The Doc Fix and the AMT Patch: Add a Trillion to the Debt and Call Me in the Morning

By :: October 20th, 2009

Congress is absolutely right to end the decade-old fantasy that it wants to trim Medicare payments to doctors. This law has been on the books for 12 years and is annually ignored. Lawmakers should stop pretending. But I fear they will make this change without paying for it--adding $250 billion to the national debt over the next decade.

Failing to pay the bill will only perpetuate the dangerous illusion that we can have unlimited health care at no extra cost. This thinking helped bring us to the health care mess we face today. And at just the moment when it is trying both to reform the medical system and confront a $1.4 trillion deficit, Congress is setting an extremely dangerous precedent by closing its eyes to a huge and very real expense.

Next stop: the Alternative Minimum Tax. The AMT patch is the tax policy analogue to the doc fix. It exists under a similar illusion: Each year the AMT is poised to hammer an increasing number of middle-class taxpayers. And each year, like a latter day Perils of Pauline hero, Congress steps in at the last moment to save those voters by indexing the income levels at which the tax kicks in. But it never makes up a dime of the lost revenue.

I fear that one day soon, lawmakers will permanently index the AMT at a 10-year cost of $450 billion (nearly double the doc fix), and not pay for any of it.  President Obama has already started that ball rolling by including the lost revenue from AMT relief in his budget baseline. From there, it will be easy enough for Congress to wave its fiscal wand and permanently index the tax since it will show as costless, at least relative to the Obama’s artificial numbers.

But fiscal legerdemain aside, if those tax revenues are not made up somehow, the nation’s debt will continue to grow. And keep in mind that the 10-year costs of the doc fix and the AMT patch underestimate the long-run price tag. In 2019 alone, the changes would increase Medicare payments by $47 billion, and cut tax revenues by $70 billion.       

Pretending money grows on trees is what Washington does. Not so many years ago, President George W. Bush and a Republican Congress passed the Medicare Part D drug benefit, fought two wars, and slashed taxes without worrying about what any of it would do to the national debt. Now it is the Democrats' turn. Led by Senate Majority Leader Harry Reid (D-Nev.), and with the acquiescence of the Obama Administration, Congress is about to make the physician payment mess go away by wiping a decade of proposed spending cuts off the books, much like a business might write down a really bad investment.

But this isn’t just an accounting exercise. Medicare will need real money to pay the docs those additional fees—cash government will have to borrow from somebody.

Senators Kent Conrad (D-N.D.) and Chuck Grassley (R-Iowa) among others are looking for ways to pay for the doc fix. I hope they find one and can sell the idea to Obama and the Congress. Because if they don’t, this business could go viral, like some sort of fiscal swine flu.    

7Comments

  1. Anonymous  ::  10:01 pm on October 20th, 2009:

    Howard, playing games with baselines and with promised future spending cuts and tax increases that will never happen is par for the course for Congress. Congress invented budgeting rules, then invented subterfuges to circumvent those rules. The net result is no improvement and less honest legislation on both taxes and spending.
    Only when the government can no longer borrow at attractive rates will all this end. Furthermore, it will end with high inflation and large (in real terms, not nominal dollar terms) spending cuts. Why? Because revenues will crash with the economy, and because generous welfare state programs are fundamentally a luxury good.
    When the country has to economize, the luxuries will go first. Starting with Social Security benefits for high-income seniors, which will be clawed back 100% through taxation, with an option to refuse benefits that all these seniors subject to state income tax will exercise. The truly needy will be hit hard, in large part because modern programs have expanded so far that it's now difficult to sort out who the truly needy are. Government employees will be laid off, and their unions will call general strikes to protest, to no avail. It will be a difficult time to be a progressive.
    Just to add to the gloom, I don't see how either party could benefit from conceding ground now on taxes or spending. They both benefit from holding the partisan line until the crisis hits, so that the starting point for tax increases and spending cuts is as favorable as possible to their side.

  2. Anonymous  ::  2:23 pm on October 21st, 2009:

    The AMT fix is only a problem with our complex tax system. The need to increase taxes across the board is only a problem if they show up in paycheck. Both of these problems can be corrected by using an expanded business income tax to replace payroll taxes, low rate (and the low portion of high rate) income taxes and the current business income tax, taxing all businesses and making wages and salaries taxable. A VAT can be used to mask how high this rate would need to be and all family subsidies could be included as an expanded refundable child tax credit payed as a pass through by employers (replacing the child exemption, the mortgage interest deduction and the property tax deduction – the state income tax deduction would be moot since in most states it would not exist for most people).
    This proposal was submitted to the PERAB tax reform subcommittee. We will see if they consider it or mention it in their analysis. Luckily, the Fair Taxers have not seemed to notice PERAB's work – or know that they have no chance of influencing it.

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