Sep 042012

Fix Medicare, primarily by restricting end-of-life care, as insurance companies do now.

Fix Social Security by minor changes to (1) the payroll tax, (2) the benefit formula for high-income beneficiaries and (3) the retirement age.

Fix the hopeless hairball that is the U.S. tax code primarily by (1) broadening the base, (2) reducing rates and (3) eliminating virtually all tax breaks.

This is not rocket science, folks. The case for a fix is laid out with extraordinary clarity and persuasiveness (IMHO) in an article in Fortune cover-dated Sept. 3 by Geoff Colvin and Allan Sloan. I recommend the article to everyone interested in a real solution to the unsustainable U.S. fiscal mess. Skip it if you are just looking for sharp sticks with which to poke your political opponents.

Restrict end-of-life care? Aren’t you talking about “death panels”? Skip the “Mediscare” talk, please. Colvin and Sloan lay out the facts simply: More than 25% of Medicare spending goes to those in the last year of life, only 5% of the covered population. As baby boomers start to check out, “end-of-life expense will blow through the roof unless we deal with it now.”

Nobody has succinctly summarized the issue better than William Falk, editor of The Week, who wrote in April 2011:

Rationing is not inherently evil. If there’s a finite amount of money to spend on health care, we’ll need a system of values and rules to divvy up that money humanely and effectively. Whatever system we ultimately choose, someone will have to say no to expensive treatments of dubious value; we may have to reconsider spending a quarter of the entire Medicare budget keeping people tethered to machines in the last months of life. We could, of course, continue to operate as if there’s an infinite amount of money available. But how’s that working out? For Americans to stop spending trillions we don’t have, we’ll have to accept limits on personal choice. We’ll even have to accept our own mortality.

People (or care-givers) who want heroic measures at the end of life, Colvin and Sloan assert, should spend their own money. Once limits are set, they said, private insurance to cover such care would become available. By the way, they also propose surcharges on smokers and the morbidly obese.

The Colvin/Sloan Social Security fixes are standard stuff. In my public speaking, I have been arguing for years that the program can be fixed with relatively minor adjustments. The one new (to me) wrinkle in the Fortune essay: Ditch the fiction of the “trust fund.”

Until recently, Social Security was taking in more than it paid out. Uncle Sam spent the surplus, replacing the cash with promises to pay. The mythic “lock box” is full of IOUs that will have to be redeemed by general revenues. Here’s the Fortune take:

The $3 trillion Social Security trust fund, while impressive on paper, is of no economic value because the government has to sell new Treasury securities to raise the cash to buy the Treasury securities that the Social Security trust fund liquidates in order to meet its obligations. The bookkeeping is so complex and misleading that it causes some people to say the system is broke, which it isn’t, and others to say it’s flush, which it also isn’t.

What about tax breaks? Get rid of virtually all of them, argue Colvin and Sloan, including those for employer-sponsored health care and the mortgage-interest deduction. I find their reasoning highly persuasive.

I like my deductions for mortgage interest, property taxes, charitable giving and the rest as well as the next man.  But if there is one point I would emphasize, it is that most of the benefits of these tax breaks go to those in the highest income brackets. And Colvin/Sloan make another important point:

…by making various favored activities less expensive for individuals or companies, special breaks distort economic incentives, drawing money away from other activities. And because special breaks let some people and companies pay less tax, rates have to be raised on everybody else. Broadening the tax base by wiping out special breaks — including the very favorable treatment investment income gets — exposes more taxpayers to the same tax rates, which can thus be lowered substantially while still bringing in the same revenue — in a simpler, fairer way.

 Amen, brothers.

One of the reasons the Fortune piece appeals to me is that the main mantra on the tax side — broaden the base and lower the rates — is what I have been saying about Washington’s tax system for years.

Washington has no income tax. It gets roughly half (47%) of its general-fund revenue from the retail sales tax. Rates are high — as much as 10% on restaurant meals in King County — which encourages tax avoidance, especially by crossing into Oregon and Idaho for major purchases.

If I spend $50 on a shirt at Nordstrom, $4.75 eventually makes its way to Olympia, part of which gets parceled out to Seattle and King County. If I walk across the street and get a $50 haircut, the barber sends only 75 cents to Olympia (as a 1.5% gross-receipts tax). The effective tax on goods is more than six times higher than the tax on services.

Put simply, the retail sales tax applies to a part of Washington’s economy — purchases of tangibles — that while growing in nominal terms is shrinking in real terms as we become more service-oriented.

Sure, my doctor and dentist and barber would squawk if they had to collect a sales tax, 4% or 5%, say. But if we simultaneously reduced the punitive sales-tax rate on goods, we’d make Washington’s tax system more fair.

And we’d save gas, too, because we’d reduce the incentive to shop at Costco in Oregon for that big-screen TV. In case you are wondering, by the way, I’m the last kid on my block without a big-screen TV.

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