Friday, August 3, 2012

Obamacare facts: Reform is not ‘deficit neutral’

President Obama and the Democrats attempted to sell Obamacare to the American people by claiming that we could not afford not to pass the bill. President Obama is quoted by Politifact as saying that, “According to the Congressional Budget Office -– the independent organization that both parties have cited as the official scorekeeper for Congress –- our approach would bring down the deficit by as much as $1 trillion over the next two decades." The undated Politifact piece rates the promise as half-true, which is being generous.

A recent New York Times article makes a similar claim. The article notes that, according to the Congressional Budget Office, repeal of Obamacare would add $109 billion to budget deficits over the next 10 years. Logically, that does not make sense. How is it that the federal government can enact a massive new entitlement, create scores of new bureaucracies, add insurance coverage for millions of people, and still save money on the deal?

The answer can also be found in the Times article. “Specifically,” the article notes of the CBO report, “it said repeal of the law would reduce spending by $890 billion and reduces revenues by $1 trillion in the years 2013 to 2022.” The secret to how President Obama and the Democrats could claim that the Affordable Care Act was “deficit neutral” is that they built more tax increases than spending into the law. Both taxes and spending increase under Obamacare by about a trillion dollars each.

The individual mandate tax/fine is probably the most well known tax in Obamacare, but it is far from the only tax increase. Americans for Tax Reform has put together a comprehensive list of tax increases found in the Affordable Care Act. The long list includes higher withholding from pay checks for Medicare and restrictions on the use of Flexible Spending Accounts and Health Savings Accounts. It also raises the income requirement to deduct medical expenses from 7.5 percent of adjusted gross income to 10 percent. There are new taxes on charitable hospitals, medical device manufacturers and even indoor tanning salons. One of the most insidious taxes is a new cap on Flexible Spending Accounts that will hit families of special needs children especially hard. The full list of tax increases can be viewed on the ATR website.

The new taxes listed do not include increased state taxes, but states that choose to participate in the Medicaid expansion will have to look for new sources of revenue. As Medicaid requirements are liberalized, more people will flock to Medicare. The federal government will pay a portion of these costs, but the state will be responsible for at least 10 percent. Most state governments are already short of cash. Paying for Medicare benefits for millions of new enrollees will require spending cuts, borrowing, tax increases, or some combination of the three.

Two other factors further skew Obama’s claim. Government programs are almost universally more expensive than their original estimates. According to the Wall Street Journal, this has been true for government health care in the past. Since the introduction of Medicare and Medicaid in 1965, medical costs have increased more than twice as much as inflation in the general economy.

Similarly, tax increases almost always produce less revenue than estimated. This is because people and companies act to avoid taxes. A classic example is the luxury tax on yachts enacted in 1990. The intention was to make the rich pay their fair share by levying a 10 percent tax on yachts. In reality, the tax was a disappointment. According to the New York Times, its main result was to almost destroy the U.S. pleasure boat industry and cause thousands of workers at boat companies to lose their jobs.

If income is taxed, people defer it or take other benefits. If tanning salons are taxed, people won’t tan as much. If medical device manufacturers are taxed, they will likely sell fewer devices. If hospitals are taxed, less money will be spent on their patients. The common denominator is that taxes mean that there is less of the activity or thing that is taxed.

Obamacare promises the American people that they will get something for nothing. In reality, the services promised by Obamacare are not free or even low cost. Their cost is simply hidden in unseen taxes on other products and services. Obamacare’s continuing unpopularity means that most Americans understand the fundamental economic truth that “There ain’t no such thing as a free lunch.”

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