Grand Bargains One and Two, Two Budgets and Ridding Ourselves of Fiscal Cliffs and Fiscal and Economic Mediocrity, my paper to Capitol Hill Democrats

By Tom Pallow of Third Way Progressives

America is now in need of a great Congress. The best way to achieve a great 113th Congress is to start early with a great agenda that the vast majority agrees upon, then get it done. Below is what I believe are two grand bargains that would help create two on-time federal budgets, a more than balanced budget likely before 10 years, and a much more prosperous and egalitarian economy.

Given that Congress must now pass a budget by April 15th and given that the debt ceiling must be extended by May 18th, it would be best to pass one good compromise bill this spring that would work both as a budget and as a way to extend the debt ceiling for at least a year. This first budget bill, or first grand bargain, should contain both new revenues and real federal savings. The new revenues should come in the form of raising the second to top personal income tax rate to 36% from 33% for joint filers making over $250,000 and for singles making over $200,000, but with the bipartisan Collins-McCaskill Employer Tax Carve-Out for businesses with less than 500 employees. This ETCO should exist for all such businesses in this second to top tax bracket as well as the top bracket that was just increased to 39.6%. This ETCO would protect America’s most prolific job creators from having needed capital pulled from them due to these two personal income tax increases. Such a tax policy when statically scored would raise about $300 billion over 10 years. But when the same assumptions of respected economic studies are used, an ETCO with these two personal income tax increases could all together raise as much as four to five times the federal revenues, or $2.8 trillion to $3.5 trillion over ten years (1). For more on ETCOs visit the website, ThirdWayProgressives.org. In exchange for this new tax increase Americans and Republicans should receive federal savings in the form of their choice of one of the larger and one of the smaller healthcare efficiency improvements that are in my December 8, 2012 paper. Again, these are not federal spending cuts as much as they are the elimination of regulations that will save virtually everyone money, including the federal government and our state governments. Also, all four efficiency improvements have in the past received bipartisan support.

The first larger healthcare efficiency improvement is the right of Americans to buy private healthcare insurance across state lines. By allowing this to happen we would permit “healthcare cost shifting” to occur, whereby, lower Medicare and Medicaid payments to most all healthcare providers can be offset for those healthcare providers by private insurers who now have much more moneys due to their new ability to consolidate internal bureaucracies due to their new ability to sell anywhere in the US without having to worry about state regulatory concerns. There exists much literature on this reality. Respected studies like that of Kowalski, Congdon, and Showalter 2008, suggest that state insurance mandates can raise the costs of private healthcare premiums by 30% to 50% (2). This might translate into something in the range of $300 billion to $500 billion a year in likely cost shifting savings once health insurance companies are able to fully adjust to their new opportunities. Even if in reality this policy change turned out to save a much smaller amount than $3 trill to $5 trill over ten years, it would still be worth making this change. As for the constitutional question of the federal government regulating healthcare commerce across state lines, clearly the commerce clause allows for this, and clearly Obama Care too makes this possible. After all, these state regulations are in reality tariffs and Obama Care can always help regulate this issue if need be.

The second larger healthcare efficiency improvement concerns a probable but not certain inefficiency. This is the inefficiency that Republicans are trying to solve with their effort to bring a private insurance option to Medicare. Republicans in the past have proposed that this new option to Medicare could save as much as $4.7 trillion over 10 years! Even if they are just partially right, it would be worth enacting.

The first somewhat smaller healthcare inefficiency concerns Medicare’s inability to use their bulk purchasing power with prescription drugs. President Obama has proposed such a plan that his administration says will save more than $200 billion over ten years. This is something that should be done if only just for the principle that it is unfair for Americans to pay the pharmaceutical drug costs of developed nations who do use their government backed purchasing power with drugs. For those who are rightfully concerned that our great American drug companies, that we want to continue to be the world’s leaders, will lose enough profits to have their future growth and R&D expenses cut, any such cut will be more than offset by an expanded market via the new patients coming onto Obama Care, even more generous and stable R&D tax credits and structures, increased government research spending, and new industrial policy programs that should be able to be enacted in the next several years.

The second smaller healthcare inefficiency has to do with tort reform. Liberals dont’t like to talk about tort reform, but we are now about to add 15 to 30 million people to our healthcare system, and right now we can’t even figure out how we are going to pay for those we are now serving! A reasonable tort reform in healthcare would be to allow in Obama Care the legal right for doctors, hospitals, and healthcare providers to be protected civil and criminally if they run only the one device or procedure that epidemiological studies suggest has the highest probability of success. This is where much money in healthcare can be saved. Moreover, in no way would the federal government be taking away a current right. This tort reform would only apply to Obama Care, so it would only apply to the 15 to 30 million people who now do not have any health insurance. Or if Congress chose, this tort reform could apply to those Americans who choose a private healthcare option that has this tort reform as a feature. Other much less radical tort reforms are said by CBO to be able to save about $54 billion over 10 years. The above proposed tort reform would likely save much more than that.

The Republicans with this, by April 15th 2013 vote, should receive their choice of one of the two larger healthcare reforms and one of the two smaller reforms. In my opinion the best larger reform to start with is being able to buy private health insurance across state lines. One reason this is because this reform would also allow the state exchanges in Obama Care to be much more streamlined and much less expensive to operate. In my opinion the best smaller healthcare reform to start with in 2013 would be tort reform in Obama Care. One reason for this that this would be one of the quickest of the healthcare reforms to implement.

The above first grand bargain should extend the debt ceiling for one full year. This is because our deficit problem will only be halfway solved with this first budget vote. Plus, given that a very important part of our new budget involves new healthcare reforms, the appropriations portion of the budget process, that existing from April 15th to October 1st, will be extremely important and requiring of added efforts. These are also why as part of this spring’s vote No Budget No Pay would be enacted as part of the 2014 budget process.

The second half of our deficit problem can be solved with a second grand bargain to come by April 15, 2014. With this second compromise Democrats should receive a capital gains and dividends tax rate increase of 5 percentage points to 23.8% for joint filers earning over $250,000 and singles over $200,000. However, very similar to the personal income tax rate increase that came with the first grand bargain, the second grand bargain’s capital gains and dividends tax increases, along with January 1, 2013’s investment income tax increases, should be enacted with Employer Tax Carve-Out. Yet these are Employer Tax Carve-Outs that are applicable to investment income. Much more on investment income ETCOs can be found at ThirdWayProgressives.org. Republicans in this second grand bargain will receive one of the larger healthcare reforms and one of the smaller healthcare reforms. Yet because the smaller healthcare reform that will likely be leftover after the first grand bargain is more often supported by Democrats, that being Medicare using bulk purchasing power for drugs, the tax increase in the second grand bargain will be smaller than the tax increase in the first grand bargain. However, the statically scored about $400 billion over ten years that would be raised by all of the investment income tax increases enacted after January 1, 2013 could possibly be increased by as much as four to five times that amount with an investment income ETCO.

Investment income ETCOs are relatively simple yet extremely effective when it comes to simultaneously raising large amounts of new government revenues and incentivizing the creation of large amounts of new private sector jobs in the US. Investment income ETCOs carve-out the generally 5% to 12% of financial market gains that are derived from those investments that directly fund American job and economic growth (3&4). These four financial investments are: venture capital funds and investments, bonds bought at first issue, stocks bought at IPO and secondary offering, and the underwriting of the above three investments. Very importantly, in order for gains from these financial investments to receive a tax carve-out the business that received the capital investment must increase its combined labor and capital investment in the US by 80% of the total financial investment that could receive a tax carve-out. Therefore, with April 2014’s vote the top tax rate on dividends and capital gains would be set at 23.8%, however, if the investment income comes from one of the four special financial investments with the US investment qualifiers, than the top tax rate would be only 15%. The other generally 95% to 88% of financial market investments that receive the higher tax rate are virtually only the trading of existing stocks, bond, or derivatives that have very little effect on direct job and economic growth, while the four special financial vehicles are the conduits for virtually all economic growth that is facilitated through the financial markets. Also, just like with the personal income tax ETCO, the greater the difference in effective tax rate between income that comes directly from US employment and that income that does not, the greater will be the tax revenues raised and the more the wealthy will be incentivized to invest in ways that employ fellow Americans. The investment income ETCO is also a great way to fix the carried interest rule.

The fact that the investment income ETCO and some of the above healthcare reforms are new concepts is one of the reasons why this budget process will take at least two years. Yet when these two grand bargains are fully implemented and our economy is able to fully adjust to them, it is possible that all together they could raise and save as much as about $15.5 trillion over ten years. Very importantly again, these two grand bargains would not be pulling $15.5 trillion out of our economy, they would for the most part simply be making our healthcare and tax system much more efficient and effective, thereby freeing up these monies to stimulate the rest of the economy. Moreover, the four healthcare efficiency improvements, along with a fifth efficiency improvement of moving from a fee for service system to a fee for patient system, are all interrelated so it would be best to handle them all in one relatively short period, and now before Obama Care is fully implemented would be much better than afterward.

Maybe we do not raise and save as much as $15.5 trillion over ten years, or maybe we raise and save even more! But this is what good governments do: they find better policies and laws and then work on refining them. So if we do not raise or save $15.5 trillion this decade, we will learn how to do it in the next decade, and we will get fairly close to it this decade! Further, $15.5 trillion is $4.5 trillion more than the $11 trillion in debt we would accrue if our current deficit is continued over the next 10 years, and it would be far better than taking the sequestration cuts that will be enacted if we do not pass a budget this spring. We have all already witnessed how austerity, IE, sequestrations, are not working now in Great Britain as they are now starting to experience a double-dip recession. The US could use this extra $4.5 trillion to make certain that every police and fire station in the nation can make instant background checks for gun purchases. We could also use it for many infrastructure improvements and industrial policy programs, green and otherwise, and we could even use a little bit of it in the form of an economic stimulus as a way fighting the economic headwinds of the FICA tax increase that just fell upon most Americans!

This decision is really simple. Remember, the biggest change in our lifetimes is the effective 12 fold increase in global trade that has come with the fall of communism. It is time for us to stop relying on tax and healthcare policies that are 100 years old and not built for the global economy of the 21st century!

1. Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.
2. State Health Insurance Regulations and the Price of High-Deductable Policies, Kowalski, Congdon, and Showalter, 2008.
3. “Recent Changes in US Family Finances” Federal Reserve Bulletin.
4. Jay R Ritter, University of Florida, “Initial Public Offerings.”

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