Inside Financial Services

This Is No Way To Cut The Deficit

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My pal Whitney Tilson is one of the most thoughtful people I know on Wall Street-he’s smart, forthright, and tough-minded-so I was surprised no end when I saw that the opinion piece on deficit reduction he co-wrote for Bloomberg with Anthony Scaramucci turned out to be so light on new or workable ideas. If this is the best two of Wall Street’s brightest can come up with, the country really is in trouble.

The conceit of the piece is that Whitney (a Democrat and active Obama backer) and Scaramucci (a Romney finance chair) were able to overcome partisan differences and put forth the broad outline of a deficit reduction plan that they said both sides would be able to support. Great idea. You’ll get no argument here that the budget deficit and the country’s mountain of debt are among the toughest problems we face. The sooner the federal government gets its finances under control, the better.

Unfortunately, it’s not clear that the proposals the two have put together would either a) do much to reduce the deficit or b) get a whole lot of support, either in Congress or out of it. Take their approach to taxes. Whitney and Scaramucci (whom I’ll henceforth refer to as W&S because their names are so darn long) propose a grab bag of tax hikes on “the wealthy” that you’ve probably already heard suggested before: everything from eliminating the cap on the payroll tax, to raising taxes on capital gains and dividends, to limiting personal income-tax deductions. I won’t bore you with the argument that hiking taxes on the most productive would likely retard economic growth and so make matters worse rather than better. You’ve heard that argument before and either you agree with it by now or you don’t. More to the point, W&S essentially concede that their tax-hike schemes wouldn’t provide a whole lot of deficit reduction. “Some argue that even if these arguments are carried out, they won’t be enough to eliminate the budget deficit,” they write. “True, but think of the math this way: For every $1 billion not raised from the wealthy that’s equal to having 1 million average American families each pay an extra $1,000 in taxes.” Actually W&S’s proposed hikes wouldn’t put much a dent in the deficit at all. To put matters in perspective, if the government taxed all incomes over $1 million at 100%, the deficit would still be roughly $500 billion.

W&S are really making a fairness argument here, which is entirely legitimate. They feel that the wealthiest Americans should pay their “fair share.” The top 1% of earners already pay 38% of taxes while taking in just 17% of income. That tax burden’s not enough? Fine. What percentage is? I’ll be happy to hear their answer-but as part of a deficit-reduction discussion, it’s entirely beside the point.

The federal government’s finances are in the sorry state that they’re in, in my view because the government spends too much (and inefficiently), not because it doesn’t take in enough in taxes. In particular, the only path to real, significant deficit reduction is via entitlement reform, notably Social Security and Medicare. This is not a secret. W&S admit as much. They propose, for instance, to raise the minimum retirement age to 70, which I actually agree with. When Social Security was established in 1935, life expectancy at age 65 was roughly 13 years. Now it’s 18 years. So by all means, bump up the retirement age.

But the main part of W&S’s plan to slow Social Security spending involves means testing the program. The richer you are, the less you’d get paid. That sounds great in theory, but is devilishly hard to put in place in the real world without inducing huge distortions. If Social Security were means-tested, the affluent would move into non-income producing investments, for instance, or move assets offshore. An alternative approach might be to means-test by looking at assets rather than income, but that would be even worse. I can’t imagine a bigger disincentive to long-term savings and investment. People would end up paying a huge price in forgone Social Security payments for leading a life of prudence and thrift. A bad idea.

W&S’s “plan” for fixing Medicare is even fuzzier. Here, as they note, there can be no means testing since everyone will be covered under Obamacare anyway. W&S spend roughly one half of one sentence talking about lawsuit reform and waste, fraud, and abuse before they get to the core of their proposal, which has to do with the “need to have tough conversations about how much we can spend in certain areas, without silly talk of death panels.’”

This is apparently code for cutting back on end-of-life care, and it is one of the most pernicious arguments that health-care controllers put forth. I’m surprised W&S have fallen for it. The argument goes like this: roughly one-third of health care costs are spent in the patient’s last year of life. That’s obviously a lot of money being spent on a doomed enterprise, so why not save the system a ton of money by not spending it in the first place?

Bull. The problem with this argument is that one doesn’t know what counts as “end-of-life care” until after the fact. Often-very often-doctors will take the costly lifesaving measures of which W&S disapprove and the result will be that the patient will recover and live many more happy and productive years. That’s not end-of-life care! I believe it counts as a good outcome and suspect that, should those patients be W&S’s loved ones, they’d think so, too. In any event, the one-third-of-health-costs-spent-near-end-of-life number is a bogus, misleading statistic, since by definition it excludes good outcomes and skews to emphasize the bad. The arithmetical average can sometimes be a deceptive statistic. This is one of those times. Meanwhile, besides wanting to cut “end-of-life” spending, W&S have nothing to offer.

There’s no doubt in my mind that serious men of goodwill can come together and work out a plan to reduce the country’s fiscal deficit that’s fair and effective. Whitney and Scaramucci are to be applauded for trying. Unfortunately, the plan they’ve come up with won’t fix the problem.

What do you think? Let me know!

10 Responses to “This Is No Way To Cut The Deficit”

  1. sgr

    Good piece. I have to chuckle a bit, however, when you hope(?) for “serious men of goodwill” to come together. What percentage of elected officials in DC today fit that description? 20%? 30%?

    There is no goodwill in these negotiations. We have president who won on dividing and demonizing. And that’s what we’re going to continue to see. It’s a winning hand, apparently, for him.

  2. Independent

    I’m tired of the all political rhetoric about “fairness.” Is it fair when some banks or automakers are bailed out while others aren’t? Is it fair when a person who pays mortgage interest may receive a tax deduction when some who rents doesn’t receive a similar type deduction? Is it fair when one person smokes 3 packs of cigarettes a day and his medicare premium is the same as mine who doesn’t smoke?

  3. rivvir

    Social security and means testing. I’ve long advocated ss should be, in part at least, an insurance program, not simply a paid for entitlement program (kind of ridiculous to say it’s an entitlement when it’s something we actually pay for, even if the funds are borrowed against for other things; but i won’t argue against the fact that we now overpay ourselves when compared to how much we do put in). Whatever. If ss was treated at least in part as insurance, pay enough to bring someone up to at least the line between poverty and non-poverty when taking into account all their assets and income, you could probably reduce the ss tax. The hardest part i believe would be to refine the assets and income for each taxpayer. I can see someone approaching retirement age giving his/her assets to their kids to skirt around the means test. But enough to get sufficiently down under the poverty level to get a portion of that social security benefit? Anyway, ss should be part guaranteed benefit, with that benefit being counted in when means testing, and part insurance subject to means testing. I truly believe, though on gut instinct only, do it right and ss contributions could actually be lowered while the overall retiree standard of living gets raised.

  4. CFO in Denver

    All good points but you don’t address the huge problem with Medicare either. The truth is a senior heath care system with no limits is going to continue to grow and grow. Who does not want to consume more when it is free? Americans and their child-leaders in Washington have chosen an entitlement system that no one wants to pay for, rich, poor and the middle. The real truth is if we want the entitlement system we have, we all are going to have to pay more in taxes. The media and Washington have fed us this huge lie that it can be fixed just by increasing taxes on the rich or putting 3-4% back to work. The math does not add up- not even close.

    • Sunil

      Though I understand your point of view, I am way too close to the edge to not know that that, “free,” money is going to be a life saver for those who are out ponidnug the beat looking for jobs from shop to factory and have nothing to feed our family with these days. I know…we support my son and his family while they wait for SSD after a horrendous accident that left him unable to work. His wife works at Micky Ds since she lost her job.We are thankful this Christmas that my husband is still working and that I am available to be grandma after school and some evenings. God has given us thatgift.

  5. DB

    I think any discussion on the “Bush tax cuts” needs to include the context around which they were enacted. Remember the days when Alan Greenspan voiced concern that there would not be enough US Treasuries in circulation to support the financial markets with a “risk free” asset upon which pricing and price discovery could take place? In the waning days of the Clinton presidency Greenspan believed that budget surpluses – experienced and projected – had the potential to payoff the federal debt. Bush picked up this point and said he wanted to give back the money to the American people because it was theirs. [He somehow failed to notice that the people’s money had been spent over the prior decades to get themselves elected and re-elected.] At the onset of the recession the justification for the tax cuts was to stimulate a flagging economy. In short, the justification for the Bush tax cuts is gone. Can anyone look back on the “lost decade” and say the Bush tax cuts contributed to America investing in productive assets that enhanced the economic vibrancy of the US and will allow our children and grandchildren to payoff the associated debt and in addition generate wealth for them?

  6. Vegasjoe57

    Tilson ought to stick to running the VIC! What utter nonsense!
    Hey, ask him why he doesn’t volunteer to pay 100% in taxes to feel better?

  7. Bekir

    …Jesus is Risen. Jesus will come again. Can we move on now?***Except that the money is NOT “free”, Doug.It’s borrowed from China and Saudi Arabia, and such.My felnieg: can Our New Global Overlords PLEASE take our multi-millionaires/billionaires off our hands, PHYSICALLY TOO? I’d love to see our hedge-fund managers and investment bankers, oh, say, sewing underwear in a Chinese sweatshop!

  8. Newman

    I had no idea all of those things were inecudld in the income tax. I especially find it interesting that a single person, with a lower wage and no children, has to more than a person who makes a higher income. Granted the higher income option had children in the equation, but still. Crazy I would be spending more in taxes than a family. Interesting little evaluation tool.

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