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Sunday, October 12, 2008

AFSCME Lies About McCain's Health Care Plan

I have the unfortunate (non)pleasure of receiving campaign garbage from AFSCME, all of which is hard left, angry, ugly, and frankly usually quite dumb. Below is an image of a lit piece I received from them regarding John McCain's health care plan (click to enlarge):

John McCain wants to raise taxes by $2,800 per year on the average American family! Can you believe it? Well, no you can't, because AFSCME is a lying, scum sucking organization.

If you look at the footnotes for their claims, they cite the Center for American Progress, a DNC front group posing as a think tank, as their source. A search of their website turned up the following document as the source for these distortions of the McCain health care plan.

Let's start with their definition of the average American family. The CfAP uses a married couple making $40,000 per year as their norm. Now, let's look at the effect of the McCain plan on the taxes of this couple, as presented on the McCain campaign website (click to enlarge):

McCain uses $12,000 as the cost basis for the average health care plan, whereas the CfAP uses $13,800 as the basis. Looking at the table, one can see that under the McCain plan, our couple would SAVE $3,200 in taxes. Using the CfAP basis of $13,800, our couple would still save $2,930.

So, what's going on here? Where does this claim that our couple would pay $2,800 more in taxes come from? Thin air, my friends. Well, actually, it arises from a number of dubious assumptions (shocking!) by the political hacks at CfAP.

Let's start with a criticism of McCain campaign economic pointman Douglas Holtz-Eakin, who made the following statement in support of the McCain plan:
For the typical ESI recipient -- $12,000 policy — nothing changes. The tax liability on the policy ($12,000 x .35) when insurance is taxed as compensation is $4,200; this will be immediately offset by the credit of $5,000.
This statement only adds confusion to the debate - nice job Doug. He appears to be placing the typical American in the top, 35% tax bracket which kicks in at $350,000. That, of course, is nonsense. So, what he hell is he talking about? The CfAP saw an opening in this ambiguity and took their shot.

Here is the money graph from the CfAP "study":
Public information available from the McCain campaign lacks clarity on several important details forcing us to make several assumptions before conducting our analysis. First, we assume that the McCain campaign would repeal the exemption for payroll taxes as well as for income taxes. While campaign aides have not stated Sen. McCain’s policy definitively, it has estimated that subjecting health benefits to taxation would raise $3.6 trillion over 10 years, a figure apparently based on a congressional estimate that includes higher payroll taxes. A campaign advisor has also estimated its impact on a typical family by using a 35 percent tax rate; tax rates faced by typical families are close to 35 percent only if payroll taxes are included. As with the Bush plan—which served as the model for the McCain plan—the revenue from additional payroll tax revenue is needed to ensure that the proposal has no net cost to the federal government over 10 years, a stated goal.
They assume that payroll taxes, both the employee share and employer share, would have to be paid on the value of the health care plan. This would add approximately 15% to the marginal tax rate for our couple, which at their income is 15%.

They use Holtz-Eakin as their primary rationale for this assertion, but they also assert that:
While campaign aides have not stated Sen. McCain’s policy definitively, it has estimated that subjecting health benefits to taxation would raise $3.6 trillion over 10 years, a figure apparently based on a congressional estimate that includes higher payroll taxes.
First of all, who has estimated the pricetag? A careful reading suggests that it's not the McCain campaign. This figure of unknown provenance is "apparently" based on a congressional estimate, no doubt compiled by Democrat staffers at the CBO. Now that's solid scholarship.

Most independent analysis of the McCain plan puts the pricetag at just over $1.0 trillion over ten years; the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution (not exactly rightwing groups), put the ten year cost at $1.3 trillion.

Second, contrary to their assertion, the McCain plan is not really based on the Bush plan, which employed a Standard Deduction for Health Insurance rather than a tax credit. The difference is in the cost, as the Bush plan was much more generous to high income earners and therefore more costly.

In short, all the justifications put forward by the CfAP to tack on the 15% payroll tax amount are flimsy and do not stand up to scrutiny.

The second major add-on to the tax rate is simply flipped out there with no justification:
Workers are assumed to bear the burden of all payroll taxes, even though employers are nominally responsible for half of these taxes. Unless stated otherwise, state income taxes are assumed to be 5 percent above an additional $5,000 exemption.
Boom! Just like that, they tack on another 5% for state taxes on the benefit. How about that? But there's nothing in the McCain plan that even begins to touch on state tax treatment of these benefits. There's no reason to believe that individual states would go either way in terms of taxing these benefits. It's absurd to simply tack on this extra 5%, unless... you're trying to figure out a way to reach the magic 35% tax rate that you imagine is part of the McCain plan.

Now, I want to direct your attention back to the content of the AFSCME hit piece. They make the claim that our average taxpaying family would owe an additional $2,800 should the McCain plan be implemented. Okay, let's do the math on that, using the CfAP asumptions:

The cost of the health care benefit, $13,800, is taxed at 35%, producing an additional tax liability of $4,830. After the application of the $5,000 tax credit, our couple would save $170. So, where does the $2,800 figure come from?

Here's the deal: while the cost of health care insurance is assumed to rise at, say 7%, the value of the McCain tax credit is assumed to rise with the consumer price index, say 3%. As you can see, the value of the credit will erode over time. At some point in the future, the tax liability and the value of the tax credit will converge; those taxpayers who initially pocket a healthy amount of money after application of the the tax credit will see that move toward zero.

It is this movement toward convergence that the CfAP uses to achieve their $2,800 figure. You see, that figure is reached under the bogus CfAP assumptions in 2018.
because the credit quickly falls behind rising premiums that are the basis of the current tax break, the family would pay $1,169 more in taxes in 2013. The family would pay $2,809 more in taxes by 2018.
That's not the impression you get from the hit piece, is it? It's obvious that you're supposed to take away from the piece that our average American couple will take an immediate $2,800 tax hit from McCain's plan. Completely misleading.

I offered earlier some data from the Tax Policy Center. You can get an assessment of each candidate's tax plans here. This is their assessment of the long-term impact of the McCain plan:
The benefits of the McCain plan would be distributed more broadly, raising after-tax income in 2009 about 9 percent for the bottom quintile, 3 percent for the middle quintile, and less than 1 percent for the top quintile. However, as health care inflation erodes the value of the tax credit, the subsidy would decline over time. By 2018, high-income households would be worse off than they would have been under current law because the credit would be worth less than the exclusion of ESI for those in the top tax brackets.
The McCain plan is actually progressive, and by 2018, only those in the highest income bracket would realize negative tax consequences from the McCain health care plan.

I frankly, have some questions about the McCain plan. The erosion of the tax credit value over time was news to me. I would ask, however - how are we supposed to address any of this country's pressing issues if one side of the debate is so completely dishonest? You wonder why financial markets are allowed to collapse, even when the alarms are sounded well in advance? Will you be surprised when Social Security is permitted to reach the edge of the abyss, causing a "crisis"? It really isn't a surprise when you have dishonorable groups like AFSCME dominating one side of the discussion and spreading lies and disinformation.

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Blogger Shaun said...

This is the kind of garbage we are going to get to hear for the rest of the election. How can anyone know what to believe.

The truth is that if the economy doesn't get better, it won't matter where they are on any issue. People won't be able to afford healthcare, houses or anything else.

I was taking this survey the other day. ..


-- and, I realized that I don't exect an economic recover for a couple of years. Hope I'm wrong.

10/13/2008 12:16 AM  
Blogger Thrifty Scot said...


Thanks for taking the time to read my post and comment.

You know, I'm still PO'd about the treatment President Bush got for trying to reform and save Social Security, before it swallows the budget. I went to a town hall meeting at a union hall during the Social Security reform debate, featuring Betty McCollum, and it was nothing but lies and scare tactics What was even more galling was listening to an abject idiot like Betty deliver this garbage straight off of powerpoint slides with canned talking points. She didn't know anything more than the talking points crammed into her pin-shaped head.

Regarding your outlook on the economy, i agree, but we're just going to have to go through it to reach a more substantial footing for this economy. As an economist would say, there is a lot of inefficiency to be wrung out.

10/13/2008 8:45 AM  
Blogger Right Hook said...

Excellent post. A prime example of the alternative media doing the job of the lamestream media.

10/13/2008 9:51 AM  
Blogger G-Man said...

Democrats are lousy at understanding cause and affect. They never appreciate the difference in human behavior when buying power is returned to the consumer.

One of the biggest reasons for the high cost of health care insurance is the fact that bureaucrats, not the consumers, have the buying power. The consumer has no direct means to reward the most efficient providers with their business. In most cases, the consumer doesn't even know the costs.

Democrats assume that the costs of insurance will continue to grow no matter who chooses the products – be it the employer's bureaucracy or the free market. They refuse to acknowledge that when consumers and insurance providers are free to negotiated plans and prices without government intervention, plan choices increase and prices fall. It's government intervention (as we have today) that artificially leads to higher prices.

The current employer provider strategy is to find one big plan that will satisfy everyone's need – even if guys really don't need to be insured for prenatal care. In the free market, insurance companies can offer a wider variety of plans that more efficiently meet the demands of the customer.

Currently, the typical employee with a family of four may pay $3,000 before taxes and the employer pays another $9,000 for the plan. Of course, this is a paper shuffle. The employer is "paying" the employee with a $12,000 benefit regardless the amount hidden from the paycheck.

However, the employee could find a similar plan for thousands less outside the company, say $8,000. But, in the current system, it is not an option for the employee to opt out of the company plan and take the total $12,000 benefit in additional salary. Instead, he will only see his take home pay increase by $3,000, less taxes. In addition, government regulations do not allow for tax deductions on free market plans.

The strength behind McCain's plan is that it lifts these regulations. It frees the employer to give the current "benefit" to the employee in additional salary. It eliminates the tax advantage now exclusive to company plans. And it leverages the cost savings of competition in the free market.

Insurance costs will ultimately decrease under the McCain plan. First, insurance companies will get competitive with that little gecko selling all kinds of plans to meet every customer's desired level of coverage. Second, the customer will be encouraged to shop around for services, thus forcing health providers to get more competitive.

I'll leave with one final thought. Last year, my plan changed from no copay for MRI's to a 20% copay. Consequently, when faced with a possible MRI, I shopped around and discovered that costs varied from $600 to over $3,000. When more consumers are able to shop around, competition will surely lead to dramatic reductions in costs.

10/14/2008 1:09 AM  

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