Mind & Politics

Imagine a country with 100 people and a total income of $100, with total federal income taxes of $11. Imagine further that one person made $100 and paid all $11 of the taxes, and the other 99 people made and paid nothing. In this case the top 1% of income earners paid 100% of all federal income taxes! If you read this in a column, would you be shocked and dismayed?

Imagine something a bit more realistic. Imagine that one person made $21, and paid $2.20 in taxes. The rest of the 99 made $79, and paid $8.80 in taxes. The person who made the most money, $21, paid a 11% of his income in taxes, or 22% of all income taxes paid; the rest of the people made the rest of the money, and paid about 11% of their incomes in taxes, or 78% of all taxes paid. This would be a flat tax. If you read in a column that the top 1% of income earners paid 21% of all federal taxes, would you be shocked and dismayed?

For a more realistic portrayal, image that the one highest earner earned $21 and paid $4 in taxes; the rest of the people made $79 and paid $7. The wealthiest 1% earned 21% of the income and paid 36% of all taxes. The rest of the people made 79% of the income and paid 64% of the taxes. The wealthy are paying taxes at twice the rate than if we had a flat tax; the rest are paying at less than the flat-tax rate. This is more or less the situation in the United States in 2009. If you read in a column that the top 1% paid 36% of all taxes, would you be shocked and dismayed?

I have read many columns, some listed below¹, which present half the information needed to come to a reasonable opinion, and use that half-information to stir up outrage. They will state that it is the wealthy who pay such an inordinate amount of our federal income taxes, without stating that it is the wealthy who make an inordinate amount of the nation’s income.

Since 1980, the percentage of the national income earned by the top 1% has risen from around 10% to around 20%. At the same time, the percentage of federal income taxes paid by the top 1% has risen from about 18% to about 37%. As the top 1% of earners have doubled the percentage of the national income which they earn, they have doubled the percentage of the federal income taxes they pay². The following graph shows this relationship. The ratio of the percentage of all federal income taxes paid to percentage of all national income earned since 1980 has been as low as 1.57, twice during the Reagan/Bush I years, and as high as 2.13 in one of the Bush II years; as of 2008, it was 1.81 (38% of the taxes divided by 21% of the income).

Since the scale of the graph flattens the “ratio” line, I have reproduced it in a separate graph below. What it shows is that the share of federal income taxes paid by the wealthiest 1% of income earners in the United States is about double the share of the national income that they make. As stated above, the wealthiest 1% of Americans make 21% of the national income and pay 38% of the national federal income taxes.

Is this too much to pay? or too little? Should we have a true flat-tax? or preserve some progressivity? How much progressivity? These are questions about which we can have intelligent discussions and differences.

In followup articles, I would like to explore the relationship between income earned and taxes paid, not just federal income taxes, but total federal taxes, or even total taxes, including state and local. I would also like to compare total wealth to taxation. This should give us a better idea of our general tax burden.

¹ Some examples of articles telling half the story:
Tax Burden of Top 1% Now Exceeds That of Bottom 95%

In Pictures: How Much the Top Earners Already Pay in Taxes

The Top 10 Percent of Income Earners Paid 71 Percent of Federal Income Tax

Top 1 Percent Pay 37 Percent of Income Taxes

² The data come from Top Incomes in the Long Run of History and go back to 1913. Because I don’t have tax shares back that far, those early years didn’t make it into the graph, but wouldn’t it be great if I could find that information. There’s a nifty graph of this information at Share of the Nation’s Income Earned by the Top 1 Percent. Also, I found the information on the share of taxes paid by the wealthiest 1% at Summary of Latest Federal Individual Income Tax Data; similar information can be found at Historical Effective Federal Tax Rates: 1979 to 2002.

Health care costs by the numbers:

• Americans spend $7500 per capita on health care. This is the highest in the world. The nation with the next highest spending is Norway, at $5000; we spend 50% more. Even though our spending on health care is higher, our health outcomes are generally worse than those of other industrialized nations.¹
• In 2002, 5% of the people with the highest health care expenses in the U.S spent 49% of the overall health care dollar. On the other hand, 50% of the population spends just 3% of the overall health care dollar.²
• The elderly tend to spend more of the health care dollar. At 13% of the population in 2002, they spend 36% of the overall health care dollar.
• In 2002, the five most expensive health conditions were heart disease, cancer, trauma, mental disorders, and pulmonary conditions. They account for about one-third of all health care spending. 25% of Medicare beneficiaries account for 85% of all Medicare spending; among the 25% of these beneficiaries, 75% have one or more of the top 7 most expensive medical conditions.²
• The rise in spending on the five most expensive health conditions between 1987 and 2002 was related to the rising numbers of people with the conditions, rather than a rise in the amount of spending per person with the conditions.²
• 10% of all health care spending, and 25-30% of all Medicare spending, goes to those in their last year of life.³
• The difference between health care expenditures for the elderly and the non-elderly is greater in the U.S. than in other industrialized nations. This difference is in part explained by the fact that the elderly in the U.S. have virtually universal coverage, more than the non-elderly; other industrialized nations have more universal coverage at all ages, and so don’t see this steep rise.⁴
• The cost per health visit or procedure is much more expensive in the U.S. than in other industrialized nations.⁵
• Health care administration costs are over $1000 per capita in the U.S. compared to $300 in Canada. The percentage of administrative and clerical personnel in the U.S. health care labor force grew 50%, from 18% to 27%, between 1969 and 1999.⁶

If most of our health care spending goes to the elderly and those suffering from chronic disease, then most of our effort to reduce spending needs to be concentrated there. Since the rise in spending on patients with chronic diseases results from an increasing number of patients with chronic disease, rather than an increasing cost of individual treatment, then prevention would be in order.⁷ For care at the end of life, we need to be less aggressive at treating conditions which will not extend life or contribute to its quality.

If our goal were to reduce health care spending to the level of other industrialized nations, we might want to concentrate on reducing expenditures in areas where we spend more. The McKinsley Quarterly has a well-done report on Why Americans pay more for health care⁸ The most prominent categories in which U.S. health spending exceeds that of other countries are outpatient services, pharmaceutical prices, and health administration and services. The report notes the difficulties we face in trying to bring health care costs down, including:

• Demand. People are less healthy and require more services, and there is no value consciousness, since individuals only pay 12% of the total health care costs.
• Supply. In other industries, innovation tends to drive prices down, but this is not the case for innovation in health care, which tends toward more expensive equipment and procedures. The report cites this as a difficult problem to overcome: how do we promote innovation, which tends to drive costs up, and not drive those costs up?
• Intermediation. Fee-for-service reimbursement increases incentives to provide more health care than is necessary; fear of malpractice contributes, as well. The report also notes that Medicare prices become a benchmark for private insurance to follow, but that Medicare’s cost-plus formula reduces pressure on providers to reduce costs.

It seems that prescriptions for reigning in health care spending will require attacking several different areas, and that the more simplistic recommendations from either the liberal or conservative side of the political sphere are not sufficient.

¹ Health Care Spending in the United States and Selected OECD Countries
April 2011; It’s a Ripoff! -or- Why America Spends So Much on Health Care
² The High Concentration of U.S. Health Care Expenditures
³ The Economics of Dying; How Much Do We Spend on End-of-Life Care?
⁴ Health Care Expenditures in the OECD
⁵ International Federation of Health Plans 2009 Comparative Price Report Medical and Hospital Fees by Country
⁶ Costs of Health Care Administration in the United States and Canada
⁷ Prevention: The Answer To Curbing Chronically High Health Care Costs (Guest Opinion)
⁸ Why Americans pay more for health care

CNN’s chief political analyst Gloria Bolger, in the article Epic failure by Washington sets us adrift¹, puts forward the proposition from the late Sen. Daniel Patrick Moynihan that, “Great changes in national public policy should never be erected on slender partisan majorities.” She uses this to criticize the health care reform bill and the Obama Administration. While she gives the White House some due by saying that the Republicans “weren’t interested in their plan,” it still feels like she’s practicing a bit of historical revisionism.

It is true that in the end, the health care law passed by means of some unusual procedures including the Senate’s use of reconciliation to avoid a filibuster. It is also true that the final vote in the House was a close 219-212, with all Republicans and 34 Democrats voting against. Still, the history of the bill includes members of both parties working together, with a number of Republican ideas included in the bill, and some Democratic ones tossed out, in the name of compromise.

Starting with the ingredient to which there is the most opposition, the individual mandate, in a June 3, 2009 article in the New York Times (Obama Open to a Mandate on Health Insurance²), Robert Pear reports that, “President Obama said Wednesday that he was receptive to Congressional proposals that would require Americans to have health insurance and oblige employers to share in the cost. But he said there should be exemptions for people who cannot afford insurance and for small businesses in general.” President Obama indicated his opposition to the individual mandate during his campaign for the presidency, but in June of 2009 is deferring to Congressional leaders in the name of compromise and in the hopes of bipartisan support. Much of the rancor directed at President Obama over the individual mandate in the health care reform bill is misplaced.

Bipartisanship was quite evident in the early months of the reform effort. In a February, 2009 column³, the author at PoliticusUSA quotes Newt Gingrich’s strong support for a health care overhaul. He is quoted as saying, “President Obama is right: we cannot wait any longer to fix the problems we face in health – they are beyond critical. We waste billions of dollars every day and people die unnecessarily every day at the hands of a broken, fragmented healthcare system…There is a time for Republicans and Democrats to stand their ground when they must; but it is equally as important to have the courage to collaborate when they should. Health reform is one of those moments.” In July, the New York Times carried an article by David M. Herszenhorn and Robert Pear (Health Policy is Carved Out at Table for 6⁴), describing the 6 Senators, 3 Republicans (Michael B. Enzi, Charles E. Grassley, and Olympia J Snowe) and 3 Democrats (Max Baucus, Kent Conrad, and Jeff Bingaman) who were negotiating a bipartisan plan which became the basis for the health care reform act. In an Op-Ed in the Washington Post August 5, 2009 (Working Across the Aisle for Health Reform⁵), Senators Ron Wyden and Robert F. Bennett write about 12 Senators from both parties working to craft a bipartisan plan for health care reform. And as late as August, Ezra Klein interviews Lindsey Graham (Is There a Deal to be Made on Health Care? An Interview With Sen. Lindsey Graham⁶), who is quoted as saying, “We refuse to let partisanship kill health reform.”

While the bill did not end up a paragon of bipartisanship, there was plenty of it along the way.

That early bipartisanship led to compromises between Democrats and Republicans and the inclusion of a number of Republican ideas in the final bill. In a November 8, 2010 recap of the health care law, MediaMatters (Fox attempts to rewrite health care reform history⁷) delineates many of the Republican ideas which made it into the bill. President Obama, during a House GOP retreat visit, mentioned

• Creating a high-risk pool for uninsured folks with preexisting conditions
• Allowing insurance companies to sell coverage across state lines
• Creating pools where self-employed and small businesses could buy insurance
• Letting kids remain covered on their parents’ insurance until they’re 25 or 26
• Incentivizing wellness
• Creating an affordable catastrophic insurance option for young people

These ideas are reiterated by Ezra Klein, in a Feb 2010 blog post⁸, who lists fundamental features of the health care bill which come from the four planks of GOP’s Solutions for America, including

• Let families and businesses buy health insurance across state lines
• Allow individuals, small businesses, and trade associations to pool together and acquire health insurance at lower prices, the same way large corporations and labor unions do
• Give states the tools to create their own innovative reforms that lower health care costs
• End junk lawsuits

Among the Democratic ideas tossed out in the name of compromise was the public option⁹.

The reform bill is now in the hands of the Supreme Court, but not before another dustup. President Obama, in an April 2, 2012 Rose Garden press conference, stated, “I’m confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress. And I’d just remind conservative commentators that for years what we’ve heard is the biggest problem on the bench was judicial activism or a lack of judicial restraint, that an unelected group of people would somehow overturn a duly constituted and passed law. Well, this is a good example. And I’m pretty confident that this court will recognize that and not take that step.”  This led to an avalanche of criticism by the conservative blogosphere and what was described by Jeffrey Toobin as a “hissy fit”¹⁰ on the part of Federal Judge Jerry Smith, who was hearing a case involving a section of the health care bill, and who gave the government lawyer the homework assignment of writing a 3-page, single-spaced letter explaining the administration’s views on judicial restraint; Attorney General Eric Holder complied.

While Politifact.com (April 4, 2012¹¹) rates the remark False, it does so mostly because it felt compelled to judge the remark literally, given that President Obama had not explicitly stated the historical context in which the remark was to be understood. The article notes that the term “strong majority” is not accurate when describing a House vote of 219-212, but even though, as it notes, the original vote in the Senate barely broke the filibuster level with a tally of 60-39, and had a final tally of 56-43, those are still significant majorities. The article also describes the accuracy of “unprecedented”. While the Supreme Court has clearly overturned laws passed by Congress, the general view of commentators is that the Supreme Court has not overturned such a significant Congressional act since the 1930′s, nor such a significant act dealing with an economic issue since, as the President himself mentioned, “Lochner”, “a controversial 1905 decision striking down a New York labor law because it interfered with employer/employee contract rights”. (Michael Tomasky¹² illuminates Obama’s words, assuming he was using the strict term “Lochner” to refer to conservative jurisprudence in what liberals refer to as the “Lochner era” between the 1905 of the aforementioned case and around 1937.) The Politifact article continues by quoting Norman Ornstein of the conservative American Enterprise Institute, “At least since the early part of the New Deal, when you had a Supreme Court that blocked at least a few initiatives of the new Roosevelt administration, we haven’t had a major social policy overturned,” he said. “And I don’t think any of them were as sweeping or significant in their effect on the country as this one (the health care law). They didn’t overturn Social Security; they didn’t overturn the (Works Progress Administration).” Lisa Knepper adds¹³, quoting a 2011 Institute for Justice study, that the Supreme Court, between 1954 and 2002, struck down two-thirds of a percent of laws passed by Congress and less than one-twentieth of a percent of laws passed by state legislatures. So while “unprecedented” is clearly too restrictive a term, it would be “extraordinary” or “exceptional” for the Supreme Court to overturn such an important law as the health care reform act.

What will the Supreme Court decide? The immediate reaction to the hearings and the poor performance by Solicitor General Donald Verrilli was that the key justices, Chief Justice John Roberts and Justice Anthony Kennedy, by the tone of their questioning and the poor responses from Mr. Verrilli, would vote against the individual mandate, and possibly the whole act. Since then, commentators have weighed in¹⁴, and a number think it will actually go 6-3 in favor.

My best guess is that the justices will vote 6-3 to uphold the individual mandate, and by extension, the whole act. I’m looking forward to the conservative commentary which is sure to explode with such a decision, and their new, improved takes on judicial review and judicial activism.

¹Epic failure by Washington sets us adrift
²Obama Open to a Mandate on Health Insurance
³Newt Gingrich Supports Obama on Health Care Reform
⁴Health Policy is Carved Out at Table for 6
⁵Working Across the Aisle for Health Reform
⁶Is There a Deal to be Made on Health Care? An Interview With Sen. Lindsey Graham
⁷Fox attempts to rewrite health care reform history
⁸The six Republican ideas already in the health-care reform bill
⁹‘Public Option’ in Health Plan May Be Dropped
¹⁰Court’s Obama order a ‘hissy fit’
¹¹Obama attaches stark terms to possible Supreme Court ruling on health care law
¹²How the Supreme Court Ended Up on the Ropes
¹³‘Judicial activism’ a convenient bogeyman
¹⁴ Too numerous to list; just Google “supreme court will rule 6-3 to uphold health care law”

On Oct 12, 2007, the Dow Jones Industrial Average stood at 14,093. On Jan 20, 2009, it had plummeted to 8279. Then Barack Obama became president. On March 6, it had further plummeted to 6627. Then it started rising. By July 17, 2009, it passed it’s Jan 20 value and reached 8724. It has not fallen further since then.

I bring this up because I have been reading articles from the past year or two comparing the Reagan recovery to the Obama recovery, and because in comments to an article on The Foundry called Morning Bell: A Disappointing Recovery Leaves Americans Suffering, one reader notes that Americans have lost thousands of dollars in their retirement plans due to President Obama’s economic policies. That’s a hard argument to make, since almost all losses in retirement plans occurred before Obama took office, and all losses have been regained since he did take office (assuming you can equate retirement plans with the Dow Jones).

The reader also laments the loss in housing value due to the Obama administration’s economic policies. Home values reached a peak (JP’s Real Estate Charts) of $275,000 in 2006, then plummeted to just below $175,000 at the beginning of 2009, when President Obama took office, which is about where it was in mid-2011. Again, it’s a hard argument to make that the Obama administration’s economic policies since he took office in 2009 account for the plummet in home values in the 3 years before he took office.

Just a few more numbers comparing the Reagan recovery to the Obama recovery. In January, 1981, when President Reagan took office, the unemployment rate was 7.2%. It rose and fell until August, when it was also 7.2%. After August, 1981, the unemployment rate rose until it reached 10.8% in December of 1982. In July of 1984, three and a half years after Reagan took office, and three years after it had started climbing from 7.2%, it settled back down to 7.2%.

When President Obama took office in January, 2009, the unemployment rate was 7.8% and rising. The unemployment rate peaked at 10% in October of 2009, and is now at 8.3%, three years later. You could call this advantage Reagan, except that all of the increase in unemployment on his watch was as the result of his (and to be fair, Paul Volker’s) policy, since it didn’t start rising until 6 months into his term; whereas unemployment was rising when Obama took office, so maybe he shouldn’t get blamed for the first few months it rose.

The Democrats would like to put a good face on the progress of the Obama recovery; Republicans would like to continue to lionize Reagan and imagine that were he president today, the recovery would be in full swing. Truth is, the two recessions, the Reagan Recession and the one Obama inherited, are too different for simplistic comparisons, and in many of the ways in which Americans really feel hit in their pocketbooks (see housing, above), the damage had been done before President Obama’s oath of office.