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Archive for the ‘Entitlements’ Category

If pessimism was an Olympic event, I used to think I might be favored to win a medal. After all, growing levels of dependency outside of Washington and rampant corruption inside of Washington sometimes lead me to conclude that America is doomed to a Greek fiscal future.

But compared to some people, maybe I’m just an amateur Cassandra. Or even a Pollyanna.

Holman Jenkins of the Wall Street Journal has an ultra-pessimistic column today arguing that “many of us believe the entitlement programs need to be reformed” but worrying about “Republicans who pose as ‘conservative’ defenders of Social Security and Medicare.”

And part of his column is rather convincing since he points out that Donald Trump has criticized Republicans who favor reform.

…the meaning of Trumpism…goes like this: “…Every Republican wants to do a big number on Social Security, they want to do it on Medicare, they want to do it on Medicaid. And we can’t do that. And it’s not fair to the people that have been paying in for years and now all of the sudden they want [it] to be cut.” Mr. Trump is a political harbinger here of a new strand of populist Republicanism.

To be fair, Trump’s comments aren’t necessarily anti-reform. One could argue that he’s simply saying that benefits for existing retirees and older workers shouldn’t be adversely impacted.

But since “The Donald” hasn’t expressed any support for reforms that would create better and more viable options for younger workers, Jenkins is probably right to be pessimistic.

But he also argues that Tea Party-type Republicans are opposed to reform.

The tea party animus toward ObamaCare is…means-tested new entitlements…are viewed as a threat to the traditional, universal, “earned,” middle-class retirement programs of Social Security and Medicare. …The unspoken tea party stance of defending the good old-fashioned entitlements of “real” Americans is increasingly, in dog-whistle terms, what differentiates one Republican from another.

While it’s almost certainly true that there’s more animosity to redistribution-oriented programs such as Obamacare than there is to so-called earned entitlements, I think Holman misreads the Tea Party crowd.

Based on my speeches to – and other interactions with – these activists, I have never detected any measurable hostility to Social Security reform and Medicare reform. Fixing those programs may not be at the top of their agenda, but they’re not on the wrong side.

Moreover, I work closely with folks on Capitol Hill and I almost never hear about any meaningful opposition from Tea Partiers. And since House GOPers have approved budgets with genuine entitlement reform for five consecutive years, there’s been plenty of time for opposition to materialize.

Jenkins also is glum because Governor Christie, who has openly expressed support for reform, hasn’t fared well. And he notes that Senator Rubio has rejected reforms that would harm current seniors.

Chris Christie, who went nowhere in Iowa, did himself no favor by dragging Social Security and Medicare into every debate, however much those programs need to be addressed. Marco Rubio was just as quick to modify any implication that Republicans therefore are entitlement reformers: “We are talking about reforms for future generations. Nothing has to change for current beneficiaries. My mother is on Medicare and Social Security. I’m against anything that’s bad for my mother.”

I’m not a political expert, so I won’t pretend to know why Chris Christie didn’t get many votes in Iowa, but I don’t think it’s right to label Marco Rubio as an opponent. He’s been very upfront about supporting much-needed structural reform of Medicare and Medicaid. He simply doesn’t want to change the rules for existing retirees and older workers.

You can argue that such a condition makes it harder to save money in the short run, but I’m more concerned about dealing with the long-run fiscal challenge (as seen in these IMF, BIS, and OECD numbers). So Rubio’s position doesn’t strike me as a problem. Indeed, I think he’s pushed the envelope in the right direction, particularly since he comes from a state with so many seniors.

And since Ted Cruz also has said similar things about entitlement reform, that means both top-tier GOP candidates (other than Trump) are willing to do the right thing to restore fiscal sanity.

To be sure, maybe I am being naively optimistic. Perhaps Rubio or Cruz will win and will decide to kick the can down the road, even with a GOP Congress that might be primed for reform.

If that happens and we miss what may be a once-in-a-lifetime opportunity for genuine entitlement reform, I’ll be very unhappy and Holman Jenkins will have demonstrated that pessimism is a much smarter assumption when contemplating the actions of politicians.

In which case my already-low opinion of politicians would drop to a record depth. And it also might be time to escape to a country that still has some sensible people and is less likely to suffer fiscal collapse.

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My views on the value-added tax are very simple and straightforward.

If we completely eliminated all income-based taxes, I would be willing to accept a VAT (or even a national sales tax) as a revenue source for government.

But unless that happens, I’m unalterably opposed because it’s far too risky to give politicians two major sources of tax revenue. Just look at what happened in Europe (and Japan). Before the VAT, the burden of government spending wasn’t that much higher in Europe than it was in the United States. Once VATs were adopted, however, that enabled a vast expansion of the welfare state.

This is why I’m worried about the Rand Paul and Ted Cruz tax plans. On paper, both plans are very good, dramatically lowering income tax rates, significantly curtailing double taxation, and also abolishing the corporate income tax. But I don’t like that they both propose a VAT to help make up the difference. It’s not that I think they have bad intentions, but I worry about what happens in the future when a bad President takes office and has the ability to increase both the income tax and the value-added tax. When the dust settles, we’re France or Greece!

By contrast, if we do some type of tax reform that doesn’t include a VAT, the worst thing that could happen when that bad president takes office is that we degenerate back to the awful tax code we have today. Which would be unfortunate, but not nearly as bad as today’s income tax with a VAT on top.

Bad since I’ve already addressed this issue, let’s focus on a part of the Paul and Cruz tax plans that has received very little attention.

Both of them propose to get rid of the payroll tax, which is the part of your paycheck that goes to “FICA” and is used to help fund Social Security and Medicare.

Alan Viard of the American Enterprise Institute has a column in U.S. News & World Report that explores the implications of this repeal.

Would you like to see the FICA item on your pay stub go away and be able to keep the 7.65 percent that the payroll tax takes out of your paycheck? If so, Republican presidential candidates Rand Paul and Ted Cruz have a deal for you – each of them has proposed getting rid of the tax. The senators’ plans would also eliminate the other 7.65 percent that the government collects from your employer, which you ultimately pay in the form of lower wages.

That sounds good, right? After all, who wouldn’t like to keep 15.3 percent of their income that is now being siphoned off for entitlement programs.

But here’s the catch. As Alan explains, other revenue sources would be needed to finance those programs, particularly Social Security.

The payroll tax finances two large benefit programs – 6.2 percent goes to Social Security and 1.45 percent goes to Medicare Part A. If the payroll tax went away, we would have to find another way to pay for those benefits. Paul and Cruz would turn to a value added tax, known as a VAT. …using it to pay for Social Security would have repercussions for the program that the candidates haven’t thought through. …once the payroll tax was gone, Social Security would no longer be a self-financed program with its own funding source. Instead, it would draw on the same general revenues as other government programs.

Viard thinks there are two problems with using VAT revenue to finance Social Security.

First, it means that there’s no longer a limit on how much money can be spent on the program.

…having a separate funding source for Social Security has been good budgetary policy. It’s kept the program out of annual budget fights while controlling its long-run growth – Social Security spending is limited to what current and past payroll taxes can support.

Second, replacing the payroll tax with a VAT eliminated the existing rationale for how benefits are determined.

And that will open a potential can of worms.

…what would happen to the benefit formula if the payroll tax disappeared and Social Security was financed by general revenue from the VAT? Paul and Cruz haven’t said. …One option would be to switch to a completely different formula, maybe a flat monthly benefit for all retirees. …that would be a big step, cutting benefits for high-wage workers and posing tricky transition issues.

I imagine there are probably ways to address these issues, though they might wind up generating varying degrees of controversy.

But I’m more concerned with an issue that isn’t addressed in Viard’s article.

I worry that eliminating the payroll tax would make it far harder to modernize Social Security by creating a system of personal retirement accounts.

With the current system, it would be relatively easy to give workers an option to shift their payroll taxes into a retirement account.

If the payroll tax is replaced by a VAT, by contrast, that option no longer exists and I fear reform would be more difficult.

By the way, this is also the reason why I was less than enthused about a tax reform plan proposed by the Heritage Foundation that would have merged the payroll tax into the income tax.

Yes, I realize that genuine Social Security reform may be a long shot, but I don’t want to make that uphill climb even more difficult.

The bottom line is that I don’t want changes to payroll taxes as part of tax reform, particularly when it would only be happening to offset the adverse distributional impact of the VAT, which is a tax that shouldn’t be adopted in the first place!

Instead, let’s do the right kind of tax reform and leave the payroll tax unscathed so we’ll have the ability to do the right kind of Social Security reform.

P.S. Some of you may be wondering why Senators Paul and Cruz included payroll tax repeal in their plans when that leads to some tricky issues. The answer is simple. As I briefly noted above, it’s a distribution issue. The VAT unquestionably would impose a burden on low-income households. That would not be nice (and it also would be politically toxic), so they needed some offsetting tax cut. And since low-income households generally don’t pay any income tax because of deductions, exemptions, and credits, repealing the payroll tax was the only way to address this concern about fairness for the less fortunate.

P.P.S. Since we have a “pay-as-you-go” Social Security system, with benefits for current retirees being financed by current workers, some people inevitably ask how those benefits will be financed if younger workers get to shift their payroll taxes into personal retirement accounts. That’s what’s known as the “transition” issue, and it’s a multi-trillion-dollar challenge. But the good news (relatively speaking) is that coming up with trillions of dollars over several decades as part of a switch to personal accounts will be less of a challenge than coming up with $40 trillion (in today’s dollars) to bail out a Social Security system that is actuarially bankrupt.

P.P.P.S. It goes without saying (but I’ll say it anyhow) that class-warfare taxation is Obama’s (and Hillary’s) ostensible solution to Social Security’s shortfall.

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What were the most noteworthy events from 2015?

Regarding bad news, there’s unfortunately a lot of competition. But if I’m forced to pick the very worst developments, here’s my list.

Resuscitation of the Export-Import Bank – I did a premature victory dance last year when I celebrated the expiration of the Export-Import Bank’s authority.  I should have known that corrupt cronyism was hard to extinguish. Sure enough, Republicans and Democrats conspired to re-authorize the Ex-Im Bank and transfer wealth from ordinary Americans to politically connected corporations.

Expansion of IMF authority – I also did a premature victory dance in 2014 when I lauded the fact that Congress did not approve increased bailout authority for the International Monetary Fund. Sadly, as part of the year-end spending agreement, Congress agreed to expand the IMF’s authority so it could continue to push for higher taxes around the world.

Busting the spending caps (again) – When I wrote last August that maintaining the spending caps was a key test of GOP integrity, I should have known that they would get a failing grade. Sure enough, Republicans deliberately fumbled the ball at the goal line and agreed to higher spending. Again.

Supreme Court ignores law to bail out Obamacare (again) – Back in 2012, the Supreme Court had a chance to rule whether Obamacare was an impermissible expansion of the power of the federal government. In a truly odious decision, Chief Justice John Roberts ignored the Constitution’s limits on federal powers and decided we could be coerced to buy health insurance. Last year, he did it again, this time by bailing out a key part of Obamacare by deciding to arbitrarily ignore the wording of the law.

Business-as-usual transportation bill – The desire of Congress to fund pork-barrel transportation projects is at least somewhat constrained by the amount of revenue generated by the gas tax. There was an opportunity for reform in 2015 because proposed spending was much higher than the trajectory of gas tax revenue, but rather than even engage in a discussion of good policy options, politicians merely bickered over what combination of tax hikes and budget gimmicks they could put together to keep the pork projects flowing.

Creeping support on the right for the value-added tax – When I wrote early last year that the 2016 election might create an opportunity for tax reform, I was being hopeful that we might get something close to a simple and fair flat tax. Yet probably the biggest news so far in this election cycle is that a couple of candidates who presumably favor small government – Rand Paul and Ted Cruz – have proposed to impose a value-added tax without fully repealing the income tax.

There’s very little good news to celebrate. Here’s my tragically sparse list, and you’ll notice that my list of victories is heavy on style and light on substance. But let’s take what we can get.

Semi-decent Republican budgets – The budget resolution produced by Congress technically doesn’t embrace specific policies, but the it’s nonetheless noteworthy that the House and Senate approved numbers that – at least conceptually – are based on genuine Medicaid and Medicare reform.

Support for spending caps – Notwithstanding the fact that GOP politicians won’t even abide by the limited spending caps that already exist, I’m somewhat encouraged by the growing consensus for comprehensive spending caps akin to the ones in place in Switzerland and Hong Kong. Heck, even international bureaucracies now agree spending caps are the only effective fiscal rule.

Good election results from the Wolverine State – It was great to see Michigan voters reject a gas tax increase that was supported by the political elite.

More companies escaping the IRS – I heartily applaud when companies figure out how to re-domicile in jurisdictions with better tax law to escape America’s high corporate tax rate and self-destructive worldwide tax system. And I’m glad these “inversions” continue to take place even though the Obama Administration is trying to stop them.

A glimmer of reality at the New York Times – I realize I’m scraping the bottom of the barrel in my search for good news, but the fact that the New York Times published a column acknowledging that feminist economic policies backfire against women hopefully is a sign that sensible thinking is possible in the establishment media.

Gun control flopping – It’s great to see that the left has totally failed in its effort to undermine 2nd Amendment rights.

Limits on asset forfeiture – The final bit of good news from 2015 was the just-before-Christmas announcement by the Obama Administration that the odious practice of asset forfeiture would be modestly curtailed.

I would offer predictions for 2016, but since my big prediction from last year that we would have gridlock was sadly inaccurate, I think I’ll avoid making a fool of myself this year.

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Because of the budgetary implications, I think it’s more important to deal with Medicaid and Medicare than it is to address Social Security.

If left on autopilot, Social Security will eventually consume an additional 2 percent of the private economy.

That’s not good news, but Medicaid (which now includes a big chunk of Obamacare) and Medicare are much bigger threats.

Hopefully, though, we don’t need to engage in fiscal triage and we can reform all the big entitlement programs.

So let’s look at why Social Security needs to be modernized.

First and foremost, the programs is about $40 trillion in the red. And that’s after adjusting for inflation!

Moreover, the longer we wait, the more difficult reform will be. I don’t always agree with the policy prescriptions of the Committee for a Responsible Budget, but they are very sober-minded in their analysis. And this chart from one of their recent publications shows that waiting until 2026 or 2034 will require more radical changes.

So it should be obvious we need reform, but now the question is what kind of reform.

Some people think the key goal is making the program solvent, but that’s the wrong focus. Sort of like making balance the goal of budgetary policy.

Instead, the goal should be creating a freer society and smaller footprint for government. And that’s why I think personal retirement accounts are the right goal.

And to understand the implications, consider these excerpts from a column in today’s Wall Street Journal. Professor Jeremy Siegel of the University of Pennsylvania explains how the Social Security system has made his retirement less comfortable.

Last month I turned 70 and, thanks to my earnings, became entitled to Social Security’s maximum benefit, currently $3,500 a month, or $42,000 a year. And so, if I live to 90, I will receive $840,000 worth of (inflation-adjusted) benefits. Over the past 50 years, according to the Social Security Administration, the combined taxes paid into the system by me and my employers equaled $329,640. This sounds like a good deal… But the benefits are only about one-third the $2.27 million I would have accumulated had the taxes instead been invested, over time, in a stock index fund. …the benefits I would collect are even less than the $1.28 million I would have accumulated if my “contributions,” as Social Security taxes are euphemistically called, had been placed in U.S. Treasury bonds. …are affluent seniors making out like bandits? Not at all. The bandit is the federal government, which provides benefits that are millions of dollars short of what anyone whose earnings are at or above the tax cap easily could have accumulated on his own.

In effect, Professor Siegel has been forced to pay for a steak and he’s getting a hamburger. Which is a good description of how all entitlement programs operate.

And it’s not just high-income people who get a bad deal. Social Security is particularly bad for young people. And many minorities also are disadvantaged because of their shorter life lifespans.

Moreover, everyone will pay more for their steak and get even less hamburger if politicians deal with the program’s giant shortfall by imposing the wrong type of reform.

But it’s not just that Social Security is bad for individuals. It’s also a burden on the overall economy.

Andrew Biggs of the American Enterprise Institute looks at how private savings is impacted by government-run retirement schemes

fixing Social Security by raising taxes – or, going further, expanding Social Security as many progressives favor – won’t increase retirement income so much as shift it from households to government. …A new report from Canada’s Fraser Institute looks at how Canadian households’ personal saving habits responded to increases in the tax rates used to finance the Canada Pension Plan (CPP). …The Fraser study, authored by Charles Lammam, François Vaillancourt, Ian Herzog and Pouya Ebrahimi,  found that for each dollar of additional CPP contributions, Canadian households reduced their personal saving by around 90 cents. As a result, total saving – and thus total future retirement income – would increase by a lot less than you’d think. Households would receive more income from the CPP but less from their own saving.

These results are similar to what’s been found in other nations.

I found a similar result across OECD countries: when a country’s government provided an additional dollar of retirement benefits, retirees provided for themselves about 93 cents less in income from savings and work in retirement. …a 2003 analysis by Suzanne Rohwedder and Orazio Attanasio which found that, for the United Kingdom’s earnings-related pension system, individuals reduced personal saving by 65 to 75 cents for each dollar of benefits they expected to receive from the government.

Here’s a very powerful chart on the relationship between private savings and government retirements benefits from another one of Andrew’s articles.

Wow, that’s a powerful relationship. And Biggs isn’t the only expert to produce these results.

All of which underscores why I think we should have a system similar to what they have in Australia or Chile (or even the Faroe Islands).

Here’s my video making the case for personal retirement accounts.

P.S. Two economists at the Federal Reserve produced a study examining why Social Security was first created. It might seem obvious that it was a case of politicians trying to buy votes by creating dependency, but they actually go through the calculations in order to explain how it made sense (from the perspective of people alive at the time) to create a program that now undermines the well-being of the nation.

A well-established result in the literature is that Social Security tends to reduce steady state welfare in a standard life cycle model. However, less is known about the historical effects of the program on agents who were alive when the program was adopted. …we estimate that the original program benefited households alive at the time of the program’s adoption with a likelihood of over 80 percent, and increased these agents’ welfare by the equivalent of 5.9% of their expected future lifetime consumption. …Overall, the opposite welfare effects experienced by agents in the steady state versus agents who experienced the program’s adoption might offer one explanation for why a program that potentially reduces welfare in the steady state was originally adopted.

Gee, what a shocker. Ponzi schemes benefit people who get in at the beginning of the scam.

P.P.S. Speaking of Ponzi schemes, here’s the case for reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.

P.P.P.S. I’m not sure whether Hillary’s plan or Obama’s plan for Social Security would be worse.

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Yesterday, I shared several stories that exposed the festering corruption of Washington.

Today, let’s look at one issue that symbolizes the pervasive waste of Washington.

Medicare is the federal government’s one-size-fits-all health program for the elderly. Because of its poor design, it bears considerable responsibility for two massive problems.

  1. It contributes to the systemic third-party payer problem in American health care.
  2. It exacerbates America’s long-run challenge of excessive entitlement spending.

But there’s another issue. Medicare also has a very serious problem with fraud. As is so often the case with government programs, the offer of free money encourages unethical behavior.

Well, we have some good news and bad news about Medicare fraud.

As reported by the Wall Street Journal, the good news is that there is a small effort to catch fraudsters who bilk taxpayers.

Recovery audit contractors, as they are known, recouped $2.4 billion in improper payments in 2014, down from $3.7 billion in 2013 before the agency scaled back other audit activities and temporarily suspended the program… Those recoveries represent just a fraction of the total amount Medicare estimates it spends on incorrect payments. The Medicare program made $58 billion in improper payments to medical providers and health plans in 2014, according to PaymentAccuracy.gov, a federal website that tracks agencies’ estimates of waste.

But the bad news is this small program is being curtailed.

The federal Medicare agency is sharply cutting back the work of auditors that review hospital claims and seek to recoup improper payments for the government… Starting in January, the auditors will be able to review only 0.5% of the claims the agency pays to each hospital or provider every 45 days, according to an Oct. 28 letter to the contractors. That is a quarter of the prior threshold: 2% of claims. The contractors say the new directive, in what is known as a “technical direction letter,” will further limit their ability to pursue undue payments.

Readers are probably wondering why this effort is being hamstrung instead of expanded.

Well, you won’t be surprised to learn that the folks who benefit from waste want to keep the gravy train rolling.

The latest step is a sign of how the $600-billion-a-year Medicare program can struggle to effectively rein in improper payments, fraud and waste, sometimes under pressure from medical providers… The Medicare agency “is getting a lot of pressure from the provider community to scale back the [audit] program,” said Kristin Walter… Hospital representatives welcomed further restrictions on the auditors.

Sort of like burglars welcoming “further restrictions” on police officers.

Unfortunately, the interest groups benefiting from waste and fraud have allies in government.

The American Thinker has a nauseating story about the fraudulent actions of a hospital in Houston

The president of Riverside, his son, and five others were arrested on October 4 as part of a nationwide Medicare fraud sweep.  Earnest Gibson III, chief executive officer of Riverside General Hospital for 30 years, has been charged with bilking $158 million out of Medicare over the last seven years. …Friday’s arrests at Riverside came nine months after the arrest of Mohammad Khan, the hospital’s acting administrator, who pled guilty to his role in the Medicare fraud scheme…the Centers for Medicare and Medicaid Services suspended payments to Riverside.

You may be wondering why this is a nauseating story when it appears that some bad guys were nailed for screwing taxpayers.

Well, now we get to the disgusting part. A politician in Washington has been fighting to enable that bad behavior.

Sheila Jackson Lee, congresswoman for Houston’s 18th district…wrote CMS Acting Director Marilyn Tavenner requesting she reconsider the agency’s decision. …Jackson Lee…asks taxpayers who have already been bilked out of hundreds of millions of dollars to pour more money into a…hospital run by alleged crooks…while administrators and politicians rake in more dough.

Sadly, the Congresswoman’s political pressure generated results.

…a month after Jackson Lee appealed to CMS…, 70% of the hospital’s Medicare payments were restored.  CMS lifted the suspension even though federal investigators were only two months away from arresting Gibson and the others.  Jackson Lee’s intervention seems to have caused even more taxpayer monies to be directed toward a hospital brimming with corruption. …This is why Washington, D.C. is broken.  Like Jackson Lee, too many politicians think that redistributing other people’s hard-earned money into the pockets of potential felons is okay as long as they get political benefit.

By the way, it’s not just Democrats. The Daily Surge reports that some Republicans are helping providers rip off taxpayers.

…efforts to rid Medicare of waste, fraud and abuse have been stymied by the power of the hospital lobby that refuses to payback excessive payments made by Medicare and are working with friends and allies in government to ensure the improper payments are never returned to the taxpayers. …at least one GOP members, Rep. Sam Graves (R-MO) has actually introduced legislation further limiting the ability of the auditors to sniff out waste. His bill would block audits of Medicare providers unless their estimated error rate exceeded 40% of total billing. More than one third of all Medicare bills would have fraudulent before an audit could be triggered. So much for good government.

Ugh, makes me want to take a shower.

So what’s the bottom line? Unfortunately, fraud is an inherent part of government. When politicians create redistribution programs, amoral and immoral people will figure out ways to maximize their share of the loot.

In the case of Medicare, it means that providers have huge incentives to over-charge, over-diagnose, over-treat, and over-test.

After all, thanks to third-party payer, the patient doesn’t care.

That’s why I’m in favor of programs to combat fraud. And the RAC program doesn’t even cost taxpayers any money since the auditors are compensated by getting a slice of the improper payments that are recovered.

Imagine that, a policy where the incentives are to save money for taxpayers!

However, the only long-run and permanent solution is to shrink the size of government.

And that’s why it’s time to restructure Medicare. We have 50 years of evidence that the current approach doesn’t work.

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Some honest statists understand and acknowledge that you can’t have bigger government unless you target middle-income taxpayers.

And why do all these statists want higher taxes on ordinary people?

The answer is that they understand you can’t finance a giant welfare state unless there’s a huge increase in the tax burden on lower-income and middle-income taxpayers.

Which is exactly what’s happened in Europe.

Of course, you don’t need to favor that outcome to predict (of fear) that it will happen. My opposition to tax hikes, for instance, is precisely because I don’t want America to have a Greek-style fiscal future.

It’s a simple matter of math. The income tax simply isn’t capable of generating enough revenue to fulfill the fantasies of folks like Hillary Clinton and Bernie Sanders.

Robert Samuelson, writing in the Washington Post, explains that the middle class will need to be targeted if politicians actually want to finance an ever-expanding welfare state.

Democrats retort that raising taxes on the rich will provide needed revenues to expand progressive government. …They obviate the need for middle-class tax increases to pay for government. …of Democrats’ faith in soaking the rich. …The trouble is that the math doesn’t match the rhetoric, as a new Brookings Institution study shows. In it, economists William Gale, Melissa Kearney and Peter Orszag asked this question: What would happen if the top income tax rate were increased from 39.6 percent to 50 percent? The answer — less than you think. …it would raise about $100 billion in tax revenues…, but it’s actually slightly less than a quarter of the $439 billion budget deficit for fiscal 2015. …Even if the $100 billion were directly distributed to the poorest fifth of Americans (an average $2,650 per household), the effect on overall inequality would be “exceedingly modest,” the authors say. …tax policies don’t come close to covering the real costs of government.

In other words, there aren’t enough rich people to finance big government, even if you somehow assume that huge tax hikes don’t have negative effects on taxable income (and the evidence from the 1980s shows that upper-income taxpayers have very strong responses to changes in tax rates).

So, given all this evidence, what’s Samuelson’s bottom line?

If middle-class Americans need or want bigger government, they will have to pay for it. Sooner or later, a tax increase is coming their way.

And he’s right.

Which makes it all the more puzzling that some good lawmakers want to give the other side a value-added tax.

One of my colleagues at the Cato Institute, Chris Edwards, wrote a column on this topic for National Review. Here are some key excerpts.

Senators Ted Cruz and Rand Paul are strong advocates of limited government. …That is why their embrace of the value-added tax (VAT) in their presidential campaigns is so baffling. VATs are the revenue engine of big-government welfare states, not a proper funding source for the small federal government that both senators favor for America. …the candidates hide behind innocuous names — “business flat tax” for Cruz and “business transfer tax” for Paul.

But calling something a “business tax” doesn’t mean the burden is borne by businesses.

The tab for taxes collected from businesses is ultimately passed through to individuals in the form of lower wages, reduced dividends, or higher prices. …VATs have huge bases. That’s because — unlike income taxes — they do not allow businesses to deduct employee compensation when calculating the taxable amount. …The result would be that tax revenues from businesses under the Cruz and Paul VATs would be enormous.

In other words, the VAT is – among other things – a withholding tax on labor income. And that’s why this levy generates a huge amount of revenue.

To make matters worse, this giant tax is hidden from voters.

Because Cruz and Paul shift much of the collection to businesses, more of the tax burden gets hidden from citizens and voters. …If the government is going to take our money, it should mug us on the street in broad daylight, rather than sneak into our homes at night and burglarize us unnoticed. The VAT would encourage more burglary.

And this hidden tax also will give statists an easy method of financing an ever-expanding burden of government spending

Cruz and Paul want smaller government, but down the road, other politicians looking to shore up entitlement programs will say, “They could be financed with just a small tax increase on businesses.” But each “small” increase in the VAT rate would transfer huge amounts of additional cash from the private economy to the government.

Amen.

When I wrote about Sen. Cruz’s plan and Sen. Paul’s plan, I specifically pointed out that the VATs needed to be jettisoned.

But Chris makes an even stronger case. And he’s correct. Adopting a VAT would be a cataclysmic error for advocates of limited government.

It would be a truly perverse tragedy if the other side eventually gets a VAT because well-meaning (but misguided) conservatives paved the way.

P.S. The left also is salivating for a broad-based energy tax.

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In my speeches, I routinely argue that an aging population is one of the reasons why we need genuine entitlement reform.

A modest-sized welfare state may be feasible if a country has a “population pyramid,” I explain, Welfare State Wagon Cartoonsbut it’s a recipe for fiscal chaos when changing demographics result in fewer and fewer people pulling the wagon and more and more people riding in the wagon.

And if you somehow doubt that’s what is happening in America, check out this very sobering image showing that America’s population pyramid is turning into a population cylinder.

The bottom line is that demographics and entitlements will mean a Greek fiscal future for America and other nations.

To bolster my case (particularly for folks who might be skeptical of a libertarian message), I frequently cite pessimistic long-run fiscal data from international bureaucracies such as the IMF, BIS, and OECD.

I’m not a big fan of these organizations because they routinely endorse statist policies, but I figure skeptics will be more likely to listen to me if I point out that even left-leaning international bureaucracies agree the public sector is getting too large.

And now I have more evidence to cite. A new report from the International Monetary Fund explores “The Fiscal Consequences of Shrinking Populations.” Here’s what you need to know.

Declining fertility and increasing longevity will lead to a slower-growing, older world population. …For the world, the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100. …These developments would place public finances of countries under pressure, through two channels. First, spending on age-related programs (pensions and health) would rise. Without further reforms, these outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100. The fiscal consequences are potentially dire…large tax increases that could stymie economic growth.

Let’s now look at a couple of charts from the study.

The one of the left shows that one-third of developed nations already have negative population growth, and that number will jump to about 60 percent by 2050. And because that means fewer workers to support more old people, the chart on the right shows how the dependency ratio will worsen over time.

So what do these demographic changes mean for fiscal policy?

Well, if you live in a sensible jurisdiction such as Hong Kong or Singapore, there’s not much impact, even though birthrates are very low, because government is small and people basically are responsible for setting aside income for their retirement years.

And if live in a semi-sensible jurisdiction such as Australia or Chile, the impact is modest because personal retirement accounts preclude Social Security-type fiscal challenges.

But if you live just about anywhere else, in places where government somehow is supposed to provide pensions and health care, the situation is very grim.

Here’s another chart from the new IMF report. If you look at developed nations, you can see a big increase in the projected burden of government spending, mostly because of rising expenditures for health care.

At this stage, I can’t resist pointing out that this is one reason why the enactment of Obamacare was a spectacularly irresponsible decision.

But let’s not get sidetracked.

Returning to the IMF report, the authors contemplate possible policy responses.

They look at increased migration, but at best that’s a beggar-thy-neighbor approach. They look at increased labor force participation, which would be a very good development, but it’s hard to see that happening when nations have redistribution policies that discourage people from being in the workforce.

And the report is very skeptical about the prospects of government-induced increases in birthrates.

Boosting birth rates could slow down population aging and gradually reduce fiscal pressures. …However, a “birth rate” solution to aging is unlikely to work for most countries. The pronatalist policies seem to have only modest effects on the number of births, although they might affect the timing of births.

So that means the problem will need to be addressed through fiscal policy.

The IMF’s proposed solutions include some misguided policies, but I was surprisingly pleased by the recognition that steps were needed to limit the growth of government.

Regarding pensions, the IMF suggested higher retirement ages, which is a second-best option, while also suggesting private retirement savings, which is the ideal solution.

Reforming public pension systems can help offset the effects of aging. Raising retirement ages is an especially attractive option… For example, raising retirement ages over 2015–2100 by an additional five years (about 7 months per decade) beyond what is already legislated would reduce pension spending by about 2 percentage points of GDP by 2100 (relative to the baseline) in both the more and less developed countries. …increasing the role of private retirement saving schemes could be helpful in offsetting the potential decline in lifetime retirement income.

But if you recall from above, the biggest problem is rising health care costs.

And kudos to the IMF for supporting market-driven competition. Even more important, though, the international bureaucracy recognizes that the key is to limit the government’s health care spending to the growth of the private economy (sort of a a healthcare version of Mitchell’s Golden Rule).

…health care reform can be effective in containing the growth of public health spending. …There is past success in improving health outcomes without raising costs through promoting some degree of competition among insurers and service providers. …Containing the growing costs of health care would help reduce long-term fiscal risks. On average, health care costs are projected to increase faster than economic growth. …Assuming policies are able to keep the growth of health care costs per capita in line with GDP per capita, health care spending will increase at a slower rate, reflecting only demographics. Under this scenario, public health care spending pressures would be greatly subdued: by 2100, health spending would be reduced by 4½ percentage points of GDP in the more developed countries.

Interestingly, of all the options examined by the IMF, capping the growth of health care spending had the biggest positive impact on long-run government spending.

So what lessons can we learn?

Most important, the IMF study underscores the importance of the Medicaid reform and Medicare reform proposals that have been included in recent budgets on Capitol Hill.

In addition to making necessary structural changes, both of these reforms cap the annual growth of health care spending, which is precisely what the IMF report says will generate the largest savings.

So we’re actually in a very unusual situation. Some lawmakers want to do the right thing for the right reason at the right time.

But not all of them. Some politicians, either because of malice or ignorance, think we should do nothing, even though that will mean a very unpleasant future.

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