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Justice Roberts is Right: The Plan Won't Work
Posted by Peter Schiff on 07/30/2012 at 5:25 PM

Now that the Supreme Court has given its narrow blessing to the Affordable Care Act, the big question is whether it will deliver the benefits that its proponents promise. Unfortunately, as it is now constructed, the plan will backfire causing fewer healthy people to buy insurance, raise premiums for those who do, destroy employment opportunities, cripple the health insurance industry, and weaken the economy.

In order to guarantee insurance to all, regardless of age, health or pre-existing conditions, the framers of the plan concede that it is essential that the young and healthy (who are less likely to be heavy users of health care) pay into the insurance pool. The surplus generated from their premiums compensates for the money lost to those receiving more in services than they pay in premiums (e.g. older people and those with medical conditions). But the ACA has given these healthy people a "Get out of Jail Free" card that many of them are sure to play.

Most healthy young people know that they are losing money to insurance providers, at least in the near term. That is the nature of insurance.  You pay to prevent costly exposure to an unlikely event. And just as homeowners wisely pay for fire insurance even though they don't expect their homes to burn down, given the high cost of medical care it is also practical that healthy young people buy health insurance.

But, the ACA makes it illegal for insurance providers to deny coverage to anyone for any reason. This allows healthy people to drop insurance until they actually need it without incurring any risk. It's like allowing homeowners to buy fire insurance after their houses burn down.  To counteract these new free rider incentives, the law imposes "no insurance" penalties (also defined as taxes by the Supreme Court). The problem is that these "penaltaxes" (for lack of a better word) are insufficient to the task. In fact, Chief Justice John Roberts ruled the law constitutional precisely because the burdens were not high enough to compel behavior. (In other words, he thought the law was constitutional because it will be ineffective.) The numbers support his arguments.

On average, in 2010, a typical healthy young person paid at least $2,500 per year for insurance (for a plan that would still involve significant out of pocket expenses). In some areas of the country, premiums were more than twice as high.  When the program takes effect in 2014 the penaltaxes will be the greater of $95 or 1% of household income. A single person earning $40,000 per year who chooses to go uninsured would then be subject to a $400 penaltax. The decision would be an easy one: drop the insurance, incur the penaltax and pay for any routine medical services out of pocket.  In the unlikely event that he gets cancer or is hit by a bus, he can always buy insurance in the ambulance on the way to the hospital.  Even in 2016, as the penaltax increases to the greater of $695 or 2.5% of household income, it will still not make sense for many people to buy insurance. The penaltaxes are capped at levels that equal the full cost of an average health plan.  So even high income individuals are no worse off financially for not buying insurance. In addition, the IRS' ability to actually collect these penaltaxes is limited to garnishing income tax refund checks. If an individual is not getting a refund, the IRS is impotent.  

The law places no requirements for businesses with fewer than 50 employees to offer insurance. So when younger workers realize the benefits of dropping insurance, they will naturally gravitate to savvy businesses that offer higher pay instead of insurance. This will drain more premiums from the insurance pools. 

In contrast, the burdens placed on employers with more than 50 workers are complex, onerous and unpredictable. Those that don't offer insurance would be subject to substantial (and open ended) penalties if at least one employee receives an insurance tax credit or a government subsidy to an insurance exchange. If they do offer insurance, they will also be subject to substantial (and open ended) penalties if the plan fails to cover 60% of employee health expenses, or if premiums for any employee are more than 9.5% of family income.  It has been left wholly unexplained how employers are supposed to accurately determine these triggers which involve knowledge of family income, not just employee income.

Smaller employers will look to avoid these headaches by staying below the 50-employee threshold. Though it should be obvious, there is plenty of evidence to support this tendency. French law involves significant regulatory requirements for businesses that have more than 50 employees.  As a result, there are currently 2.4 times more French companies that have 49 employees than there are with 50. Incentives for businesses to stay small will hurt the economy and will further shrink the numbers of people paying into the health insurance pools.  

Employers will also be incentivized to avoid hiring lower paid workers who would be more likely to trigger the penalties tied to household income. As a result, many small companies will likely look to replace lower rung employees with temps, automation or outsourcing, further raising the barrier to workforce entry for lower skilled workers. The unemployable workers will then qualify for free health insurance, further draining the system.

Unless the penaltaxes are raised significantly, far too many needed premium payers will drop out.  As they do, insurance companies will try to recoup the lost revenue by raising premiums for the customers who remain.  As the gap between the relatively low penaltaxes and the high cost of health insurance premiums increases, so too will the incentive to drop coverage. This self-reinforcing dynamic will render the entire plan non-viable.

It is a foregone conclusion that the Obama Administration and its congressional allies are already planning to raise the penaltaxes. Although such increases would render the plan unconstitutional if they compel behavior, according to Roberts's analysis, I do not expect the Supreme Court to ever rule on this case again. The Court has a history of opening small cracks in the Constitutional barn door for the bureaucratic horses to stampede. 

Unless we can summon the political will to repeal the poorly conceived law, we should all brace for higher health care costs, many more layers of impenetrable federal bureaucracy, a significantly weaker economy, diminished employment opportunities, and lower living standards.


Tags:  Constitutionhealth insurancehealthcareobamacaresupreme court
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Supreme Error
Posted by Peter Schiff on 07/03/2012 at 10:09 AM
In the wake of my last commentary on the horrendous Supreme Court decision upholding Obama’s health care plan, several people have pointed out that I erred in saying that the income tax is a “direct tax.” While it is technically correct that the Court ultimately declared it to be an excise, not a direct tax, it is important to understand how it arrived at that opinion and why the decision has no practical relevance to the way the tax has been enforced.   Just as it has done with Obamacare, the Court concocted a technically constitutional pathway to allow the government to collect a tax in a blatantly unconstitutional manner.

In the 1895 Pollock v. Farmers’ Loan and Trust case, the Supreme Court declared the original Income Tax of 1894 unconstitutional because it imposed a direct tax that was not apportioned to the states according to the taxing provisions of the Constitution. For example it said that a tax on rental income is the same as direct tax on the property that produced the income.  In other words, a tax on income was tantamount to a tax on its source.

To get around this, in 1913 Congress passed, and the state governments ratified, the 16th Amendment that authorized a tax on income from whatever source derived without regard to apportionment.    However, in 1916 the Supreme Court ruled in Brushaber v. Union Pacific Rail Road that the Amendment “conferred no new taxing power to the Federal government,” and that it “contained nothing challenging or repudiated its ruling in the Pollock case.”  Instead, the Court said that in order to be constitutionally taxed as an excise, income must first be separated from its source.  A few years later in Eisner v. Macomber (1918) and Merchants Loan and Trust v. Smietanka (1921) the Court provided a practical guide to doing just that, by defining income, for purposes of the Sixteenth Amendment, as a corporate profit.

A corporation determines profit by subtracting its expenses from its income. The difference, called profit, could then be subject to an income tax.  So if a corporation has rental income, but derives no profit after backing out all of its expenses, then the rents, and therefore the property, are not taxed.  In that respect, the income is separated from the sources that produced it.  Were it not for this separation, a tax on rents, dividends, fees, etc. would be a direct tax on the sources of income, as described by Pollock, Brushaber, Eisner and Smietanka.  That is why many U.S. corporations can have billions of dollars of income but pay no tax, because they derive no profits from that income.  This proves the income tax is, in reality, a profits tax.  The problem is that the modern income tax is not merely being levied as an excise tax on corporate profits, but as an unapportioned direct tax on the personal income of every American.    This is precisely what the Supreme Court has repeatedly held to be unconstitutional.   Yet lower courts have serially ignored the reasoning behind these Supreme Court decisions and have allowed the Federal Government to impose a tax in the precise manner that the Supreme Court ruled it lacked the constitutional authority to do.

The Founding Fathers made it difficult for Congress to levy direct taxes because they considered the more easily avoidable excise taxes to be self-correcting as to abuse.  They also wanted to make it more difficult for poorer states to vote for taxes that would be paid disproportionately by wealthier states.  As a result, they believed that during peacetime the Federal Government would rely primarily on excise taxes and would resort to direct taxes mainly during wartime.

To levy an apportioned direct tax on personal income, Congress would first have to decide how much it wanted to raise and then assign each state its pro-rata share. So a $1 trillion dollar income tax would require Mississippi and Connecticut (each with about 1% of the U.S. population) to pay about $10 billion. However since per capita income in Connecticut is 80% higher than it is in Mississippi, federal income tax rates in Mississippi would have to be 80% higher than the rates in Connecticut.  This makes it less likely that Mississippi would support such a tax. But given the way the income tax is currently enforced, Mississippi happily votes for levies that fall predominately on residents of wealthier states. This is precisely what the Constitution was written to prevent.

Just as a tax on land based solely on its rental income is the same as a direct tax on the land itself, a tax on individuals based solely on their decision not to buy health insurance is a direct tax on individuals.  To get around this, Chief Justice Roberts ruled that the new healthcare tax is indirect because not everyone will have to pay it. However, the percentage of people ultimately subject to a tax does not determine into which category it falls.  Less than two percent of Americans were subject to the original income tax, yet the court still viewed it as a direct tax.

The bottom line is that the Supreme Court has a history of giving the government latitude to get around the Constitution.  Instead of looking at the intent of legislation (even when the legislators are alive to be asked), or even its practical effect, the Court looks for any legal technicality upon which to base a ruling of constitutionality.  That is what happened with the income tax, and is now occurring with the Affordable Care Act.  Had the Supreme Court been more forthright with the income tax, the country would not now be suffering from a destructive and pervasive tax that was originally intended to be a small levy targeted only at the top 1% of American earners.

Remember, the Court’s sole rationale for ruling the exactions in the Affordable Care Act are taxes rather than penalties was its belief that the taxes are too low to actually compel anyone to buy health insurance.   This made it consistent with the Court's view that Congress lacks the authority, under the commerce clause, to compel Americans to buy health insurance.   If the Court believed that the tax was actually high enough to leave Americans with no rational choice, Roberts would have ruled it unconstitutional .

The observation that the penalty is too low to work may be the one thing the Court actually got right. However, once the government realizes that it has underpriced the fines, it will certainly raise the tax rate substantially to stop healthy people from rationally dropping their coverage (because insurance companies could not deny them similarly priced coverage after they got sick).   Just as they routinely do now with respect to the income taxes, the lower courts will likely misinterpret the Supreme Court’s ruling and rubber stamp any future rate hikes.  For political reasons it is unlikely that a Constitutional challenge to such an increase will ever make it back up to the Supreme Court.

This leaves us few good options. Unless Congress repeals the legislation quickly we will likely have to live with it for a long, long time. Sadly, despite the Romney and the Republicans’ promises to do just that with election victories this fall, there is virtually no precedent for government giving up a power that it has fought to take. In the end Americans will be forced to purchase health insurance in the manner the Supreme Court just ruled to be unconstitutional.


Tags:  Constitutionobamacaresupreme courttax
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Obama Gets Real
Posted by Peter Schiff on 12/09/2011 at 11:32 AM
For most of his time as a national political figure, Barack Obama has been careful to cloak his core socialist leanings behind a veil of pro-capitalist rhetoric. This makes strategic sense, as Americans still largely identify as pro-capitalist. However, based on his recent speech in Osawatomie, Kansas, the President appears to have reassessed the political landscape in advance of the 2012 elections. Based on the growth of the Occupy Wall Street movement, and the recent defeat of Republicans in special elections, he has perhaps sensed a surge of left-leaning sentiment; and, as a result, he finally dropped the pretense.

According to our President's new view of history, capitalism is a theory that has "never worked." He argues that its appeal can't be justified by results, but its popularity is based on Americans' preference for an economic ideology that "fits well on a bumper sticker." He feels that capitalism speaks to the flaws in the American DNA, those deeply rooted creation myths that elevate the achievements of individuals and cast unwarranted skepticism on the benefits of government. He argues that this pre-disposition has been exploited by the rich to popularize policies that benefit themselves at the expense of the poor and middle class.

But Obama's knowledge of history is limited to what is written on his teleprompter. And his selection of the same location that Teddy Roosevelt used to chart an abrupt departure into populist politics is deeply symbolic in the opposite way to that which he intended. It is not by some genetic fluke that Americans distrust government. It is an integral and essential part of our heritage. The United States was founded by people who distrusted government intensely and was subsequently settled, over successive generations, by people fleeing the ravages of government oppression. These Americans relied on capitalism to quickly build the greatest economic power the world had ever seen - from nothing.

But according to Obama's revisionist version of American history, we tried capitalism only briefly during our history. First, during the Robber Barron period of the late 19th Century, the result of which was child labor and unprecedented lower-class poverty. These ravages were supposedly only corrected by the progressive policies of Teddy Roosevelt and Woodrow Wilson. We tried capitalism again in the 1920s, according to Obama, and the result was the Great Depression. This time, it allegedly took FDR's New Deal to finally slay that capitalist monster. Then, the account only gets more farcical. Apparently, we tried capitalism again under George W. Bush, and the result was the housing bubble, financial crisis, and ensuing Great Recession. Obama now argues that government is needed once again to save the day.

This view is complete fiction and proves that Obama is not qualified to teach elementary school civics, let alone serve as President of the United States. I wonder what other economic system he believes we followed prior to the 1890s and 1920s (and during the 1950s and 1960s) that that he now seeks to restore? Capitalism did not start with J.P. Morgan in 1890s or John D. Rockefeller in the 1920s as the President suggests. In fact, it was about that time that capitalism came under attack by the progressives. We were born and prospered under capitalism. The Great Depression did not result from unbridled capitalism, but from the monetary policy of the newly created Federal Reserve and the interventionist economic policies of both Hoover and Roosevelt - policies that were decidedly un-capitalist.
 
The prosperity enjoyed during mid-20th century actually resulted from the incredible progress produced by years of capitalism. Contrary to Obama's belief, the New Deal and Great Society did not create the middle class; it was, in fact, a direct result of the capitalist industrial revolution. The socialist programs of which Obama is so fond are the reasons why the middle class has been shrinking. America's economic descent began in the 1960s, when we abandoned capitalism in favor of a mixed economy. By mixing capitalism with socialism, we undermined economic growth, and reversed much of the progress years of laissez-faire had bestowed on average Americans. The back of the middle class is being broken by the weight of government and the enormous burden taxes and regulation place on the economy.

America's first experiment with socialism, the Plymouth Bay Colony, ended in failure, and our most successful colonies - New York, Virginia, Massachusetts  - were begun primarily as commercial enterprises. When the founding fathers gathered to write the Constitution, they represented capitalist states and granted the federal government severely limited powers.

Apparently, Obama thinks our founders' mistrust of government was delusional, and that we were fortunate that far wiser groups of leaders eventually corrected those mistakes. The danger, as Obama sees it, is that some Republicans actually want to reverse course and adopt the failed ideas espoused by great American fools like George Washington, Thomas Jefferson, John Adams, and Benjamin Franklin.

The President unknowingly illustrated his own contradictory thinking with the importance he now places on extending the temporary payroll tax cuts. If all that stands between middle-class families and abject poverty is a small tax cut, imagine how much damage the far more massive existing tax burden already inflicts on those very households! If Obama really wants to relieve middle-class taxpayers of this burden, he needs to reduce the cost of government by cutting spending. After all, there is no way to pay for all the government programs Obama wants by simply by taxing the rich.

History has proven time-and-again that capitalism works and socialism does not. Taking money from the rich and redistributing it to the poor does not grow the economy. On the contrary, it reduces the incentives of both parties. It lowers savings, destroys capital, limits economic growth, and lowers living standards. Maybe Obama should take his eyes off the teleprompter long enough to read some American history. In fact, he could start by reading the Constitution that he swore an oath to uphold.


Tags:  capitalismcommunismconstitutionfounding fathersobamasocialismsocialist
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Jobs Report, U.S. Constitution, SchiffRadio.com
Posted by Staff on 01/07/2011 at 3:43 PM
Peter comments on today's jobs report, the U.S. Constitution, and SchiffRadio.com

Tags:  ConstitutionjobsSchiffRadio
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