Ethics & Public Policy Center

Long-Term Budgeting, Obama-Style

Published in National Review Online



President Obama’s 2012 budget has rightly been lambasted as completely detached from fiscal and economic reality. Even under the budget’s own rosy assumptions, the country would accumulate $7.2 trillion in deficits over the coming decade. Under more realistic assumptions, it’s a plan for trillion-dollar deficits every year, with no end in sight. By 2021, government debt would likely approach $21 trillion under this budget, up from $5.8 trillion at the end of 2008.

This might lead one to think there is no Democratic plan for closing the fiscal gap. But actually, the president and his allies do have a plan of sorts. They just don’t want voters to know what it is. Indeed, it is their hope that they can get their plan adopted by stealth — and that voters never fully realize that the government has adopted it.

To Democrats, the solution to our budget problem has two components. First, massive and steady tax hikes, not just over the next few years but every year for the next quarter century to match the explosion in entitlement costs. Second, they want stiff government cost controls on the entire health sector, not just on public insurance programs.

For years, the only thing that stood in the way of Democrats’ securing these changes were unenlightened and intransigent Republicans. But when Democrats secured once-in-a-generation majorities in the 111th Congress, Republicans were no longer in a position to stand in their way. So Democrats took the opportunity not only to pass Obamacare — the largest entitlement expansion in two generations — but also to try to reshape the long-term budget picture according to their big-government vision.

On taxes, the Democrats were more aggressive than most realize. The Congressional Budget Office (CBO) says the total tax hike over the next ten years will exceed $800 billion — a significant sum. But that’s really just the beginning of it. The authors of Obamacare were looking for a “game-changer” that went beyond a near-term tax hike. What they really wanted was a perpetual cash machine for the government, something that would generate ever-increasing amounts of revenue over the coming decades without forcing Democratic politicians to cast any further votes in support of higher taxation.

Their solution: Go back to 1970s-style bracket creep. One of the key economic reforms of the Reagan years was to put an end to the automatic tax hikes that used to occur every year as inflation pushed households into higher tax brackets. The Reagan tax cut permanently indexed those brackets to inflation, thus forcing politicians to get their tax hikes the old-fashioned way — by voting for them.

But the Obamacare tax hikes associated with Medicare — 0.9 percent on wages and 3.8 percent on non-wage income — were sold as hitting only individuals with incomes exceeding $200,000 and couples with incomes above $250,000 annually. But those income thresholds are fixed. They will be the same in 2030 as they are in 2013, when they kick in. Consequently, as the years go by, more and more Americans will find themselves paying much higher federal taxes for Medicare — even though they are decidedly not the “rich” people the president said he was targeting.

Similarly, the so-called “Cadillac” tax on insurance plans — sold as a way to hold down costs in the most expensive arrangements — will quickly become a tax that nearly everyone in America pays. In 2018, when the tax goes into effect (conveniently after President Obama has exited the scene), insurers and employers offering plans with premiums exceeding $27,500 for family coverage will pay the tax. But in 2019 and beyond, that threshold will not grow with medical inflation. Instead, it will increase only with economy-wide consumer prices, generally a few percentage points below the inflation trend in the health sector. As the years go by, therefore, virtually all health-insurance plans will start bumping up against the “high-cost” tax threshold. Last year, the average cost of family coverage was about $13,700. If premiums rise 6 percent per year and consumers inflation just 3 percent, the average plan will exceed the “high cost” threshold by 2026.

By 2020, the total tax hike associated with Obamacare will already be bad enough — about 0.5 percent of GDP. But by 2035, because of bracket creep, it will have more than doubled — to 1.2 percent of GDP, according to CBO. And it won’t stop there. It will keep going up every year, in perpetuity.

The second part of the Democrats’ long-term budget plan is the imposition of a global budget on the U.S. health sector. For years, Democrats have wanted to give the government the power to set prices in the health sector, and not just for public insurance programs, but for private-sector health care, too. In 1994, President Clinton explicitly sought such authority as part of his health-care push, which was one key reason his effort failed.

President Obama wants to achieve the same objective, but once again has chosen to pursue it in a way that is less perceptible to voters. Obamacare established what’s known as the Independent Payment Advisory Board, or IPAB, supposedly to find cost “efficiencies” in Medicare. In truth, the IPAB’s mandate is to enforce what amounts to a cap on overall Medicare spending. The only tool at its disposal to do so is price setting for suppliers of services and products to Medicare patients. It will impose arbitrary, across-the-board payment-rate reductions to hit budget targets, which will have the predictable result of driving willing suppliers of services out of the marketplace.

As the years go by, if Obamacare is allowed to stand, tens of millions of American will become enrolled in publicly subsidized coverage. The costs to the Treasury will be steep — and will lead to calls for greater cost control. That’s when Democrats will push for the next step — to extend the IPAB’s authority beyond Medicare to the insurance plans subsidized by Obamacare. We will nearly be at the bottom of the slippery slope to a Canadian-style health system.

The Democratic plan for closing the budget gap has always centered on raising taxes and rationing care. What most people don’t yet realize is just how far Obamacare has already taken us down that road.

James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director of the Office of Management and Budget from 2001 to 2004.

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