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On March 21 the U.K.’s coalition government produced its budget for the next year. Among proposals discussed had been a so-called mansion tax—an annual 1 percent levy on homes worth more than £2 million ($3.2 million). In Russia, President-elect Vladimir Putin has put forward a luxury tax to be levied on purchasers of high-end cars and real estate. In France, the Socialist Party’s presidential candidate, François Hollande, is proposing a 75 percent tax rate on earnings above €1 million ($1.3 million). Hollande’s plan may in turn have been inspired by the debate in the U.S., where President Barack Obama has proposed a surtax on Americans with incomes of more than $1 million. The plan is known as the Buffett Rule, after Warren Buffett, who argued for higher taxes on billionaires like himself.
Buffett should surely not pay a lower tax rate than his employees. But few of these proposals would make a dent in the budget deficits facing the countries involved. Buffett’s own effective tax rate is lowered by the large proportion of his income that comes from dividends and capital gains, which incur lower tax rates than regular earnings. It isn’t clear a surtax on the rich would change that.
Take the mansion tax idea in the U.K., which Prime Minister David Cameron persuaded his Liberal Democrat coalition partners to drop. The tax would have raised about £1.7 billion annually. That would barely scratch the budget deficit, which the institute projects to be £124 billion over the next year. Instead, the government increased the transaction tax for expensive homes, and promised to eliminate loopholes that allow many wealthy buyers to avoid it—a better solution.
To understand the distorting effect of ill-conceived taxes on the rich, consider the 50 percent tax rate for people earning more than £150,000 that Gordon Brown, the U.K.’s last Labour prime minister, introduced just weeks before losing elections to Cameron in 2010. HM Treasury estimated the increase would generate an extra £2.4 billion a year, adjusted for all the people who would respond by leaving the country or designing ways to avoid the tax. If no one altered their behavior, the tax change would raise more than double that amount, £7.8 billion.
There is no single answer to fixing the tax systems of all developed economies, as their tax structures and cultures differ widely. Yet governments should clearly avoid focus on the superrich alone and instead reach down to touch the upper-middle class as well. Doing so would be more difficult politically, but it’s the only way to produce the kind of revenue that would really bring down budget deficits.
Just as important, governments should start real tax reform by simplifying overly complex tax codes and eliminating exemptions and loopholes that distort behavior and favor the wealthy. That’s an area where tax-resistant Americans and free-spending Europeans may find they have more in common than they think.
Representative Paul Ryan’s first crack at Medicare reform a year ago would have turned it into a voucher-like system called premium support. Rather than pay seniors’ doctor and hospital bills, as the government does now, the Wisconsin Republican’s plan would subsidize each older American’s purchase of a health plan from a menu of options. The problem with the first Ryan plan was that annual increases would have been capped at the rate of inflation—a steep cut given that Medicare costs have grown about 8 percent annually for the last 15 years. Eventually, the failure of the subsidy to keep pace with health-care inflation would have created unbearable out-of-pocket costs.
Ryan improved his plan in December—and demonstrated again that he’s the Republican Party’s boldest policy thinker—when he teamed up with Oregon Senator Ron Wyden, a Democrat. Their plan would offer seniors a subsidy to buy private health insurance. This time, though, they could choose the traditional Medicare program. Benefits would be capped, but Ryan and Wyden would allow increases in per capita Medicare spending of 1 percent above the rate of gross domestic product growth.
The 2013 budget Ryan unveiled on March 20 picks up the Medicare option from the Ryan-Wyden plan. It would also create a competitive-bidding process to determine the annual increase in the government voucher, forcing health plans and the Medicare program to compete for patients. The federal subsidy would be based on the second-least-expensive plan in each market.
Those are all desirable additions. But Ryan 3.0 makes the formula for increasing per capita Medicare spending less generous than Ryan-Wyden, probably because the original formula wouldn’t have bent the cost curve enough. The Congressional Budget Office estimates that by 2030 spending on the average Medicare beneficiary would be $7,400 (in 2011 dollars) under Ryan’s plan, 14 percent lower than what would be spent under current law.
The danger is that Ryan may be cutting costs too steeply, forcing Americans to choose from a stingier menu of options while shouldering higher out-of-pocket costs. To further refine his proposal, Ryan should clarify that insurers wouldn’t be able to charge any Medicare patient excessively high premiums. One way to do that is to require insurers to charge the same premiums for all enrollees of the same age. To keep private insurers from cherry-picking the healthiest seniors, plans must be “risk-adjusted”—insurer-speak for customizing government subsidies for the average beneficiary’s health status.
Democrats are already hammering Ryan for ending Medicare as we know it. But the CBO estimates that the present system will run out of money in the next nine years. Ryan’s plan may be poor politics, but it’s the right policy.
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