Wednesday, March 19, 2014

A Brief History of Tax Deductions

The American health care system is a puzzle you cannot understand unless you understand how income taxes worked from 1945 to 1987. This is not a topic most children learned at their mother's knee, since only the top earners ("the 1%," as we now know them) had to pay the top rates. If your grandfather was a multi-millionaire and a story-teller, you can skip the next three paragraphs. If you're like the rest of us, read on...

America won World War II by out-producing every other nation on the planet. By the end of the war, we were rolling one new ship out every day. But all that production cost money, and the money came from taxes--graduated income taxes that took more from people who made more. The top earners in 1944 paid 94% of each additional dollar in federal income taxes.

We don't talk much about this astonishingly high level of taxation nowadays, but I was reminded of it recently as I have been reading through the "Nero Wolfe" detective stories. Nero Wolfe is an obnoxious, overweight, orchid-growing genius who hates to work and never leaves his Manhattan home on business. Rex Stout, who wrote the Wolfe books, published his first detective story in 1933 and then turned out two or three books a year for decades. Reading all the Wolfe books in order is like reliving an entire generation of urban life, death... and taxes.

One gets to know a lot about taxes in the books. Wolfe only works when he has to, and charges "obscene" fees for his services. But he hardly ever takes a job in the last part of the year--as soon as he reaches the top bracket, he pretty much refuses to work.

Not all American workers after World War II were obese neurotic millionaires, but many people in the workforce had the same problem--the more they earned, the less they kept. Union members fought for higher wages, only to find a great big hole in their paycheck when they took it home. Labor and management put their heads together and discovered a loophole that would let them keep more of their money out of the hands of the government--instead of paying more in wages (which would be taxed), companies started providing health insurance benefits (which were not taxed). This made sense for top executives, who only took home pennies from each additional dollar, and it made sense for union members, too.

With business and labor both firmly in favor of tax-free employer-provided health insurance, Congress chose to leave the loophole open, and most of country ran right through it. The vast majority of Americans get their health insurance from their employer nowadays, even though the original reason for doing so has all but disappeared. The top tax rates are under 40% now, and half of all Americans pay nothing at all in federal income tax.

Congress "created" our current system of employer-provided health care by doing nothing while American ingenuity figured out how to save money despite the tax laws. I am now predicting five more years of political gridlock on the health care front--enough time for a whole new generation of Americans to figure out how to stay healthy and save money all over again.

Wednesday, March 5, 2014

The Buck Stops Later

Our President made the news this week--rebuking Russia for invading a neighboring country, submitting a "budget" spending money we don't have, and delaying another round of healthcare changes that might hurt people just before elections next November. In each of these cases, the President put today's bills on tomorrow's tab.

Hillary was in the White House last time we had a balanced budget, and hopes to be there again next time it happens--but Obama's latest "budget" makes that job several trillion dollars harder. He has loaded it up with election year goodies that may help a few endangered Democrats in 2014 but leaves the Democratic ticket in 2016 behind the economic eight-ball.

Dollars aren't the only kind of capital our President is spending, though. He's spending down our international influence even faster. Our nation has invested trillions in defense since we entered World War II in 1941, making us the world's only superpower when the Soviet Union collapsed fifty years later, in 1991. Obama has traded that strength for global approval since the day he took office. He got a Nobel Peace Prize for this approach--but did he make the world a safer place? Events in the Ukraine say "no"--and Hillary, who was ordered to "reset" our relationship with Russia, now has to figure out how to re-reset if she becomes President. How do you put the Russian bear back in the cage that Obama dismantled?

That job would be easier if we didn't need the "bear" to like us--but Obama asked for Russia's help to solve our other problems. Obama's "red line" painted him into a corner in Syria until Russia bailed him out. Obama insists that he will never let Iran get nuclear weapons--but Russia seems to be all that stands between the world and that particular nightmare.

The problem with Russia is big, but it's just part of the problem. China has been rattling swords as well, leaving Taiwan nervous and Tibet hopeless. Saudi Arabia and Israel have well-nigh given up on America's power to keep the peace, making the Middle East a much more dangerous place. After all Obama's efforts to "be nice," Iraq and Afghanistan prefer Al Qaeda and the Taliban to America. Back in 1998, all that President Bill Clinton could do about terrorist training camps in Afghanistan was fire drones at them. In 2018, twenty years later, President Hillary Clinton may be right back where her husband was.

But this assumes that Hillary gets elected. The third objectionable way Obama pays his bills is purely political. How many times has the President taken credit for the popular parts of his signature achievement while pushing the pain down until after the next election? This week's "surprise" was that insurance companies can keep offering "junk policies" a little longer--just long enough to keep the bad news out of voters' mailboxes until after this November's elections. That's just long enough to give the President a chance at saving Democratic control of the US Senate for another cycle, but it comes at a cost to the next Democrat who wants to be President. When all those Obamacare bills finally come due, it won't be this President who pays the political price.

When Obama ran for office in 2008, young Americans responded to his vision with unprecedented enthusiasm. When he ran in 2012, Hispanics surged to the polls for him.  Some political observers concluded that Republicans were doomed to be the declining party of old, white, English speaking men. Since October 1, 2013, however, "" has shredded his support among young and Hispanic voters. Where are the "young invincibles" who were supposed to sign up for new (and more expensive) government-mandated health insurance? Hispanics have been alienated by the laughable, late "Spanglish" website that was supposed to help them to get government benefits that are only available for citizens without asking nosey questions about their immigration status. With tax penalties just around the corner, these young and Hispanic Americans have no good reason to vote for Democrats.

When Obama took over from President George W. Bush in January, 2009, he promised a "transparent administration" that would protect our privacy. Five years later, the government knows much more about Americans--and Americans know much less about their government. The public's trust is any President's most precious asset--ask George H. W. Bush, whose "read my lips" line cost him a second term in office. What will Obama's "lie of the year" cost the next Democratic candidate for his office?

Obama is burning through capital--financial, diplomatic, and political--at everyone else's expense. Republicans may be able to reign in his spending if they take the Senate in November, but he still has three more years to make life miserable for his successor, whoever he or she may be.

If I were Hillary Clinton, I'd start complaining now!

Friday, February 28, 2014

Of Cakes and Consciences

The week's big news comes out of Arizona, where Governor Jan Brewer vetoed a bill that would allow religious business owners to refuse to serve customers if such service would compromise their consciences. Religious liberty came under fire when a judge in neighboring New Mexico ruled against a photographer who refused to take pictures at a same-sex wedding ceremony.  Then a baker in Colorado refused to bake a cake for a similar celebration in Denver and got sued. Although the baker believes that creating same-sex wedding cakes would be "displeasing God and acting contrary to the teachings of the Bible," the judge ruled against him.

Rulings like these troubled Christians across the country, including neighboring Arizona, and the  legislature there responded with a law to protect conscientious objectors in that state. The Republican governor vetoed it, however, arguing that the "legislation seeks to protect businesses, yet the business community is overwhelmingly opposed to the law."

It is no wonder that the Arizona business community is "overwhelmingly" opposed to the law. They know what happened to "Duck Dynasty" when Phil Robertson quoted a Bible verse about sexual sins. Arizona is a beautiful, desolate state that depends heavily on tourism--and the Governor knows that a public backlash against Arizona might send the whole state back into recession.  If one baker refuses to bake a cake for one couple for religious reasons, that couple suffers. If every politically-correct corporation cancels next year's Arizona convention for political reasons, the whole state suffers. Given the choice between protecting Christian bakers and keeping the Super Bowl in Phoenix, the Arizona business community is clear on its priorities. "Culture wars" are bad for business!

The Arizona law wasn't specifically written to protect Christians or punish homosexuals. It applied to any believer who could not comply with an otherwise-valid law for conscientious reasons. It would help the Muslim barber who refused to give a woman a man's haircut or the Orthodox Jew who closes his liquor store all day Saturday and then can't sell his wares until 1:00 p.m. Sunday. It wouldn't do much for McDonald's or Microsoft (big businesses don't have consciences), but it would do a lot for Roman Catholics who believe that oral contraceptives flush a living human being from the womb, and therefore cannot pay for insurance that provides the Pill to their employees.

The argument against religious freedom is simple--if your personal beliefs prevent you from doing one job, do another. If you don't like killing people, don't join the Army. If you don't eat pork, don't apply at the sausage factory. If you don't approve of same-sex marriages, try baking pies instead of cakes.  It may be a good argument in theory, but it fails in practice. How does it work for the widow whose only income comes from rent from apartments she owns, which she only rents to married couples? How does it work for the photographer, whose only marketable skill is selling pictures that people mostly only buy for weddings?

Let's apply the Arizona situation to our own region. Our economy here in the Potomac Highlands is heavily dependent on tourism and turkeys. All it takes is one ruling from some government agency and our poultry farmers could find themselves facing impossible costs--and we're just one court case away from same-sex weddings here in West Virginia. It may not be that long before folks who rent cabins out to honeymooners have to decide how they feel about this issue.

So--what do West Virginians think about religious freedom? If you had to choose between a West Virginia Super Bowl and some stubborn fundamentalist who will not serve a same-sex couple, which would you pick? What about the Muslim parent who won't let her daughter wear shorts in gym class? What about the Jehovah's Witness who insists on knocking on your door when you're sleeping late on Saturday?

It's easy to fight for popular freedoms. That's what politicians do--that's why they keep on getting elected. That's what happened in Arizona--they were all for freedom until they realized it might cost them something.

Is that what we want in West Virginia?

Arizona can have the Super Bowl. I'll take our mountains and our people, all of them--hillbillies, hippies, prosperous poultry farmers, poor widows. I'll take the same-sex couple raising goats up the hollow, and the Primitive Baptist who can't sleep at night at the thought of all that sin. The right to do what you think is right includes the right to oppose what you think is wrong--even if the rest of the world disagrees with you. That's what freedom means--and mountaineers are always free.

Wednesday, January 22, 2014

Student Loans or Health Insurance?

The logic of the new healthcare law is that "young invincibles" have a patriotic duty to pay for older or sicker Americans.  The idea is that people with lower risks should pay higher premiums as long as we offer subsidies (or Medicaid) for people who really can't afford insurance. There may be more of a problem with this reasoning than we recognize--due to the new dynamics of student debt.

Here's the bottom line: the new law computes subsidies based on income, not discretionary income. For a lot of young graduates, that turns out to be a big problem. If you like math, read on. 

Professor Glenn Reynolds of Instapundit has been writing about the "higher education bubble" for some time now. This somewhat-controversial hypothesis claims that the value of a college degree is going down even as the cost of a degree is going up, and that the entire system of higher education in the United States is due for a "correction," much like the housing market bubble that popped in 2007.

Whether the "bubble" is sound economic theory or not, it focuses attention on how school debt burdens young people in an underperforming economy. A recent graduate who borrowed $50,000 for her BA in sociology may find nothing better than Starbucks--unless she's willing to borrow even more to get a masters degree.

Student debt is different from mortgage debt--and every difference disadvantages younger people. Student loans are paid out of after-tax dollars; home loans are paid from pre-tax dollars. Home loans vanish after bankruptcy, student loans stay with you until you die.

So let's put these facts together and see how they apply to the "young invincibles" who are supposed to sign up on the exchanges. A 26-year-old who makes 29,000 in Frederick, Maryland pays $168.00 per month for a "silver" plan, which has a $1,300 deductible and a $6,350 out-of-pocket maximum. A ten year loan for $50,000 at 6.8% costs $575 per month. Rent for a single person in Frederick is over $600 a month. Federal income tax on a person with no dependents or deductions is over $200 per month. Adding it up, we get:
  • Income: $29,000
  • Fixed Expenses: $21,600
    • Federal taxes: $2,400
    • Rent: $7,200
    • Student loan: $6,900
    • Insurance: $2000
    • Car loan (4 years on $5000): $1500
    • Cell phone (basic plan): $600
  • Living Expenses: $2800
    • Food ($100 a month for basics): $1200
    • Gas (40 miles per day at 22 mpg): $1600
  • Discretionary income: $5600
That is less than $500 per month--and doesn't include little items like state taxes, car repairs, clothes, and the like.

What if this particular graduate is one of those "young invincibles" that the law depends upon?  We have to add a few items:
  • Young invincible expenses:
    • Fast food
    • Beer
    • Sports
    • Cable television
    • A real car
    • Etc.
 Of course, not all young men need fast cars or six six-packs to get through the week. I go to church with some remarkable young men who are saving up to get married and start a family. After paying their tithe (which gets them no tax advantages, since it falls within the "standard deduction"), these men have a total of $2700 they can save each year for an engagement ring and honeymoon--assuming they can find a girl who will say "yes" when their date budget only covers sandwiches on a park bench.

All that is for a student loan of $50,000 for a graduate with a pretty good job. What about the graduate in the next cubicle with the same salary and a $75,000 loan? His interest payment is just about $3600 more each year, leaving him with less than $200 a month after basic food and gas.

Bottom line? The new law wasn't written by a recent graduate, and things may get worse before they get better. The kind of job you need to pay off the kind of debt you need to get the kind of job you need is too high for subsidies but too low to get ahead in life. And don't forget--this lifestyle of "unsubsidized subsistence" is considered success for the recent graduate.

Is it any wonder that "millenials" aren't excited about the new healthcare law?

Tuesday, January 14, 2014

A HealthShare Pilgrimage

I am on the road today, visiting Samaritan Ministries in Peoria, IL, and the Alliance of Healthcare Sharing Ministries in Washington, IL. Tomorrow I will be meeting with Christian Healthcare Ministries in Barberton, OH. I hope to visit Medi-Share in Melbourne, FL in March.

I feel a little like the Apostle Paul, who submitted his message of a Gospel to the Gentiles to the church leaders in Jerusalem in Acts 15. I believe that "bearing one anothers' burdens" is a beautifully biblical way to pay for modern health care. I want to do what I can to persuade my brothers and sisters to explore the healthshare model. But I also know that the people who actually serve Christ by running healthshare ministries have been doing this humble, faithful work for decades--and they don't need me to come in and disrupt things.

So I'm on the road to find out how to combine enthusiasm with humility; energy with wisdom. Pray for me today!

Monday, January 6, 2014

Puzzling Over Medicaid

I have proposed a 50% federal tax credit for paying for someone else's health insurance. Payments to an insurance company or 501(c)(3) charity would be reported to the IRS, and the IRS would apply half the amount reported to federal income taxes owed. This tax credit would:
  1. double what some people now pay in taxes,
  2. reduce the burden on doctors who accept Medicaid, and
  3. extend the solvency of the Medicaid fund, which is expected to go into the red by 2024 at the latest.
 Who might be interested in such a proposal? Here are a few examples:
  1. Parents of low-income children over 26 who live in "Medicaid gap" states. 
  2. Children of low-income parents over 55 who do not want the Medicaid estate recovery program (MERP) to take the family assets after death.
  3. Church members who want to help the poor people in their congregation.
  4. Women's rights activists who want to give low-income women access to all reproductive choices despite Medicaid restrictions.
  5. Immigrant groups that want to help Medicaid-eligible individuals get coverage without disclosing the immigration status of their family members.
In my online discussions about this idea, I have encountered a handful of objections. These include:
  1. "You just want to privilege church-goers." (Rebuttal: I think many church-goers would be willing to pay twice what they now pay in taxes. Maybe I'm trying to exploit church-goers!)
  2. "Why shouldn't the state claim all the assets from a person who goes on Medicaid?" (Rebuttal: the so-called "Death Tax" only takes 40% of the assets from billionaires. Why take 100% from the working class?)
  3. "This doesn't help the people who don't have wealthy family and friends." (Rebuttal: overloading the Medicaid system hurts the people who need it most. This frees it up as a true safety net for the truly destitute.)
  4. "It's a tax break for the rich." (Rebuttal: no, it's a tax break for the working class. Tax deductions are fairly valuable to people in the top tax brackets, because they can save about 39 cents on the dollar by giving money away. People in the lowest bracket are just as generous, but they get 10 cents of the dollar for their donations. A tax credit levels the playing field for altruism.)
  5. "Medicaid may be cheaper than insurance." (Rebuttal: yes, and you get what you pay for. Why not help people get better medical care at lower overall cost to the taxpayer?)
The only objection I haven't encountered yet is the only one I can't get around--"your system might actually work, which would keep Medicaid from crashing, after which the federal government would have to create a single-payer system."

Friday, January 3, 2014

Elder Law Opportunity

Approximately one million Americans are now at risk of losing their homes, farms, and small businesses to Medicaid's estate recovery program ("MERP"), but as of today there have been less than 20 news stories about the problem--and most of those have been published in the "local news" section. That is a problem for older, poorer Americans but a terrific opportunity for elder law attorneys.

Attention, attorneys: would you like more business? Here's your recipe for free advertising:
  • Find a person who is:
    • over 55 
    • with an income below 138% of the federal poverty line
    • who owns a home, farm, small business, substantial savings, or other assets.
  • Research MERP in your state (if you don't already know the law).
  • Find the webpage where your state explains MERP.
  • Find the newspaper(s) that serve your area and look for their "submit a story" button. (If they don't have a "submit a story" button, search for "health" and find the reporter who covers health issues.) Explain the problem, the solution, and offer to put them in touch with your client. Make sure they include the name of your firm in the story!
To make this work, you have to be able to explain the solution. As I have explained in previous posts, any person with enough assets to worry about can sell just enough of their property each year to generate the income they need to qualify for subsidies. For some, one big yard sale might boost their income over the Medicaid line. Other clients may need more specialized help--which is why this is such an opportunity for specialists in elder law.