Tim on September 17, 2009 at 1:22 PM

well I didn’t read it, so you could be right. But I can’t imagine why the unions would support taxing their own members 35%. Unions would be hit the hardest because they have the best benefits.

ThackerAgency on September 17, 2009 at 1:27 PM

Take Baucus, along with with Pelosi, Reid, Frank, Dodd, Obama, Biden, Axelrod, and Rahm and drop them off as the cast of “Survivor-Antarctica”. I’ll watch the whole season.

jimmy2shoes on September 17, 2009 at 1:30 PM

Baucus’ bill was reportedly written by Liz Fowler. Fowler is a far removed insurance executive – that is not important. Because she has another history that is more important.

A joint report on health care was to be released in December of 2008, The Authors: Liz Fowler, House ways & Means health subcommittee chair & known loon Pete Stark, Apollo Alliance Board member Roger Hickey and the man they call the architect of the public option, a speaker often sponsored by the Apollo Alliance, Jacob Hacker.

Hickey, BTW, is the founding co-director of the Institute for America’s Future.

Look at the Reuters link – Fowler, Hickey, Stark & Hacker were meeting & were pushing “… that a public insurance option is a critical element of President-elect Obama’s health care reforms”. Ya think they stopped meeting after that? Ya think the meetings ever stopped?

batterup on September 17, 2009 at 1:30 PM

My 10 yr old daughter seems to understand this better than the Democrats. We had a discussion just this morning about the negative impact of higher taxes. I told her to imagine that she got paid $100 and paid $10 in taxes and could spend the rest as she saw fit and one thing she liked to do was go to the one restaurant in town. I then told her that her taxes would now by $30 and she only had $70 left and now she could no longer afford that monthly dinner out. I then asked her what would happen to the restaurant if what happened to her happened to everyone else in town that ate at that restaurant. Of course she knew the place would go out of business. Economics is common sense. Democrats suffer from a stunning lack of the stuff.

DerKrieger on September 17, 2009 at 1:31 PM

I don’t understand Rockefeller’s issue with the plan. He says that this will raise the cost of coal miners’ health care plans. He must not have been paying attention when O (a/k/a Cappy Trade) said he would bankrupt the coal industry. So listen up Jay as I’m going to say this only once: no coal industry, no health care plan for the miners – soooo, they won’t pay the tax. Problem solved.

Jed_Eckert on September 17, 2009 at 1:33 PM

Our resident idiots in Congress are so ignorant in the laws of economics, it is pitiful. Idiots all of them.

Hannity was saying last night that it was very telling that Baucus was introducing the bill all by himself instead of being surrounded by a bunch allies. Interesting.

karenhasfreedom on September 17, 2009 at 1:34 PM

After all of this lying from Dems and Obama, do you even need to read any of these bills to know they’re bullsh*t? Even if they say EXACTLY WHAT WE WANT, they’ll let the committees butcher them to their liking and we’ll get screwed anyway. VOTE NO TO EVERYTHING

marklmail on September 17, 2009 at 1:38 PM

Where’s Obama’s bill?

/Rush echo

SouthernGent on September 17, 2009 at 1:39 PM

there could be some backlash here. Given the amount of taxes and costs / fines levied there could be a new push for the public takeover, I mean: “option” as the make believe savior to cost.

Jed_Eckert on September 17, 2009 at 1:44 PM

Where’s Obama’s bill?

/Rush echo

SouthernGent on September 17, 2009 at 1:39 PM

What do you think that Baucus’ plan is? There is a reason that there are no others around it, and he’s presenting this as his own. It’s Obama’s bill with his signature on it so that Obama has an out if things go south.

AW1 Tim on September 17, 2009 at 1:49 PM

Read the bill yesterday, this is nothing more than a structure BUILT to fail, so they will have an excuse to bring in single payer later…

It does NOT do anything to solve the Illegal Alien / Emergency Room question, and in fact EXEMPTS them from having to get insurance.

It only levys a $700 Tax fine for not having insurance (indvidual) between 100-300% of Poverty level, BUT it forces insurance companies to accept Prior Conditions… thus, as $700 is MUCH lower than the cost of Health Insurance, you can pay the fine, right up until you get sick… then get insurance, and they HAVE to cover you… bankruptcy for insurance companies.

So, it does NOTHING to cover the two largest groups of uninsured… and IMO MORE people will fall off the insurance rolls.

CBO didn’t figure in gaming the system apparently…

Romeo13 on September 17, 2009 at 1:50 PM

Idiots; I have my companies retiremnt program which because of my age and not old enough for Medicare, I pay $9,400 dollars a year; obviously I am a wealthy person receiving a “Cadillac” or “gold-plated” health care plan. A friend has had a heart attack, his cost is $12,000 per year. Bet that my plan option will disappear if this becomes the law.

amr on September 17, 2009 at 2:16 PM

A friend has had a heart attack, his cost is $12,000 per year. Bet that my plan option will disappear if this becomes the law.

amr on September 17, 2009 at 2:16 PM

Interesting point. I would expect a majority of these “gold plated” plans are plans of last resort. Well, not exactly last resort, there is always that quick visit to a death panel.

pedestrian on September 17, 2009 at 2:42 PM

WOW… even the Doc’s hate the Baucus plan…

Two of every three practicing physicians oppose the medical overhaul plan under consideration in Washington, and hundreds of thousands would think about shutting down their practices or retiring early if it were adopted, a new IBD/TIPP Poll has found…

Then again…

“…during the Presidntial campaign — when, among other things, they had John McCain winning the youth vote 74-22 — the IBD/TIPP polling operation has literally no idea what they’re doing.”

So what’s the reality…

[The] Investors’ Business Daily poll purporting to show widespread opposition to health care reform among doctors is simply not credible. There are five reasons why:

Oh my…!

Geezer on September 17, 2009 at 3:33 PM

Geezer

Convenient how you left out a link backing up your claim that IBD/TIPP had McCain winning the youth vote. I wonder why? Because it’s nonsense, that’s why.

What did you do, go through the entire list to find the worst outlier giving McCain the youth vote, while ignoring all the others that gave it to Obama, like the one on 11/3 that gave the youth vote to Obama 67%-33%?

xblade on September 17, 2009 at 9:21 PM

Read the bill yesterday, this is nothing more than a structure BUILT to fail, so they will have an excuse to bring in single payer later…

Romeo13 on September 17, 2009 at 1:50 PM

Cloward Piven my good man, Cloward Piven…..

bullseye on September 18, 2009 at 7:35 AM

xblade on September 17, 2009 at 9:21 PM

Here yah go X…

Geezer on September 18, 2009 at 8:20 AM

bullseye on September 18, 2009 at 7:35 AM

Right on target…where there’s a will; a good politician will find a way…!

Geezer on September 18, 2009 at 8:24 AM

“You never want a serious crisis to go to waste.”

Right on!
Right on!
Right on!

He he hee!

Geezer on September 18, 2009 at 8:33 AM

I certainly hope you good hearted folks are being totally satirical like Rush and aren’t actually serious in some of your posts here…?

Geezer on September 18, 2009 at 9:12 AM