Surprise in Obamacare

Obamacare was passed so quickly that, admittedly, lawmakers did not have time to so much as read the multi-volume bill.  Hardly anyone, opponent or proponent, knows everything that Affordable Health Care law will do.  So as it is being implemented over the next two years, we will probably keep getting surprises.  Here is the latest, from the Associated Press:

Your medical plan is facing an unexpected expense, so you probably are, too. It’s a new, $63-per-head fee to cushion the cost of covering people with pre-existing conditions under President Barack Obama’s health care overhaul.

The charge, buried in a recent regulation, works out to tens of millions of dollars for the largest companies, employers say. Most of that is likely to be passed on to workers.

Employee benefits lawyer Chantel Sheaks calls it a “sleeper issue” with significant financial consequences, particularly for large employers.

“Especially at a time when we are facing economic uncertainty, [companies will] be hit with a multi-million dollar assessment without getting anything back for it,” said Sheaks, a principal at Buck Consultants, a Xerox subsidiary.

Based on figures provided in the regulation, employer and individual health plans covering an estimated 190 million Americans could owe the per-person fee.

The Obama administration says it is a temporary assessment levied for three years starting in 2014, designed to raise $25 billion. It starts at $63 and then declines.

Most of the money will go into a fund administered by the Health and Human Services Department. It will be used to cushion health insurance companies from the initial hard-to-predict costs of covering uninsured people with medical problems. Under the law, insurers will be forbidden from turning away the sick as of Jan. 1, 2014.

via Surprise: New Insurance Fee in Health Care Reform Law – DailyFinance.

Yes, it’s nice that pre-existing conditions will be covered.  Yet another thing we don’t know (“hard-to-predict”) is how much this will cost.  Normally, businesses–and especially insurance companies with their actuarial charts and calculations–would need to have those figures.  I doubt that $63 dollars per insured person would come anywhere near paying for the nation’s pre-existing conditions.  But at least something is budgeted for it.  Still, this amounts to a tax on everyone with health insurance, whether paid by the company or the insured.  I believe we were told that taxes would only go up for the wealthy.

HT:  Jackie

Short sellers’ fiscal cliff

The Bush tax cuts aren’t the only measures that expire on New Year’s Day.  So will the Mortgage Forgiveness Debt Relief Act of 2007.  Without that law, homeowners who have negotiated a short sale–that is, have part of their mortgages forgiven by the lender because they are so far underwater when they sell their home–will have to count the amount chopped off their mortgage as income for tax purposes.

Say a person owes $200,000 on his house but it’s only worth in today’s market for $100,000.  If the mortgage is held by the federally regulated lender Fannie Mae or Freddie Mac, there is a federal program that makes it possible for the underwater amount to be forgiven when the home is sold at market value.  So in a short sale, the person might be able to sell the home for $100,000 but be clear of the mortgage.  But after New Year’s Day, he will have to declare the $100,000 that Fannie Mae wrote off as if it were money that he actually received.  And then pay taxes on it!

Various bipartisan bills have been proposed to extend the Mortgage Forgiveness Debt Relief Act, but no votes are scheduled, and it isn’t part of the package that either side is proposing in the fiscal cliff negotiations.

 

via Short sellers may be hit with big income tax bills if Washington doesn’t act – The Washington Post.

Cutting charitable deductions

The Republican proposal to step away from the fiscal cliff is to raise revenue by cutting tax deductions while also lowering overall tax rates.  Democrats would keep rates higher for those who make over $250,000, and probably cap their tax deductions at $50,000.   So it looks like we have some agreement from both sides and that deductions for home mortgages, state taxes, and charitable giving will be cut, if not cut out entirely.  From Ezra Klein:

“Base-broadening, rate-lowering tax reform.” It sounds so good, right? But what if you call it what it really is? Charity-destroying, home-shrinking, state-burdening tax reform.

Doesn’t sound as good, does it?

But that’s really what we’re talking about. The term ”base-broadening, rate-lowering tax reform” has the advantage of vagueness: No one knows what it means. But the practical definition, at least the one that’s emerging in the ongoing “fiscal cliff” negotiations, is tax reform that limits itemized deductions among high-income taxpayers. And as former OMB director Peter Orszag points out, 90 percent of the value of those deductions comes from just three categories: “taxes paid (mostly state and local taxes), home-mortgage interest and charitable contributions.”

So when we say “base-broading, rate-lowering tax reform,” here’s what we’re really saying: Tax reform that’s paid for by cutting tax breaks for charities, homes, and state and local taxes.

Most economists will tell you that cutting the home-mortgage interest deduction, particularly for high-income taxpayers, is a good idea. There’s no real reason the tax code should be subsidizing McMansions. But cutting the break for charities is more complicated. As Orszag writes:

In 2009, households with incomes of more than $200,000 claimed almost $60 billion in charitable deductions — or about 20 percent of total charitable giving in the U.S. that year. Households with incomes of more than $10 million claimed an average of $1.75 million each in charitable donations in 2009, and they accounted for roughly 5 percent of all giving.

Charitable giving reacts to tax incentives, and in response to any limits on deductions it could even fall by about the same amount as the increase in the tax bill, according to John List of the University of Chicago, who recently reviewed the literature on this subject. Other studies have suggested an effect about half as large. Even that smaller estimate, though, suggests that limiting deductions to $50,000 a year could easily reduce giving by tens of billions of dollars.

via The reality of tax reform: Less charity, smaller homes, higher state taxes.

As Klein says, “limiting itemized deductions in order to raise revenues is a tax increase.”  So the Republican plan to eliminate or cut back on these deductions as a way to raise revenue is a tax increase, even if other rates are lowered.

People complain about “the rich,” but whenever there is a capital campaign for a museum, a college, an arts group, a charity, or a church, the wealthy are wooed and generally come up with most of the money.  Conservatives want “the private sector” instead of the government to bear more of the responsibility to help the poor, support the arts, and do other good works.  That means those worthy causes would need the support of wealthy donors.  Do you think that donors would be as generous as they are without the incentive of a large tax deduction?   I am convinced many of them would, but I worry about the practical effect on non-profit organizations (which incorporate for that status precisely so they can become tax  deductible).

What impact do you think cutting deductions for charitable giving might have on churches?  Specifically, on your congregation?  Probably most of your members come nowhere near the high-income level that would trigger the limits.  And yet a total limit of $50,000–including home mortgage, state taxes, charitable giving, and everything else–would hit people who don’t consider themselves all that wealthy.  [Tote up how much you deducted last year.]   And yet, very often a big chunk of a congregation’s revenue comes from a few families.  Again, one would hope that they give because the Lord loves a cheerful giver, because they believe in tithing, because they see themselves as stewards of the Lord’s gifts, etc., etc.  But a tax deduction is surely an incentive to generosity.  What would happen if all deductions for giving to the church were eliminated for everybody?

Perhaps this would become liberating in the long run.  No more would churches or other organizations have to operate under the regulations for non-profits.  They could express political opinions and endorse candidates without  the threat of losing their tax-exempt status.

At any rate, we need to consider the consequences–including especially the unintended consequences–of these proposed changes.  (And remember, these ideas aren’t coming primarily from liberals but from Republicans.)

Each party’s wrong ideas on taxes

As our lawmakers try to prevent us from falling off the “fiscal cliff” when the Bush tax cuts expire with the new year and mandatory federal reductions click in, Matt Miller argues that BOTH Republicans AND Democrats are laboring under two wrong ideas when it comes to taxes.

Republicans believe our fiscal woes can be solved by cutting taxes.  And Democrats believe our fiscal problems can be solved by raising taxes on the rich.  Miller tries to show why neither will work and how such ideological blinders will prevent effective solutions.

See Matt Miller: Dead ideas on taxes – The Washington Post.

Perhaps it isn’t that one side is right and the other wrong, or that both are partially right, but that both are wrong!  Where does that leave us?

If this is true, does anyone have any viable suggestions for putting our financial house in order?

 

Cliff diving

On New Year’s Day, the Bush-era tax cuts will expire and mandatory cuts in government spending will go into effect, a double-whammy to the economy that is being called “the fiscal cliff.”  Republicans do not want the tax increases and Democrats do not want the spending cuts.  So Congress is negotiating with the President about compromises, reforms, and trade-offs, all in an effort to avoid what nobody wants, the country going off the cliff.

But might falling off the fiscal cliff, in the long run, be the best solution, despite the horrible short-term consequences?  Under that scenario, taxes would rise dramatically (giving the government more revenue, the Democrats’ dream) but also government expenditures would be cut dramatically (resulting in a smaller government, the Republicans’ dream).  The combination of higher revenues plus lower expenditures would solve the deficit.

Isn’t this a true bi-partisan solution?  Don’t we as a nation need to take our bitter medicine before we can get better?  Other countries, such as Great Britain, have gone through austerity programs as a necessary step to fiscal health.  Could we Americans handle austerity?

(I am not necessarily advocating this, simply proposing for now a mental experiment.  Some of you suggested this in yesterday’s discussion of “Breaking Pledges,” but it’s worth discussing in its own right.)

Breaking pledges

Republican lawmakers are bailing on the formal pledge they made not to vote for a tax increase.

Grover Norquist’s anti-tax pledge has been a sacred and unchallenged keystone of the Republican platform for more than two decades, playing a central role in almost every budget battle in Congress since 1986. But Norquist and his pledge, signed by 95 percent of congressional Republicans, are now in danger of becoming Washington relics as more and more defectors inch toward accepting tax increases to avert the “fiscal cliff.”

On Monday, Sen. Bob Corker (Tenn.) became the latest in a handful of prominent Republican lawmakers to take to the airwaves in recent days and say they are willing to break their pledge to oppose all tax increases.

“I’m not obligated on the pledge,” Corker told CBS’s Charlie Rose. “I made Tennesseans aware, I was just elected, the only thing I’m honoring is the oath I take when I serve when I’m sworn in this January.”

House Majority Leader Eric Cantor (R-Va.) also suggested Monday that Norquist’s anti-tax pledge would not dictate the GOP’s strategy on the fiscal cliff, raising questions across Washington about whether Norquist’s ironclad hold on the Republican Party has loosened. . . .

Even House Speaker John A. Boehner (R-Ohio) expressed dismay with Norquist’s pledge and his role in the GOP at the time. . . .

Last November, 100 House members, 40 of them Republicans, wrote a letter to Congress’s deficit-reduction “supercommittee” urging it to consider all options — a vague pronouncement that, at least in theory, endorsed tax increases forbidden by Norquist. A number of House members, including freshman Rep. Scott Rigell (R-Va.), said openly that they no longer felt bound by the pledge they had signed when running for office. Rigell was reelected this month. . . .

And now, with severe cuts in line if Congress doesn’t reach a deal on the fiscal cliff, coming to an agreement is paramount. Analysts have a hard time forecasting a deal that doesn’t include tax increases — especially after President Obama won reelection, having run in large part on letting tax cuts for the wealthy expire.

Some Republicans are bowing to that version of reality. Over the weekend and on Monday, Sens. Lindsey O. Graham (S.C.), Saxby Chambliss (Ga.) and Corker (Tenn.), along with Rep. Peter T. King (N.Y.), said they would be willing to violate the pledge under the right circumstances.

via Will the fiscal cliff break Grover Norquist’s hold on Republicans? – The Washington Post.

Now I can agree that it is foolish to bind oneself in a pledge like this.  There may well be a time when it is in the republic’s interest to raise taxes.  Perhaps this is such a time.  But it is still highly unethical to violate one’s word.  (And how about Scott Rigell not feeling bound by the pledge because he made it while running for office?  As if campaign promises, by definition, don’t need to be kept!)

But if lawmakers no longer believe in what they once pledged, they still are obliged to keep that pledge.   The honorable course of action would be to resign their office so that their governor can appoint someone who has not made the pledge.