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The Health Bill’s Fiscal Bonus

Wall Street Journal - Editorial

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Washington, March 15, 2017 | comments

The best chance in a generation to control a runaway government.

WSJ, Editorial 

The furor over the Congressional Budget Office’s report on the House GOP health bill is concentrated on predictions about insurance coverage, which suits Democrats fine. Lost amid the panic is that CBO shows the bill is a far-reaching advance for the market principles and limited government that conservatives usually favor.

The CBO is not omniscient, but if its projections are even close to accurate then ObamaCare repeal and replacement is the most significant government reform in perhaps three decades. Under conventional (static-revenue) scoring, the bill cuts spending on net by $1.22 trillion and eliminates a raft of new taxes worth $883 billion through 2026.

Despite this tax reform and new refundable tax credits for individual insurance purchases, the bill still reduces the deficit by $337 billion. Reducing spending, the tax burden and further debt generation is an enormous pro-growth fiscal bonus.

 

President Obama sought to permanently increase the government’s share of the economy to redistribute income to reduce inequality. ObamaCare was his spending wedge to force tax increases long after he had left office. The House health-care bill is the first crucial step to limit that wedge and restore the federal fisc to a more sustainable long-term path.

Absent reform, the brutal budget math is that the U.S. is headed for a debt crisis; major tax increases that subtract from GDP and living standards; or deep and immediate cuts to entitlements that Americans have planned their lives around—or maybe all three. The longer Washington waits, the more painful and politically convulsive the corrections will be.

We keep reading that President Trump and Speaker Paul Ryan are on a collision course over entitlements, though when was Medicaid demoted from entitlement status? The bill transitions the program’s funding formula to block grants starting in 2020—for the first time, limiting the automatic and open-ended commitment that defines an entitlement.

Taxpayers will save $880 billion in Medicaid alone over the decade as states search for efficiencies. Relative to current law, that’s a 17.6% cut over 10 years. In 2026 Medicaid will be 25% smaller than the CBO otherwise projects on present trend.

When was the last time a government program got 25% smaller? By comparison, inflation-adjusted cash welfare spending has returned to a level nearly as high today as the years before the 1996 reform. That measure caused a 60% decline in welfare dependents over the decade after it passed, reflecting both its work requirements and the tight labor markets of the late 1990s. As with welfare, we should want fewer Americans to need Medicaid.

The health-care bill also zeroes out almost all ObamaCare tax increases. The targets include the 10-year, $144.7 billion tax on the health insurance industry, which is merely passed through to consumers, and the $19.6 billion medical device excise tax, which undermines life-saving innovation.

Perhaps ObamaCare’s most damaging tax is the 3.8 percentage point surcharge on capital gains, dividends and other forms of “unearned income.” Liberals and some big-government conservatives are claiming hypocrisy, because President Trump supposedly didn’t run on tax breaks for wealthy investors. But he did run on raising incomes and increasing growth, and slashing the top marginal tax rate on capital to 20% from 23.8% will improve incentives and help raise labor productivity and wages.

The tax also hurts middle-class savers and small-business job creators more than the superrich. A couple who earn even a single dollar more than $250,000 get the tax slapped on every dollar of their investment income, creating a marginal-rate spike.

Conservative critics are discounting these and other benefits because the bill isn’t everything they imagine, but they’re missing the larger and rarer opportunity. ObamaCare was designed to expand over time, reaching deeper and deeper into the middle class and displacing ever-more private health insurance. This private market decomposition has been slower than expected because the Obama Administration botched the law’s design.

But if ObamaCare continues on present trend, the result will inevitably be much higher levels of taxation across society. As the entitlement state’s obligations consume more GDP, the economy’s long-term growth trend will further decline and there will be fewer jobs, as the European welfare-state experience demonstrates.

If conservatives fumble this repeal-and-replace moment, they won’t get another chance. And they’ll have squandered their best opening in a generation to control the size and scope of the federal Leviathan.

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