Ryan's $34 Trillion Tax Folly

Original Link: http://tax.com/taxcom/taxblog.nsf/Permalink/UBEN-8GPHM9

By David Cay Johnston

If repairing your car cost 18 percent of your income, would you buy a new car? Of course you would.

Now imagine that your mechanic tried to persuade you to keep the jalopy with a clever tax argument: The costs of your annual car tax and registration would decline over time, saving you money. Keep the car long enough and you would save a third of a year's income just in taxes.

That sounds appealing, unless you stop to think about how much more you would pay for repairs as your vehicle ages and breaks down ever more often.

Now imagine that your mechanic's savings estimate relied on data that could be analyzed to determine how much of your tax savings would be offset by higher repair costs, but he did not give you those figures. So you do the analysis and find out that for every dollar of tax you save, you would spend $5 to $8 on repairs.

How would you react? Would you laugh out loud at your mechanic? Or get mad? Or walk away in disgust at his lack of candor? Would you not only buy a new car, but also look for a trustworthy mechanic?

This analogy describes the "roadmap" for future taxes and spending on Medicare being marketed by House Budget Committee Chair Paul Ryan, R-Wis.

Ryan is touting his plan to replace Medicare, the universal healthcare plan for older Americans, with a form of defined contribution plan. Ryan would replace universal care with a subsidy for older Americans to pay for health insurance in the private marketplace.

There is not a scintilla of evidence that the private insurance market is clamoring to enroll anyone over age 55 for full medical coverage, especially those with a preexisting condition. Yet Ryan would repeal the 2009 law sponsored by President Obama that requires insurers to take people with preexisting conditions.

Ryan's plan would save taxpayer dollars, no doubt about it. But it would not save money. In fact, it would add tremendously to total healthcare costs, which now run 18 cents of every dollar in the economy. That is twice what we spent in 1980. Other modern countries spend 9 to 12 percent of their economy on healthcare and yet manage universal coverage, some with little or no out-of-pocket costs.

The problem is not, as Ryan posits, that taxpayers cannot afford Medicare. The problem is that we cannot afford our existing sick care model with its massive denial of services, loss of productive capacity by injured and sick individuals who get inadequate treatment, and billion-dollar fortunes for the few positioned to scoop up healthcare dollars by selling what should be utterly unnecessary services, like private health insurance.

Ignoring decades of actual data showing that health as a business drives costs up, Ryan displays his faith in the magic of markets as competitive forces to lower prices. I'm a huge fan of markets, but not all markets lower prices. Some, by design, compete to drive costs up. Healthcare, like electricity, is one of those markets that tend to reverse competition's higher prices. That is a reason why every other modern country uses a universal healthcare model, some with competitive features, some without.

Applying Ryan's own data to Social Security estimates and to the official Congressional Budget Office data and using the CBO "alternative scenario" that Ryan prefers shows total expected health costs for older Americans and how they would be borne.

So what happens if we buy the Ryan plan? For those age 55 and older, not so much. But a lot changes starting in 2022, when today's 54-year-olds turn 65, through 2084, the end of the 75-year period covered by Social Security trustee projections.

David Rosnick and Dean Baker, economists at the Center for Economic Policy and Research, crunched the numbers. Whether you like their liberal views or hate them, Rosnick and Baker are just spreadsheet mechanics in this exercise.

Reduced to net present value, Ryan's plan would save $4.9 trillion in taxes from 2022 through 2084, the numbers reveal. That's not chicken feed. In fact, it is within range of the close to $6 trillion shortfall in Social Security between now and 2084.

But the official data show that private insurers pay providers more than Medicare for the same services. That's because government uses its buyer power -- and political power -- to hold down payments to healthcare providers. Thus, each dollar shifted out of Medicare in to individuals buying private insurance or paying out of pocket buys less healthcare.

So the net present added individual costs would be more than $25 trillion, using Ryan's preferred CBO alternative scenario. Running the numbers using the CBO baseline scenario, the added cost is $39 trillion.

Back out the tax savings, and the net cost is north of $20 trillion using Ryan's preferred and nonstandard baseline and $34 trillion using the standard CBO baseline.

So for every dollar Americans would save in taxes, they would shell out $5 more from their own pockets using Ryan's preferred baseline, and nearly $8 using the standard baseline. When you stack a plan in favor of its advocate and the additional costs are five times the savings, like the story of the mechanic trying to keep getting paid for fixing up a clunker, the plan should be greeted with laughter, derision, or disgust. I go for all three -- in that order.

Rosnick and Baker call this net extra spending of between $20 trillion to $34 trillion waste. That's their political judgment. I'll stick to the facts: The Ryan plan shifts costs and raises them at the same time. Spending $5 to save $1 is nuts. Spending $8 to save $1 is lunacy.

Hardly anyone knows about the gargantuan added costs because of the way Ryan is marketing the plan. Like the mechanic, Ryan is looking out for his agenda and being deceptive by omission.

The idea -- promoted by Ryan as inherent truth -- that market forces will cut costs is absurd. No one lying on a litter in pain from an accident or who was just told they have a cancerous tumor is going to start negotiating price any more than airline passengers are going to cross-examine the pilots on their skill and training. Even if you did, do you have the technical knowledge to compare physicians?

There is a smarter path, one that saves taxpayers money and reduces healthcare costs. That is to junk our taxpayer-subsidized model in favor of a modern healthcare system.

In addition to saving money, a modern healthcare system would reduce paperwork, eliminate time wasted by businesses on health insurance, and make labor markets more fluid because small employers would not be forced to discriminate against people with preexisting conditions.

A well-designed modern system also would focus on prevention to minimize preventable chronic conditions and reduce the massively wasteful use of costly technology like MRIs, which are needed for only very limited diagnoses.

A modern system would cover everyone. Currently about one in seven has no insurance, and at some time during the year one in four goes uncovered, a situation not found in any other modern country. Universal coverage would cut emergency room costs and provide care for chronic diseases like cancer and diabetes.

It would end the practice of doctors who deny care getting bonuses, as detailed in my book Free Lunch.

Universal coverage would save money -- lots of it. Indeed, if all we did was get universal coverage without the profits, paperwork, and fights over claims denial that are the hallmarks of healthcare as an insurance business rather than a public service, our federal budget would be in balance soon.

Ryan's plan is to replace universal care for seniors with vouchers to help buy insurance in the private market. One of Ryan's defenders, Diana Furchtgott-Roth, charges me with error in my previous Tax Notes column for describing the Ryan Medicare plan as a voucher system that would pay less than the actual costs of healthcare.1 In her column, Furchtgott-Roth wrote that Ryan is proposing "premium support" and that "premium support is not a voucher."

So what did Ryan himself say back on April 5 at an American Enterprise Institute event? "My roadmap does have vouchers."

Ryan cited one trivial difference between his plan and what people usually think of when the word "voucher" is mentioned -- the payment would go directly to the insurer issuing a policy, rather than to the insured to hand to the insurer. That seems more efficient, so if Ryan's plan becomes law I hope that proviso remains. But the hard fact remains that Ryan's own videotaped words disprove what Furchtgott-Roth wrote almost a month later.

Now, it is true that the Ryan plan anticipates some adjustments in vouchers based on age and health status, as Furchtgott-Roth observed. But it still leaves a gap. In fact, the Rosnick-Baker analysis shows that by one measure, that gap would be so large that the voucher (fixed at $6,600 in today's dollars) would cover less than a third of the estimated cost of insurance ($20,600 in today's dollars).

A senior without the capacity to pay that extra $14,000 would be forced to suffer with inadequate or no healthcare.

Ryan would halve the federal tax burden of the top 1 percent, a policy that is as explosive as an economic bomb and that I will explore in a future column.

For now we need to think about the immorality and higher costs of Ryan's plan -- and the portions embraced by 237 other House Republicans -- not only to destroy Medicare as a universal health plan, but also to slash aid for the powerless.