Tax Policy to Support a Growing U.S. Economy in a Competitive Global Marketplace
Volume 1, Issue 3, May 2006

Mallinckrodt Distinguished University Professor

There is a basic mismatch in the national debate on health care. On the one hand, the actuaries tell us that the Medicare program will run into very serious financial problems in the years ahead. In contrast, the public concern is focusing on the inadequacy of benefits and the lack of health insurance on the part of many Americans. In effect, the experts are saying that there is not enough revenue coming into the health care system, while the public is saying we are not spending enough. That is going to be a very difficult question of public policy to deal with.

Unfortunately, there is no simple way of cutting medical costs. Of course, there is a certain amount of avoidable waste and more widespread use of information technology would make for both cost efficiency and perhaps fewer medical errors. Also, legal reform might reduce medical insurance costs. All that would help, but the major driver in increasing medical costs is technological advance.

Let us remember that Americans are living longer. That is not merely good luck or adopting healthier lifestyles such as better diets. In this case, bigger is not better. Americans are getting bigger, or rather fatter. The real life extenders are those MRIs and other medical gadgets that minimize invasive surgery and enable physicians to successfully do procedures which were not feasible a generation ago. Let us not forget the medicines that cure or contain many diseases without surgery and the research breakthroughs that are increasing physicians' knowledge of our illnesses. They all have one characteristic in common: They are very expensive.

After all, nobody wants to shorten his or her life in order to balance the health care budget. Rather, the general attitude is often, "I want the best possible medical care, especially if I don't have to pay for it."

To summarize a great amount of professional research and writing on the subject of financing Medicare and health care, there are no simple or straightforward answers. It will probably take a combination of actions over a long period of time without any assurance that the problem will be solved. Some background information may be a useful start.

The average citizen is not aware of or concerned about the financial status of the Medicare Trust Fund, or the rising share of GDP going to health care. Citizens worry about losing their health insurance, especially if they lose their job or if the employer cuts the benefits. That is becoming increasingly likely, with employees sharing more of the costs. However, all those factors are pressures to maintain demand for health care. So is the concern over those who lack health insurance. That makes dealing with the financial problem very difficult ...

Read "The Never-Ending Dilemma Over Medicare and Social Security," USA Today Magazine, May 2006

CSTR is a nonprofit organization whose purpose is to evaluate and develop in full operational detail all options for fundamentally restructuring the American tax system.

The Honorable Bill Frenzel and the Honorable Murray Weidenbaum are co-chairmen and Ernest S. Christian is the Executive Director.


If you wish to support CSTR's tax reform research efforts, please send a tax deductible contribution to CSTR-TRI at:

800 Connecticut Ave, NW
Suite 705
Washington, DC 20006



Dr. Murray Weidenbaum is the Mallinckrodt Distinguished University Professor and Honorary Chairman of the Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis, Missouri.

Edward M. Graham of the Institute for International Economics recently published his latest book entitled U.S. National Security and Foreign Direct Investment.


Upcoming CSTR Seminar Dates:

Tuesday, July 18, 2006
Tuesday, September 12, 2006
Tuesday, October 10, 2006
Tuesday, November 14, 2006

Heritage Foundation/Brookings Institution
Dynamic Analysis Seminar and Discussion
June 16, 2006
10:00 a.m. to 2:00 p.m.
The Van Andel Conference Center
The Heritage Foundation
Event Information



Forget about the idea that the cost of paying $1 in tax is $1. Even academics on the left now acknowledge that taxes do have some dynamic effect on economic performance. When taxes go up by $1, it is not just the private sector's after-tax income that goes down; its pre-tax income goes down as well. Thus, when the question is, "How much does it cost the private sector to provide government with $1 in tax revenue?" -- the answer is $1 plus the amount by which taxpayers' incomes go down because of the negative effect the tax has on the economy.

Because of that negative effect, there is general agreement that an attempt by the government to increase tax collections by $1 will, in the long run, net only $0.68 -- but the effect on government tax receipts is only part of the story and the least important part at that. The important story is that the government "lost" the $0.32 in anticipated extra tax revenue and ended up with only $0.68 because the taxpayers "lost" $1.07 in income that otherwise would have been produced and would have been taxed at an assumed average rate of 30 percent ($1.07 x 30% = $0.32).

Up to this point in the story, the private sector has lost $1.07 in income and paid $1 in tax for a total cost to it of $2.07 -- but the government has on net collected only $0.68.

For the government to actually receive a full $1 net addition to tax revenue, the total cost to the private sector would be $2.57.


There is reason for hope and rejoicing at the Treasury Department. Deputy Assistant Secretary Bob Carroll is moving forward effectively in establishing the Treasury's first-ever Dynamic Analysis Division (DAD). When fully operational, DAD will be able to predict and quantify with reasonable accuracy the effects that particular changes in the tax code have on the economy.

Treasury included a limited amount of dynamic analysis in its evaluation of the tax reform proposals submitted by the President's Advisory Panel on Federal Tax Reform in November 2005. The Bush Administration and Republican members of Congress have also used dynamic analysis in arguing for permanency of the 2001 and 2003 tax cuts and, most importantly, fundamental tax reform.

At the CSTR/CRAG meeting on May 23rd, Deputy Assistant Secretary Carroll said that Treasury's initial dynamic analysis efforts will emphasize transparency and will illustrate a range of estimates that show how sensitive the results are to differences in modeling methods and underlying assumptions.

OMB and DAD hope to include some aspects of dynamic analysis in the Mid-Session Review set to be released in July -- and Deputy Assistant Secretary Carroll reaffirmed that the focus will be solely on dynamic analysis of economic results, not dynamic scoring of revenue results.



CSTR and the Center for Data Analysis at the Heritage Foundation are jointly hosting a "People Who Make A Difference" luncheon series. Important opinion leaders and decision makers will meet in roundtable discussions to analyze policy issues. Some of these meetings will be videotaped and broadcast via the internet by the Heritage Foundation.

After three and a half years as Secretary of the Treasury, John Snow announced his resignation on May 30th. President Bush nominated Goldman Sachs Chairman Henry M. Paulson as his replacement.


"Moderating Regulatory Growth: An Analysis of the U.S. Budget for Fiscal Years 2006 and 2007"
By Susan E. Dudley
Murray Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis

"Learning From History Part II: Estate Tax Repeal Will Have No Effect On The Budget Deficit"
By Daniel Clifton
American Family Business Institute

IRET Congressional Advisory #190: Statement of Stephen J. Entin to Senate Committee on Finance, Subcommittee on Taxation and IRS Oversight, Hearing on "Encouraging Savings and Investment: Stay the Course or Change Direction?"
Institute for Research on the Economics of Taxation

"A Victory for Taxpayers and the Economy"
By Tracy L. Foertsch, Ph.D.
The Heritage Foundation

"Taxes and Wages"
By Kevin A. Hassett and Aparna Mathur
American Enterprise Institute

"Job Numbers Show a Strong Economic Recovery"
By Rea S. Hederman Jr.,
James Sherk and Samuel Hyman
The Heritage Foundation

"U.S. Aging Time Bomb: When Will It Blow Up Treasurys"
By Dr. Rudolph Penner
The Urban Institute


"Tax Policy: A Behavioral Science Part 2"
By Ernest S. Christian and Gary A. Robbins
First Appeared in Tax Notes on May 8, 2006

"Expensing = MC2 = Economic Growth"
By Ernest S. Christian and Cesar Conda
First Appeared in National Review Online on May 16, 2006

"Let's Give John Snow the Praise He Has Earned"
By Kevin A. Hassett
First Appeared on on May 30, 2006

"Reality Check on Taxes from Steve Moore"
By Larry Kudlow
Posted on "Kudlow's Money Politics" on May 4, 2006

"Mr. Paulson's Challenge"
By N. Gregory Mankiw
First Appeared in The Wall Street Journal on May 31, 2006

"Strong growth of economy no coincidence"
By Daniel J. Mitchell
First appeared in the Des Moines Register

"Taxing Questions"
By Richard Rahn
First Appeared in the Washington Times on May 14, 2006

"The Top One-hundreth of One Percent"
By Alan Reynolds
First Appeared on on May 11, 2006

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