On Fuel Prices, Taxes, and Profits

ExxonMobil's fuel tax map of the United States shows regional variation in tax policy:

The page's author presents a defense to the charge that oil companies are scamming government out of tax money: the government earns in taxes an order of magnitude more on each gallon refined, shipped, and sold in the United States than ExxonMobil earns in profit on the same gallons.

The defense is interesting, but I think it dodges the charge.  Those who accuse multinational oil companies of running a tax scam aren't focused on sales taxes imposed on locally-sold products, but the international business of companies that historically paid U.S. income taxes on income earned in foreign jurisdictions.  From the point of view of ExxonMobil, of course, the government collects not only 40 to 60 cents per gallon refined, shipped, and sold in the U.S. – but also 35% income tax on ExxonMobil's 5.5¢ profit per gallon.  From the perspective of ExxonMobil's detractors, what has that to do with ExxonMobil's 'right' to use U.S. resources to build and defend a global business empire from which it gathers income free of U.S. taxes?

It's an interesting situation that invites inquiry into local competitive conditions globally and examination of the practical effects of tax policy.  With the elimination of the double-Irish scheme, international tax planning will take another wave of innovation (and consultants in the area will make another fortune).  Is there a tax policy that will result in more tax collected and less resources wasted avoiding taxation?

IRS Sends Billions To Wrong People

Apparently, now the IRS has sent $106b to erroneous recipients.

Sigh.

Snipes Released After 3-Year Misdemeanor Tax Sentence

The definition of a 'misdemeanor' used to be a crime for which punishment could not exceed a year. So it's with some surprise that I read Wesley Snipes was just released following completion of a 3-year federal sentence imposed following a criminal failure to file or pay taxes. No, I wasn't surprised a person could be locked up for nonfiling – I was merely surprised that the 3-year sentence arose from a misdemeanor conviction.

On closer examination, the conviction turns out to be three convictions for the same charge – that is, one year per conviction – plus a year of probation. One charge per failure to file. The sentence, handed down by a judge, followed a jury's decision not to convict Snipes for any of the felonies with which he was charged.

Occasionally, when you hear the United States has a "voluntary" tax system, think of Snipes.

Buffet On His Own Tax Rate

Buffett says his 2012 tax rate is lower than his secretary's.  "I'll probably be the lowest paying taxpayer in the office."

Is he right, or just using creative math?

And You Thought Putting Them Behind Bars Was Going To Change Things?

News about the IRS and news about zany crime are good enough alone, but today we offer a two-fer. Lat year, incarcerated felons talked the IRS out of tens of millions of dollars by submitting fraudulent returns claiming "refunds" were owed.

Of course my first thought was, at 8¢ an hour to mop floors and 12¢ an hour to stamp license plates, exactly how much money can the IRS be led to believe these guys are due. It's not like prisons are sending millions in withholdings to the federal government, is it? 

In defense of wardens who might be thought too lax in allowing bogus returns through their mail systems (which wardens are permitted to check), many criminals apparently used outside shills in their scams, and stolen identities.

Hidden Tax Deferral at AGNC, MTGE

Just published at Seeking Alpha, the newest article from the Jaded Consumer looks at the effect on your taxes of all those share issuances ACAS is conducting at its managed funds AGNC and MTGE.

In a word: it's good news.

Buffet Pays More Than His Secretary

Warren Buffett's claim that he pays at a lower tax rate than his secretary is bogus. The real question is what we will do about the dizzying tax code, not what we will do about secretaries paying a lower tax rate than their supervisors who earn tens of millions per year.

Not that Buffett can't lobby to be taxed at a higher rate than he is currently taxed, or that feeling that he could pay more is somehow illegitimate, but the basis for a tax increase should be something more sound than the tax rate shell game being perpetrated on observers innocent of how the tax system really works.

Now, for something that might prove to be a real puzzle: why is "carried interest" – a bonus paid to fund managers for service that exceeds performance metrics – treated as capital gain rather than the ordinary income of the fund manager? The difference is 15% vs. 35% in marginal rate. Anyone care to venture an explanation? I haven't researched this one but it was certainly a surprise.

Job-Making Tax Credit All Backwards

As described here, the mere declaration in the State of the Union of a tax credit to small businesses that hire workers won't cause such small businesses to hire workers. Because businesses make hires based on sales, cash flow, and demand for products/services that requires additional personnel, the tax credit won't so much give an incentive to hire as it provides a windfall to businesses whose success was going to lead to hires without the tax credit.

Who benefits? Not the public. Why are we paying for this?

Taxpayers' $7B Gift To Fiat

Since Chrysler won't be repaying the $7B in taxpayers' money "loaned" to Chrysler by the federal government within the last year, as the debt will apparently be extinguished in Chrysler's bankruptcy, the sum in effect has become a gift to Chrysler's new suitor Fiat. (Having taken Chrysler, Fiat is next going to gobble GM's German unit Opel. I'm betting Fiat takes it free of US taxpayer obligation, too.)

My question is fairly simple: why is it that when AIG, Fannie Mae, and Freddie Mac wanted federal money, they had to pony up an 80% equity stake and submit to federal oversight of fundraising activities, but when the auto makers wanted money they just stuck out their hands? Sure, legislators gave them some trash talk and spoke badly of auto makers' apparent lack of plan to turn the money into success. This fact didn't keep them from handing the auto makers billions, though -- just maybe fewer billions than initially begged for.

I guess it's easy to write those checks when it's not your money.

Changing America's International Tax Policy for Better or Worse

President Obama has announced plans to change United States tax law to increase taxability of overseas subsidiaries of American companies.

Let's look at how this works.

American companies which now compete in overseas markets on similar footing to their local competitors, by paying similar local tax rates and thus achieving similar after-tax returns on investment, would no longer be able to check a box to avoid U.S. taxation of those operations. Operations in many parts of the world -- those parts with higher-than-U.S. tax rates -- will be unaffected in practice because the United States would still collect no tax: the local operations would be taxed at higher local rates, and under U.S. tax treaties designed to prevent double taxation, the Internal Revenue Service would collect no further tax on those earnings. The new rule would impact businesses operating in those jurisdictions with lower-than-U.S. tax rates.

In these low-tax jurisdictions, the competitiveness of non-local business depends in part on the taxing policy of their parents' governments. American-style "we tax you on your worldwide income" policy results in taxpayers facing a 35% tax rate floor regardless where they situate operations (well, with the exception that certain economic zones carved out by Congress for special tax treatment might get better deductibility of expenses or the like; the tax code is rife with favoritism ... ask any sugar farmer). So in a 10% tax jurisdiction, local firms with $1 of profit will end up with $0.90 to reinvest after taxes, whereas an American competitor with the same performance would have $0.65 to reinvest -- assuming the jurisdiction has a tax treaty that prevents double taxation, without which the American operation would have a post-tax profit of $0.55 (after paying both U.S. federal income tax at the 35% rate and tax at the local 10% rate). The difference -- the $0.25 or $0.35 -- is unavailable to pay dividends to U.S. owners, be split into profit-sharing plans for U.S. employees, or used to uprade companies' U.S. facilities and infrastructure that make the company's worldwide operations possible.

The jump from $0.65 to $0.90 is a 38.5% gain. Improving after-tax profit by 38.5% is so attractive -- this isn't an increase in taxable income, mind you, but after-tax income, making it a much more valuable way to gain an additional $0.25 than one ordinarily is able -- that organizations facing this situation have a very powerful motive to avoid the extrajurisdictional tax. (In the case of a jurisdiction without a tax treaty with the U.S. to prevent double-taxation of income, the motivation becomes much more severe -- as it does in the case of a foreign jurisdiction with an even lower tax rate wuch as 5%, 3%, or 0%.) Careful evaluation of the tax rules will always turn up ways to avoid unnecessary taxation, because the rules for taxing incomes have never been simple -- especially across the borders of countries with which the United States has tax treaties.

Tax avoidance is not the same as tax evasion: it's lot a lie told to prevent government from learning the true extent of one's tax obligation, it's a decision to structure transactions in such a way as to enjoy the benefit of the tax rules. As a hypothetical, imagine a corporate owner deciding not to pay himself a multimillion dollar salary (which would be taxable as ordinary income) but to richly fund an employee benefit plan (which depending on the type of benefit could be exempt from taxes, could result in deferral of tax payment until some future distribution date, or could be a deductible expense and thus paid for with pre-tax dollars) while reinvesting against the day he sells his shares (for a long-term capital gain, taxed at a more favorable rate). This decision would be tax avoidance, not evasion: it requires neither deceit nor illegal activity to conduct. It's why companies engage in tax planning. Tax planning is a big high-dollar business -- precicely because every dollar saved with tax planning is an after-tax dollar.

The expected outcome of international tax planning in the face of the proposed checkbox elimination is not difficult to imagine: fewer U.S. companies doing international business through foreign subsidiaries. Instead, foreign-sited business (whose owners would include, perhaps in numerous minority stakes, Americans who used to do business abroad directly) would do business in the U.S. through owned subsidiaries, if at all, with the rest of their worldwide operations never touched by American tax laws. Efforts to attch U.S. income taxation to listings on major exchanges is sure to fail: major exchanges include numerous foreign corporations' ADRs (American Depository Receipts) that trade just like shares, and the United States would be unable to reach them with U.S. tax laws. It would be hard to see how Americans structuring foreign public companies with US-traded ADRs would fare differently, unless we restructured the rules to make non-US companies prefer to trade on some non-US exchange. (How's that for progress?)

Americans would continue to compete against all comers at home, but would generally not compete abroad. Americans who employ tax advisors would organize operations so that all non-US business was conducted through entities that never did any business in the United States (other than perhaps through subsidiaries or partners which would bear the U.S. taxes) and thus never fell within the reach of U.S. tax laws. Certainly, some businesses with highly-concentrated ownership would be unable to appear non-US in nature and would be stuck with worldwide U.S. taxation -- family businesses, for example -- but the really big organizations would presumably be able to structure their affairs to avoid U.S. taxes until U.S. tax law finally attempted to tax on their worldwide incomes all corporations wherever situated regardless who owned them and regardless whether they ever did any business in the United States. However, the 38% increase in after-tax income will surely draw multiple owners into collaboration to co-own foreign entities in small minority slices, for the express purpose of gaining an overnight 38.5% increase in take-home profits.

Assuming that U.S. tax law doesn't soon purport to tax on their worldwide incomes all corporations wherever situated regardless who owned them and regardless whether they ever did any business in the United States, avoidance of U.S. taxes by firewalling U.S. operations from foreign holding companies is likely to be the principal result of eliminating the checkbox. More money will be made by those who offer tax advice and structure international business organizations, but not much more will be collected by the Internal Revenue Service (except through increased income taxes collected from tax advisors enriched by harshening U.S. tax policy).

Assuming we don't want to lose American competitiveness abroad, we should be looking at ways to ensure foreign profits come home, not ways to ensure they are punished.

Unfortunately, American efforts to control markets have a pretty bad history of improving the status of foreign competitors. We wanted to reduce the number of physicians in the U.S., so we reduced funding for seats in medical school -- reducing U.S.-trained physicians. Of course, residency programs still want trainees to do work in their programs, so we import non-US physicians every year by the thousand. Foreign-trained medical students unable to get into U.S. medical schools have become so ubiquitous that they are a stock figure in caricatures of the modern medical establishment. Why are we helping foreigners to get high-dollar prestige jobs here in the U.S. at the expense of Americans, able to speak English intelligibly, who would happily have done similar work had medical schools not been shrunk in favor of foreign grads?

Our investment in education isn't just enhancing the stock of foreign medical grads. Bill Gates famously called for abolishing federal H-1 visa quotas on the ground that the U.S. wasn't producing enough programming talent. The United States invented programming talent. Why is it we can't be bothered to make training accessible to locals?

Presumably we don't plan to save America by contracting the job to foreigners. Let's think of a plan that does something more sensible, and keeps the money (and the pride) at home.

Funding the Stimulus

There's been a suggestion that the stimulus package is funded by the folks at the top of the socioeconomic pyramid. The chart is based on the apparent assumption that the existing distribution of income tax rates across the population of U.S. households will be used to fund the stimulus in the year it is spent. A little thought is in order.

Since income taxes are taxes on "income" one needs to make sure stimulus efforts and their associated burdens don't impair those who would pay these taxes -- which will be presumably paid from future earnings -- or the thing is a bust.

On the other hand, my understanding is that Obama expects years of trillion-plus-dollar federal budget deficits, which means funding by borrowing the money (or printing it) instead of charging it to present-day taxpayers. (The assumption that the stimulus would cause an increase atop existing taxes would, in fact, change all the tax rates of everyone in the chart in the first link.) This essentially means the present-day taxpayer households in the chart don't pay the expenses of the stimulus. The stimulus is funded by some future sucker-taxpayer who will face it plus accumulated interest. And it'll be paid back years in the future, during which time more annual deficit will be mounting. The value of the dollar might be rather different by the time this $850B or so comes due.

This thing -- the stimulus package -- is a gamble on the capacity of Americans to make lemonade from lemons while the sun is shining on the hay fields, or something of the sort. There's no specific plan to create taxable profits to fund the stimulus package, there's just a plan to create economic activity in the expectation that Americans will find ways to create long chains of people earning income in the process. Assuming the funds are spent on things involving labor, design, research, and local fabrication, there's a high probability that the funds will indeed circulate in the local economy, leading to numerous serial points of (taxable) profit. To the extent we spend funds on imported raw materials (e.g., fuels) or imported finished goods (vehicles, televisions), we lose the chance of multiple local serial profiteers.

The key seems to be encouragement of spending on things that are hard to outsource. Toward that end, local construction and energy development infrastructure (and associated engineering, architecture, construction, and other service expenses) seem a pretty good bet.

The interesting thing about long chains of serial profiteers is that they don't get smaller and smaller. The little earners, who profit little, spend most of their small incomes on things like food, shelter, and utilities -- recycling the funds back toward the top of the pyramid and enabling the support of more downstream profit-makers. Dividend recipients, new-added employees, capital gains earners, re-employed home remodelers -- all will benefit from these little guys' expenses and will in turn spend the money again.

The question is how long we can keep the expenditures local before they disappear from the taxable pot to Venezuela, China, and other places we'd rather not fund.

This isn't a one-line calculation, and it doesn't fall neatly into a small table. The impact of a trillion-dollar stimulus package is a complex web of calculations that depend in part on the capacity of Americans to satisfy the demands of Americans. Domestic energy production is an example of a way to invest for the future in the capability of Americans to satisfy the demands of Americans, and to create more domestic benefit from each domestic dollar spent.

The whole thing may not be a work of genius, but it's certainly not the laughable folly some urge. At base, it's a bet on the long-term ability of Americans to make money, and that's a bet with some astute investors' money behind it.

CNN Censorship Slip

As I mentioned recently, I'm working too much just now to post much. The unpublished drafts are piling up, but they need polish; I have some pride. Also having some pride this week are Parisian nude models, who are outraged at (tax motivated) government intervention against their traditional supplementation of their minimum-wage art-school jobs by accepting tips from students and instructors. CNN covered the ensuing outdoor naked protest, with the expected American-media pixelation of nipples and a little effort to film only above the waist.

Worry about inadvertently objectifying women seems to have paid off as expected, but if you want to see a highly detailed male member whose partially exposed glans peeks from its foreskin in full focus, look at the chap laying on his back next to the sitting woman wearing the blue robe.

Cold out there in Paris this time of year, isn't it?

Risk Segmentation In The Health Care Market

The Jaded Consumer hopes to outline a few salient health care finance issues in a series of issue-focused posts. There may be many solutions to some issues, and the Jaded Consumer does not pretend to offer ideal solutions. However, a policy piece finding fault with the status quo should offer proposed interventions, or it is a mere gripe session. Other nations, with different national predilections, would doubtless steer a different course likely to be recommended here. However, The Jaded Consumer intends offering practical solutions that might be accepted in the United States.

This first article addresses risk segmentation as a barrier to affordable universal coverage. Universal coverage is not addressed as a right, though there are states in which legislatures sought to make it a right before encountering federal barriers to achieving the goals of their constituents. Universal coverage for health risks is addressed here as a national aspiration.

The barrier raised by risk segmentation is escalating marginal cost. The idea is something like this:
0) The risk of health care expenses is distributed unequally across the population
(This point is a huge deal and is numbered zero as a sort of emphasis.)
1) Most easy-to-cover people get covered easily through private funding. (This is in part a result of the tax-advantaged status of employee benefit plan contributions under statutes designed to enshrine compensation practices dating from the time of World War II wage freezes, when non-cash benefits seemed to employers a plausible way to compete for scarce labor. Today, anyone sufficiently healthy and socially stable enough to hold down a permanent full-time job is advantaged in accessing externally subsidized health care. The subsidy isn't, as often thought, the subsidy of employers -- they will never pay more than they can afford for labor -- but the subsidy of the federal government, which has chosen to push people into employee benefit plans by electing to tax this form of compensation at zero percent.)
2) People who argue most forcefully that they need coverage, and those whom advocacy groups most urge should be covered, are drawn overwhelmingly from a subset of the population far from the left tail of the health care expense curve; these people are, on the whole, less likely to be cheap risks to cover. (Think about impoverished, permanently disabled Medicaid enrollees and the elderly, who are already in high-cost federally-supported safety net systems precisely because the risks posed by these persons has led to government intervention.)
3) Uncovered and safety-net populations experience increasing concentrations of high-risk individuals. This one takes a little explanation, and is critical to the problem of incremental establishment of universal coverage. The cherry-picking of "good" risks by for-profit coverage schemes (like mandatory coverage participation at some level for young full-time employees who've never been ill a day in their working lives) cause the population of already-covered people to have a lower cost of coverage than the groups described by (2) above, making the "high expense" of covering those easy-to-cover people seem to be chump change by comparison to the cost to cover the concentrated risks in the remaining population. As the cost of coverage increases, the benefit of the tax breaks in (1) will push more people into available private schemes because of the amplified after-tax cost advantage, despite legal uncertainty regarding enforceability of rights under employee benefit plans (compared to non-employment-related insurance coverage).

How Insurance Works

You don't hope to crash your car.

However, for only a few hundred bucks, you can get months of protection (by a licensed insurer, regulated by the state for its solvency in the face of its insurance obligations) against the risk that you cause a wreck that crumples someone else's fender -- protection that includes sending someone to inspect the claimed damage, haggling on the phone or by mail with the other driver about the cost of his repairs, and even defending you against his law suit -- hiring lawyers, conducting depositions, running a trial -- if he doesn't like what your insurance company is telling him about the value of his rusting jalopy.

All things considered, this coverage is a deal.

As it happens, you don't have a choice about this coverage; every state in the Union has a vehicular financial responsibility law, and when last I checked forty-eight of them specifically required insurance as the way this financial responsibility must be demonstrated. In order to evade this coverage, there are people who work all kinds of scams -- paying one month on a six-month policy and then ceasing payment, printing false insurance cards, you name it -- but if you want to renew your driver's license and keep your car registered so you're not pulled over and ticketed every week, you either have the coverage or you work very hard to evade the requirement. The reason this coverage is so cheap is part of the secret of how insurance works, and why it works so well when the covered population is (almost) the whole population at risk. Only scam artists escape the pool; all the responsible people like yourself are in the covered pool, and are sharing the cost of the risk. The legal minimum insurance is cheap not because law suits aren't costly and not because people don't get into wrecks in this country and because there aren't tens of thousands killed every year on U.S. roads and many more injured -- the insurance is cheap instead because the burden of all this cost is allocated across an enormous pool of covered risks. (Okay; it's also cheap because the legal minimum caps out at a cost well below the cost of a human life. Most fender-benders aren't million-dollar claims. The outlier risks are left where they started, in the hands of individual motorists, because the many state legislatures creating the mandatory coverage laws have reached a compromise between the premium-paying public and the premium-hungry insurers, and have drawn a line where the mandate ceases, and private choice to obtain more coverage steps in. Tweaking local coverage requirements isn't rare.) In short, since the whole population contributes to mandatory coverage, the per-member burden is comparatively modest.

The coverage you elect, the one that protects you against the risk of someone totaling your car and fleeing into the night, is more expensive. It's above the point the mandatory coverage, above the point risks are spread population-wide, that risks are concentrated among a subset of willing buyers -- and this is the point at which it starts to become expensive. If you don't owe a bank money secured by a car (banks require more-than-minimum insurance to protect their loans' collateral), and you aren't frightened by these risks (fearful people often overinsure, to the delight of insurers), then you need not pay for them. You can opt out of the extra coverage.

Adverse Selection and The Problem Of Personal Choice
Insurers like to talk about moral hazard -- the tendency of the insured to conduct themselves so as to experience losses at a greater rate or severity than the non-insured -- and they like to allege that the world is full of insurance fraud. The world is as equally full of insurers trying to shirk their contract obligations in the face of loss. It's probably a wash, each side diligently working to cheat the other.

The real reason insurers hate the individual coverage market is adverse selection.

Adverse selection is the reason that when insurers price a lifetime annuity (a bet the covered life will last forever) and life insurance (a bet the covered life will end tomorrow), they don't use the same mortality tables. When you shop for an annuity, insurers use a mortality table that assumes you are healthy and going to live an awfully long time. When you shop for life insurance, they use a table that assumes you are hiding anything that can't be picked up on their screening tests, and will drop dead without a great deal of provocation. In short, the insurers assume when you shop for insurance that you know you need the coverage.

While some folks can be convinced by an insurance agent to buy anything, there are others who are particularly keen to get life insurance because they know all their near relatives died young, or they just learned they have a lethal illness and have been approached by a viatical settlement buyer, or the like. Prospective insureds who fear losses can be in a much better position than an insurer to appreciate the risks facing them. In this world -- where paper medical records can lay unnoticed by searching insurers, where billing codes are manipulated to ensure payment rather than accuracy -- insurers fear the information gap in underwriting important risks like health (which can quickly run into six or seven figures on a bad risk) is stacked against them. In a market in which members can opt out of sharing the population's risk, insurers fear the worst and charge accordingly.

Mandatory Coverage Is Coverage For Insurers
This is why full-time employees "get" health coverage in most companies whether they like it or not. Without the choice to opt out, employees are powerless to exercise adverse selection, and insurers can rest easier, unworried that new applicants are seeking coverage to run a scam; they are seeking coverage because they want a job. People with genuine work qualifications are probably less likely to be running a scam than the general population, besides. Moreover, insuring a whole pool of covered risks is a more attractive enterprise; there's little wonder insurers who deal with employee benefit plans structure their offerings so as to yield this result.

With very few employers failing to insure health risks at some level, and none to my knowledge processing claims directly, it's clear that the preference of insurers in structuring their offerings directly drives benefit plan coverage decisions. Insurers don't want to have to insure loners who turn up begging for coverage (what does he know that we don't?), but they are happy to write policies on whole populations who can't say "no" when their employers are looking for a way to pay valuable compensation that isn't subject to employer taxes.

Covering The Uninsured
So let's look at a common solution: we'll take the people who we're worried about -- the uncovered folks we want to stop choking emergency departments to death by allowing neglect of primary care to mature into a succession of expensive minor emergencies, the chronically ill who don't seem to qualify for stingy government programs, and so on -- and we'll cover them all in a special program to stem the tide of uninsurance. Because this population is selected for its high costs, coverage of it will be through the roof.

Think about it: if these people's claims weren't breaking local hospitals' ER budgets and didn't swamp county hospitals' funding and weren't killing everyone with an inclination to provide charity care, nobody would be clamoring for their coverage. If the claims weren't significant, the whole problem would be written off as not-a-big-deal. The county would cover it, or teaching hospitals, or charities. But that's the problem: the cost of this care dwarfs the resources people want to use to address it.

Covering these folks will cost a fortune.

Enter the High Risk Pool
The idea of creating government-established high-risk pools and offering group coverage to everyone in the pool surely sounds like a great idea at first: it's group coverage and not individual coverage; everyone in the group must paricipate; there should be a group discount -- right?

Ha, ha.

Americans like to think you get a deal buying products in bulk, but this is insurance, not a sack of yams. You get a discount by spreading risk, sure. But a high-risk pool isn't a place risk is spread: it's a place risk is concentrated. Insurers don't want any part of it at typical prices. Unless the premium is so high that there's a safe bet on the large concentration of risks, all bets are off. Insurers required to play this game would sooner leave the market. (Mind you, you don't need zillions of insurers to have a competitive market; two or three are enough, if there is no price collusion.)

The usual fix for this is to have government subsidize the high-risk pool. This, in effect, is the very thing the pool was to avoid: soaking the public fisc with the cost of the uncovered care. Taxpayers don't want to do this, since they are themselves (ask them) already paying for their own care. The only folks they see covered by a scheme like this are folks who don't have a job and don't pay taxes. Not exactly an easy sell, is it?

The Newest High-Risk Pool Proposal
President Obama -- I say President Obama because it's sure he will win, so why bother dreaming up silly terms like "hopeful" and "prospective" to term what's already a fait accompli? -- will urge a payroll tax to cover the cost of covering everyone not already covered by an employer plan. He spells it out right here. (In it he also spells out some funny things like how he'll save money for the health care system with tort reform, which is ironic considering the biggest estimates ever calculated for the annual financial cost attributable to malpractice claims and so-called "defensive medicine" don't amount to a tenth of a percent of the national health care budget. This, from a man who has claimed earmarks aren't a material expense!)

President Obama's plan expressly exempts from the payroll tax any employer already providing "adequate" coverage. This means that every employee will have a choice: whether it is cheaper to pay the payroll tax, or to maintain the existing plan. In other words, covered populations that are cheaper than the payroll tax will be able to avoid shouldering any of the risk-shifting associated with the incremental coverage. Once the price of the new plan is known -- that is, once the employer tax is spelled out in a statute -- employers will have even greater incentive to game their benefit plans for tax purposes. Employers with young, healthy populations will pay insurers to keep them out of the employer tax, and employers with older or less healthy populations will cheer, throw their health plan out the window, tell employees they have joined the new federal program created by Congress, and save all those extra health care dollars. After all, the payroll tax will be a tax-free benefit and fully deductible, it'll just be cheaper.

This market behavior will ensure that only populations that cost more than the payroll tax are in the federal risk pool. By spelling out the alternative in a statute, the payroll tax will enable insurers to conduct their ordinary cherry-picking operations even more effectively. Employers will be beseiged by cut-rate plans offering to "cover" for less than the cost of the payroll tax mostly-healthy populations with plans designed to scrape through the payroll-exemption language in the post-Obama tax code.

Spreading Risk For Real
To spread the risk of the whole population -- including the population of covered lives cherry-picked by insurers from an applicable risk pool -- it is necessary to tax not payroll but premiums. A premium tax of the sort states ordinarily collect on insurance premiums can be used to conduct risk allocation by funding the overpayments caused by the risk pool. A premium tax ensures that insurers price all their products -- to any market segment -- so as to cover the demands of the high-risk pool. The premium tax structure can thus be designed to make cherry-picking futile, ensuring more coverage and less coverage-avoidance.

Federal Health Services Funding Monopsony? Not The Cure!
In the law of the sale of goods, every state in the Union has the same substantive law. (Louisiana does not have common law, so the Uniform Commercial Code Article 2 language that depends on the existence of the common law cannot be used there; however, a local analog containing the same substance has been enacted to achieve the same result with different words.) Congress didn't need to create federal law on the sale of goods; the utility of uniform law was itself enough to inspire coordination and uniformity. State-law insurance insolvency statutes are the same way: federal law does not govern them (due to the McCarran-Ferguson Act), but there is nevertheless uniform law nationwide. Automotice drivers' responsibility has worked the same way. The argument that federal law is needed to create uniformity is a canard.

Federal law is in fact the major obstacle to universal care in this country, and has been so since the late 1970s when employers used federal law to enjoin a payroll tax funding Hawaii's health plan. Oregon had a radically different plan -- one with distinct and innovative cost-containment measures from which the nation could have learned valuable lessons for health plan design -- but the lessons brave Oregon would have taught us have been lost to federal preemption. Tentative movements of other states toward universal coverage have been slowed by the lack of freedom to experiment in this regulatory arena.

Experimenting on a state-by-state basis to provide data points on coverage features that are effective -- and which are ineffective -- is not a strength a single federal plan can possibly offer America. Once in place, the plan will be pulled about not by data or the lessons of neighbors' differing lessons, but by pure politics. Health care providers who have been terrorized by their powerlessness before federal payors and their ruthless watchdog agents' hungry zeal to threaten fee recoupment will understand immediately why a federal monopsony in health care finance is a danger to the field. Hospitals and physicians familiar with federal funding games will understand why giving the federal government an even larger fraction of the covered population will work against health care workers and their desire to provide quality care.

The worst obstacle to the development and innovation in health care policy in the last thirty years has been federal law preventing state experimentation in funding policy, plan enforcement, and quality assurance. The last thing America needs for the improvement of health care policy is more involvement by Congress. A new federal uninsurance pool funded by an opt-out payroll tax will accelerate risk segmentation, escalate the cost-shifting of the cost of health coverage onto government, and will prevent local efforts to innovate -- as Oregon heroically tried to do before it was stabbed in the throat for its efforts -- in ways that will result in genuine efficiency gains.

Congress Grants Self Higher Credit Limit

If my kids had a track record with money like Congress, I'd cut up their checkbooks and credit cards.  Congress, however, doesn't have parents to keep it in line.  Like a kid free in a candy store after-hours and with little concern about later tummy aches, Congress has gorged itself consuming other people's sweet assets.

To accommodate its undiminishing appetite, Congress has raised its "limit" of the national debt to a fourteen-digit sum.

The fact that the latest reason for the credit limit increase is the housing mortgage debacle doesn't really help us see the cause of it all.  Yes, bailing out financial institutions that facilitated bad loan decisions in the context of a scheme to turn a quick buck syndicating loans to buyers unwilling to consider their increasing financial risks might be a foolish idea, and it might be important to prevent loss of confidence in the financial markets, but it's still business as usual in Congress:  it's not really their money, so they don't hesitate very long spending it, especially if there's a near-term political angle.

And there always is.  One can pick one's evils and rail against spending in Congress -- regardless what political bent you might have;  both major parties have Treasury printing-press ink on their fingers.  You're a dove?  Rail against decades of foreign wars, arms races, occupation expenses in places like Germany which aren't seriously likely to be invaded, and various forts and bases all over the country where it's unlikely the US will be invaded.  You're a neo-con?  Rail against the public assistance programs that hand food stamps to pimps, pushers, madams, and hookers all over the country while they claim to be unable to find gainful employment or to be too disabled to work.  You're a Libertarian?  Rail against the federalization of every imaginable criminal offense and the attendant enforcement and penal overhead of a level of domestic regulatory micromanagement that would shock the Constitution's authors to know.

And, regardless what spending most offends you, you get -- as a free bonus -- to gasp in shock at the size of each annual budget that must be committed to interest payments on debt incurred through prior years' overspending.  The fact some politicians hope to cast government as more efficient flies in the face of the numbers, unfortunately:  the debt keeps rising and there seems to be no effective political force to bring overspending in line with likely future capacity to make interest payments.  You can look at various federal budgets at a dedicated federal web site, maintained through funds raised under threat of prison and seizure from citizens living peacefully as they work honest jobs.

In case you're interested just what the debt is, helpful civil servants have made it easy to learn.

If anyone has theories that might explain what forces will lead Congress to turn from the path to national insolvency, I'm keen to hear them.  I simply don't see any point of leverage for controlling a Congress perpetually bent on spending its way into re-election.  

Japan Says 'Ije' To iPod Tax

Unlike Spain, which apparently learned little from the experience of Canada, Japan has apparently killed efforts to enact a tax on storage devices of the kind found inside music players.

Perhaps Japanese seem to understand that the solution isn't to assume everyone is a criminal and that every storage device will be a vehicle for copyright infringement, and are offended that the honest folks will pay twice for their music -- once when they buy it, and again when they buy something with which to play it. Given the growth in digital-only music, a player tax seems contrary to the growing commercial reality that digital storage is a necessary tool for playing lawfully-acquired music.

Reason has to start someplace. It's certainly not doing well here (except perhaps to the extent you believe Lexmark should be able to use digital signatures to prevent you from accessing competitive vendors for printer supplies, or similar nonsense seemingly enabled by Congress over the signature of William Jefferson Clinton).

Trading With The Enemy

CNN seems to imply that allowing Americans to sell cigarettes, brassieres and bull semen to folks suffering under the Islamofascist regime in power in Iran since the Carter era is evidence of political hypocrisy.

I beg to differ.

As mercantilist competition of earlier centuries illustrates, trade is tantamount to war. In this enlightened era in which we like to preach free trade, we have anything but free trade. When the Soviets were still the major bogeyman for Americans, the US' staunch anti-Communist allies in Japan were so wary of US as a threat to domestic rice producers that it seized (purportedly on grounds of national security) the few kilos of specimens an American exhibitor had brought to a Toyko trade show. You know, several little clear boxes with labels like "long grain" and "for sushi" or the like. If buyers knew rice grew in Texas for a few bucks a pound, they might not want to pay through the nose for the produce of Japanese farmers that, to maintain price competitiveness, was protected with an 800% import tariff.

Yes, 800%.

The United States maintains import tariffs, too. The question isn't whether the US will protect domestic producers, but which producers and in what percentage. A look at the tariff on sugar, for example, shows that not only do we tax it strangely (for example, Congress levies a greater tariff against an import of cane sugar than it does against beet sugar), but there's a lot of energy being spent figuring out what sugar tariffs do to its price over time. Carl Hiaasen's excellent Florida-set fiction includes some hilarious hijinx caused by sugar barons and their lobbying efforts; I wouldn't recommend the movie, but read the book. The things domestic lobbies accomplish ....

Who is allowed to bring what into a national market and at what price is a big deal to people in the market, and to people trying to sell into the market. Trade isn't an academic matter. There are some financial heavy-hitters who regard dependence on foreign-produced commodities as a serious threat (Pickens views petroleum imports for energy as such an albatross that he's investing in alternative energy.)

So CNN has figured out that over the last eight years, America's biggest export to Iran is addictive poisons for recreational use. When last I heard, Iran was the enemy. (UPDATE: one of this cycle's remaining U.S. presidential candidates gets this joke, though he probably lost political correctness points for spelling it out while the camera was rolling.) Iran's current regime had been so cast since overrunning the US embassy in Tehran in 1979 (even if the invasion was unconnected with the government, the new government's later conditioning of captives' release on political accommodations by the United States unequivocally ratified and endorsed the action), then subsequently parading the corpses of US servicemen who died in an ill-coordinated interdepartmental rescue mission. Jimmy Carter's museum web site paints these events in a slightly different light that I present, and I link it in the interest of equal time. Some of Iran's attacks have been pretty clever. However, Iran's Islamofascist government has not merely confined its attacks to other tyrannical regimes, but have targeted the interests of democratically-aligned targets. Doubt that Iran's agents work to undermine neighboring democracies is quenched by Iranian reprisals for thwarting its agents and admissions by co-workers. One would be unsurprised to learn that, despite official positions on the matter, efforts against various Iranian efforts have resulted in some activity that resulted in chasing Iranian agents home to Iran.

Of course, the US position is that it is against the government in power in Tehran, not against the people whose efforts to oust them have been thwarted by systematic efforts to ensure only Islamic fundamentalists have any chance of appearing on the ballot. For example, U.S. Secretary of State Rice has discussed opening a bureau in Tehran modeled after the one in Cuba, for cultural contacts and processing visas but not for diplomatic contacts. This would be immediately attributable to a propaganda effort, except that no U.S. administration has had a competent propaganda campaign since Truman threatened to continue using atomic bombs to end the capacity of Japan to wage war, after he'd dropped the last one he could order dropped. The probable intent of a new bureau in Tehran is to process visas for dissedents and businessmen whom the US would like to encourage in the view that the US is a great place to do business and to give talks about how life sucks under what passes among Islamist tyrants for an Islamic caliphate.

If the Japanese want to suck down Marlboros -- or if Americans can work out how to market them successfully, there will always be some folks who think addictions are about supply and not demand -- at the same time as they fight tooth and nail to beat Americans in the marketplace, let them. When I say tooth and nail, I mean the Japanese government made sure the most modern production mechanisms were affordable and that container ships the US were cheap to build by providing capital to Japanese industrialists at reduced interest rates, on the backs of Japanese taxpayers whose national debt per capita swelled far past Americans' own crazily-mounting Cold War debt. Life in Japan was so stressful one could buy insurance against, and get paid benefits for insured losses from, death due to overstress due to overwork. The Japanese even have a one-word name for this risk: karoshi. Hundreds of claims are paid each year for karoshi. That's not claims made, that's claims proven.

And still, Japanese somehow live longer than nearly anyone else. So on those smokes: no harm, no foul, right?

Americans rail against dollars for petroterror, or how SUVs fuel terrorism, or the like, so they should be entitled to smirk when they hear about some distant tyranny sucking down cigarettes, bull semen, and anything else Americans can produce at will. Assuming Americans have some dog in the fight, sales are bullets in an economic war and should be withheld only for cause.

If Iranians want to buy American bull semen, how does this harm Americans? There's even a propaganda angle in there, if Iranians need to order out to America for quality semen.

Taxing Your Memory

Spain wants to tax your memory.

Ostensibly an anti-piracy tax, it will apply not only to music players but to anything "capable of recording, copying, or storing" pictures or sound that might be owned by someone else. This, of course, includes printers and ink cartridges and the media for your own digital camera. After 18 months of delay due to protest over the tax' reach and the fact there's no guarantee the tax will actually end up in the pockets of the artists the tax presumes are being robbed, it will go into effect July 1.

Spain isn't the first country to do this. The Copyright Board of Canada decided that music lovers' hard-drive-based music players were being used to pirate music, and extended blank media taxes to cover them, as well. Being based on capacity, the taxes that were a tolerable sip from the trough being spent on blank tapes and CDs were a voracious gulp -- up to $25 apiece -- from the flow of funds spent on portable music players. The fees collected in Canada were returned after the tax was overturned by the Canadadian Supreme Court.

The refund raises a peculiar question: if a year of fees collected between December 2003 and December 2004 were still on-hand in May of 2005 to be refunded to firms from which the tax had been collected, who exactly was supposed to be the beneficiary of the tax? It obviously wasn't artists, who never received it.

And this returns us to original questions about the reason d'être for the original tax: if it doesn't replace artists' lost revenues, what does it do?

(One wonders a bit about the beneficiary of the refund: assuming consumers ultimately bore the tax as a built-in cost of their players, the tax refund would just be a windfall for device makers or importers. Apple had to devise a special claims process to make sure customers got the benefit of the refund; others may not have bothered.)