Eugene Steuerle is Richard B. Fisher chair and Institute Fellow at the Urban Institute, and a columnist under the title The Government We Deserve. Among past positions, he has served as Deputy Assistant Secretary of the Treasury for Tax Analysis (1987-1989), President of the National Tax Association (2001-2002), chair of the 1999 Technical Panel advising Social Security on its methods and assumptions, Economic Coordinator and original organizer of the 1984 Treasury study that led to the Tax Reform Act of 1986, President of the National Economists Club Educational Foundation, Resident Fellow at the American Enterprise Institute, Federal Executive Fellow at the Brookings Institution, and a columnist for the Financial Times. He is alos a co-founder of the Urban-Brookings Tax Policy Center, the Urban Institute's Center on Nonprofits and Philanthropy, and Act for Alexandria, a community foundation in Alexandria, VA. Dr. Steuerle is the author, co-author or co-editor of fifteen books and more than one thousand articles, briefs, and Congressional testimonies.
No one quite knows what exactly Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) mean when they say they will rely upon a “blank slate” as the starting point for tax reform discussions. But done carefully and with political artistry, taking advantage of their unique power, Baucus and Hatch could revolutionize how members of Congress negotiate the future of taxes.
But it’s all in the practice, not the theory. Done right, the strategy could reenergize the tax reform debate. Done wrong, it will be just another dead-end.
The idea of reforming the tax system from a “zero base” or building up from a blank slate is hardly new. And lawmakers always talk about everything being on the table. The challenge is in making it happen.
Baucus and Hatch must accomplish two goals. First, they must shift the burden of proof from those who favor reform to those who would retain the status quo. Second, they must force members to pay for their favored subsidy, denying them the opportunity to pretend it is free.
As a veteran of the Tax Reform Act of 1986, I always emphasize the crucial role of process. Sure, serendipity smiles or frowns unexpectedly on any endeavor, but the ’86 effort took off when Treasury, President Reagan, House Ways & Means Chair Dan Rostenkowski (D-IL), and Finance Committee chair Bob Packwood (R-OR) all put forward proposals that started with specific rate cuts and removal of many tax preferences.
Their plans were all somewhat different, but each changed the burden of proof. Lobbyists won many later battles, but now they were forced to explain why they needed to retain special preferences when others would not be so favored. Moreover, given a fixed revenue target, restored preferences had to be paid for. Lawmakers had to acknowledge that the price of adding back tax preferences was a higher tax rate.
Baucus, ideally with the support of Hatch, can put forward a “chairman’s mark” from which committee members can debate amendments. As both senators have suggested, that mark can be a relatively clean slate. Further, Baucus can require that amendments must not add to the deficit or change his revenue target, effectively requiring members to offer what are called “pay-fors.”
Normally, members debate items one at a time. Each adds a new subsidy without worrying about who pays for it—perhaps those currently too young to vote or the yet-unborn.
In dark times, politicians try to reduce the deficit by figuring out what tax increases or spending cuts will restore order to the budget. But identifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.
But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.
This process not only gives new life to a broad rewrite of the tax code but also makes it much easier to reform specific provisions. For instance, tax subsidies for homeownership, charity, and education can be much more effective and provide more bang per buck out of each dollar of federal subsidy. But politicians largely ignore such ideas because they create losers who scream loudly. Thus, the default for elected officials who fear negative advertising and loss of campaign contributions is to do nothing to improve these tax subsidies.
But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline. Of course, as we learned in 1986, this argument grows stronger as the probability of tax reform grows.
Can Baucus and Hatch change the burden of proof and force members to pay with higher rates for the subsidies they want to keep? They can certainly lead their committee and Congress in that direction, but only by specifying precisely a chairman’s mark that sets revenue and rates while slashing tax preferences.
If they do, Baucus and Hatch may force fellow senators to acknowledge that every subsidy must be paid for. And that, in turn, will open a window to design alternative tax subsidies that are fairer and more efficient. This sort of process revolution could remake policy in ways that extend well beyond tax reform.
Charitable organizations form a vital part of America’s safety net. Ideally, foundations would be able to make greater payouts in hard economic times when needs are greatest. Unfortunately, the design of today’s excise tax on foundations undermines and in fact discourages such efficiency.
Under current law, private foundations are required to pay an excise tax on their net investment income. The tax rate is 2 percent, but it can be reduced to 1 percent if the foundation satisfies a minimum distribution requirement. The dual-rate structure and distribution requirements obviously introduce complexity. The stated purpose of the tax in legislative history—to finance IRS activities in monitoring the charitable sector—has never been fulfilled.
In the recent recession, the impact of the excise tax was especially pernicious, as it penalized those that maintained their level of grantmaking.
How? As Martin Sullivan and I first described in 1995, the excise tax penalizes spikes in giving; under the current formula, a temporarily higher payout results in a higher excise tax when payouts fall back to previous levels. A foundation that reduced its grantmaking during the last recession would not be subject to an increased excise tax because the amount the foundation paid out would be measured as a share of current net worth.
One proposal would replace the excise tax with a single-rate tax yielding the same amount of revenue. While a flat-rate tax would remove the disincentive to raise grantmaking in bad times, it still raises taxes for some foundations and not others.
A related law applying to foundations is the required payout rate, now set at 5 percentage points. Many experts have debated how high that rate should be. The current rate is believed to approximate the long-term real rate of return on a foundation’s balanced portfolio of assets. However, if foundations follow a strict rule of paying out the minimum 5 percent every year, they, too, will be operating procyclically, paying out more in good times when stock markets are high and less in bad times.
If we wish foundations to operate more countercyclically—to pay out more when needs are greater—we need to address both the excise tax and the natural tendency, reinforced by a minimum payout requirement, to make grants and payouts as a fixed percentage of each year’s net worth.
To help clarify whether IRS incorrectly, unfairly, or illegally targeted the Tea Party and other conservative groups, here are the answers to a few basic questions.
- Is it improper for IRS to target specific groups?
Almost every contact the IRS makes with select taxpayers derives from targeting. Because its resources are constrained, the IRS conducts only limited audits, examinations, or requests for information. For instance, if you give more than the average amount to charity, you’re more likely to be audited since there is more money at stake. If you run a small business, you have a greater ability to cheat than someone whose income is reported to IRS on a W-2 form. The only way the IRS can enforce compliance at a reasonable administrative cost is by targeting.
This is especially true for the tax-exempt arena. Because audits yield little or no revenue, the IRS tax-exempt division examines very few organizations. Therefore, the IRS must use some criteria to “target” which tax-exempt organizations to approach.
- Does the IRS discriminate?
Picking out which organizations or taxpayers to examine meets the definition of statistical discrimination. Firms do this when they consider only college graduates for jobs; political parties do this when they offer selective access to their supporters. Discrimination is wrong when it implies unequal treatment under the law, such as when unequal punishment is meted out for the same crime, or when people of color have less access to the mortgage market.
- Why then did IRS say it erred in targeting Tea Party and other organizations?
We don’t have all the data yet but organizations with a strong political orientation have a higher probability of pushing the borderline for what the law allows. The groups at the center of this controversy generally applied for exemption under IRS section 501 (c)(4) which requires, among other things, that its primary purpose cannot be election-related and cannot overtly support political candidates.
However, the IRS could have identified election-related activity as a practice worthy of extra attention without specifying “tea party” or similar labels to identify such organizations. Had it done so, it might not be facing a problem now.
IRS apparently initially thought it was just using these labels as a shortcut for such an identification. Had it been engaged early on, the national office might have been quicker to warn against this practice since it would tend to identify more Republican organizations than Democratic groups with similar motives. Who decided what when is still under investigation.
Remember IRS was under pressure to examine those c(4) organizations after applications grew rapidly in the wake of the Supreme Court’s 2010 Citizens United decision. If IRS waits until after an election, it’s generally too late to make any difference.
- Why did IRS start with the exemption process rather than wait and see how the organizations behaved?
Because IRS audits so few tax-exempt organizations, noncompliance is a major problem. But often noncompliance is inadvertent. Organizations trying to do “good” fail to understand legal technicalities or why IRS should be worried about them at all. If the IRS can get these organizations to comply with the rules from the start, it has a better chance of minimizing future problems.
- Well, then, why the heck is IRS even in this game in the first place?
A question asked by many. Unlike some other nations with charities’ bureaus or other government regulatory agencies, tax-exempt organizations in the U.S. are monitored mainly by IRS at the national level and the state attorneys general at the state level. The IRS efforts generally derive from the Congressional requirement that charitable dollars (for which there are deductions and exemptions) go mainly for charitable purposes and not others such as electioneering.
- But c (4) or social welfare organizations don’t benefit from the charitable deduction, so why don’t those with political orientation just operate without tax exemption or c(4) status?
They could, but the tax exemption provides several benefits. The least important may be non-taxation of income from assets since many of these organizations don’t have that much in the way of assets to begin with. However, many contributors interpret (often incorrectly) tax exemption to mean that the organization has satisfied legal hurdles, thus making it easier to raise money. Some c(4) organizations are closely connected to charities or c(3) organizations that can accept charitable contributions, and sometimes there’s a synergy between the two. My colleague Howard Gleckman reminds us that c(4)s quickly became favored over an alternative “527” tax-exempt political designation because the former does not need to reveal its donors. Finally, tax exemption provides an easy way to insure that any temporary build-up of donations in excess of payouts is not interpreted as taxable income to the organization or its contributors.
- What will be the end result of this flap?
Success at agencies like IRS is often measured by their ability to stay out of the news rather than on how well they do their job. I’m guessing this episode will only will increase the bunker-like incentives within the organization. It would be good if Congress used this as an opportunity to figure out how better to monitor tax-exempt organizations, or whether IRS has the capability under existing laws, but that isn’t likely to happen.
I would like to propose a simple plan that would let Republicans and Democrats avoid a blunt, across-the-board sequester that fails to set priorities. It would give both parties something they want without abandoning their core principles. And it would strengthen the party making the proposal by putting the other on the spot if it fails to move toward a moderate compromise.
Republicans should offer to let the president meet the sequester’s deficit targets through his choice of spending cuts, including from entitlements. Yes, they would cede some power over a moderate share of total spending, but they would retain their primary goal: forcing Democrats to tackle the spending side of the budget.
Democrats should replace their demand that the sequester include tax increases with a simpler requirement that the rich shoulder their fair share of any spending reductions. Yes, Democrats would give up their goal of balancing spending cuts with tax increases, but they would retain their more basic aim: progressivity.
To understand why these strategies would work, we have to go back to the root causes of the impasse. Each party is fiercely fighting to compel the other to ask the middle class for the inevitable—to give up something to restore balance to the budget. But each considers it political suicide to take the lead. Just think back to the presidential campaign, when Barack Obama and Mitt Romney indicated support for Medicare cuts, only to be viciously attacked by the other.
Republicans want all deficit reduction to come from direct spending but recognize that most of those outlays are in so-called mandatory or entitlement spending, which occurs automatically with no new vote required by Congress.
Democrats believe the rich have made out quite well in recent decades and should bear a significant portion of any deficit reduction. They feel it is unfair and unbalanced to exclude tax subsidies, which tend to favor high-income households, from any deficit reduction plan.
To an economist of any stripe, deciding which programs to fix according to the labels we place on them—direct spending or tax subsidy—is silly. In truth, Republicans should be as willing to cut tax subsidies as direct spending, since cutting either would reduce government interference in the economy.
By the same token, Democrats should be just as willing to cut spending as tax subsidies, as long as the wealthy bear a fair share of the burden. Since Democrats end up with smaller government either way, they should focus on progressivity, not the more semantic debate over cuts in tax subsidies versus direct subsidies.
That’s where my compromise comes in. If Republicans would simply empower the president to reallocate the spending cuts, they could eliminate the meat axe of the sequester. Yes, they would be giving up some power, but look how they came out of the last debate, with only tax rate increases and a bloody nose. Forcing the president to choose enables Republicans to run later on how they would have chosen better.
As for Democrats, why not aim their sights at their real target: progressivity? If Republicans let Obama allocate spending cuts, Democrats could get the same progressive distributional outcome as they’d get through tax hikes. And they, too, will have achieved their principal objective. To move beyond budgetary gridlock, each party must figure out what it can give up to get what it really wants. My plan isn’t perfect, but it allows each party to achieve its goals, and it is a big improvement over sequestration.
Economists and many policymakers generally agree that our tax and transfer systems should promote opportunity, work, saving, and education rather than consumption. The problem is these programs often penalize people for earning that extra dollar of income. Rather than promoting work and savings, these implicit taxes punish such otherwise positive behavior.
These penalties occur in TANF (formerly welfare), SNAP (formerly Food Stamps), Medicaid, the new health exchange subsidy, Pell grants, student loans, and unemployment compensation. The tax code also is loaded with disincentives to work, save, and study. They include PEP and Pease (reductions in tax allowances for personal exemptions and itemized deductions), child tax credits, and the earned income tax credit. These implicit taxes combine with explicit taxes to create incentives for many households that are often inefficient and inequitable, to say nothing of strange and anomalous.
At some income levels, families face prohibitively high penalties for moving off assistance. For instance, a single worker with children could face a steep cut in child care assistance simply for accepting a higher paying job or getting a raise. For some, the rapid phaseout of benefits can more than offset the additional take-home pay. Asset tests in means-tested programs create similar barriers to saving.
One way couples avoid some of these penalties or taxes is to not get married. Indeed, this strategy is the major tax shelter for low- and moderate-income households with children. Our tax and welfare system thus favors those who consider marriage optional—to be avoided if it raises taxes or reduces benefits but embraced if it comes with a financial bonus. The losers tend to be those who consider marriage a social or religious necessity.
These high rates and marriage penalties occur partly because of the piecemeal fashion in which they are developed. Designing benefit packages more comprehensively could greatly improve both the incentives families face and the quality and choice of benefits they receive.
For more details, see my congressional testimony for today’s hearing on “Unintended Consequences: Is Government Effectively Addressing the Unemployment Crisis?” before the Committee on Oversight and Government Reform.
Alexander Hamilton, the first Secretary of the Treasury, set the bar very high. The Senate is about to begin debate over President Obama’s nomination of Jack Lew to be Treasury Secretary. Lately, confirmation hearings have often focused on either the personal foibles of candidates or relatively evanescent policy disputes. But at a time when fiscal policy is so critical to the nation’s well-being, the Senate should not forget the critical role Treasury has played in forging that agenda.
The key question for the Senate: will Treasury continue to play that powerful role under Lew’s stewardship?
While Hamilton could be mercurial and even buffoonish in his monarchial tendencies and late military ambitions, he was extraordinarily visionary in molding institutions and organizations to meet the fiscal needs of the new nation. Whether writing Federalist Papers or engaging in the nation’s first Grand Bargain on the budget, his prescient gaze stretched far into the future, finding limitless possibility for this great nation.
Perhaps nowhere is his legacy more embodied than in the Treasury Department that he helped create and nurture to handle the nation’s debt obligations, taxes, and its budget. That legacy has been threatened by a modern department weakened by the usurpation of its functions.
Remember that the president is the only elected official our founders explicitly tasked to represent the nation as a whole. We expect partisanship among members of Congress because they represent different constituencies, though today the influence of special interests transcends congressional boundaries. The Chamber of Commerce, AARP, National Rifle Association, and AFL-CIO each understand the levers of power, even to the point of knowing how to scare an entire legislature to inaction. I’m not saying that these groups don’t have views worthy of consideration, but they do not—I repeat, do not—represent the “general welfare” that our Constitution explicitly mentions in its preamble and its taxing and spending clause.
Interestingly, one of the earliest fights between our political parties was over whether the federal government should get involved in arenas like agriculture or education. Both sides agreed that if such spending took place, it should be in the general interest and not favor any specific section of the country over another. Today, particular constituencies are the dominant beneficiaries of many spending and tax subsidy programs. Does anyone really think that subsidies for sugar growers or early retirees or owners of oil companies and expensive vacation homes serve the general welfare?
When it comes to spending, taxing, and budgeting in the modern era—especially when the government has made too many promises to too many people—the Treasury Department remains the only agency that can restore order by offering broad reform packages centered on the general welfare.
Treasury sits in the unique position of having to worry about paying for things. It alone must deal with the “take-away” side of the budget ledger, constantly confronting how to administer taxes or float bonds. It’s in its very blood to balance potential benefits with costs and reduce politicians’ incentive to operate on the “give-away” side of the budget by enacting tax cuts and spending increases for which future generations will have to pay.
One other part to solving our fiscal puzzle involves understanding the role of committees or assemblies of politicians. The role of these groups is to approve, not design, policy, and delegating that latter function to them neglects the role of the executive. There was a reason fiscal policy shifted to a strong Treasury and away from the committees operating under the weak Articles of Confederation.
In assuming the executive role of Treasury Secretary, will Jack Lew follow Hamilton’s example by leaving a stronger Treasury as a legacy? Will he help move us down a viable path for getting out of our current fiscal mess? I suggest he is unlikely to succeed at one without accomplishing the other.
A longer version of this column is available at my blog, The Government We Deserve.
Despite the ideological hype over revenue increases for the upper-income taxpayers and restricting itemized tax deductions, almost all the considered changes will tackle only a portion of the deficit.
As the graph below indicates, the Congressional Budget Office projects a fiscal year 2015 deficit under current policy of $883 billion, not far from the $1 trillion–plus deficits in the Great Recession and its early aftermath. By comparison, the Tax Policy Center calculates that revenue gained from repealing ALL itemized deductions would be only $183 billion. Smaller limitations on itemized deductions have smaller effects: President Obama’s proposal to limit the value of itemized deductions to 28 percent would raise only $15 billion. Capping itemized deductions at $50,000 would raise $59 billion, or $38 billion if the charitable deduction was excluded.
The value of all individual tax expenditures is $1.161 trillion, even larger than the deficit. But most revenue proposals—particularly those confined to a tiny portion of taxpayers and only a subset of various tax programs—also only chip away at that amount.
Sources: CBO Budget and Economic Outlook, U.S. Treasury Green Book, and Urban-Brookings Tax Policy Center.
* Tax expenditures estimate excludes payroll tax effects.
Notes: Baseline is current policy, which assumes extension of 2001 and 2003 tax cuts, except for Individual Income Tax expenditures, which uses Treasury’s baseline.
Several proposals are circulating concerning the Buffett Rule, aimed to insure a 30 percent minimum effective tax on those making $1 million or more a year. The proposal scored by the Tax Policy Center would eliminate the AMT and replace it with a “fair share tax” styled on the Buffett rule. The “fair share” part would raise $22 billion in 2015 (the amount shown in the graph above), but repealing the AMT would lose $54 billion.
How much will you pay in Social Security and Medicare taxes over your lifetime? And how much can you expect to get back in benefits? It depends on whether you’re married, when you retire, and how much you’ve earned over a lifetime.
I recently published with Caleb Quakenbush “Social Security and Medicare Taxes and Benefits Over a Lifetime: 2012 Update” which updates previous estimates of the lifetime value of Social Security and Medicare benefits and taxes for typical workers in different generations at various earning levels based on new estimates of the Social Security Actuary. The “lifetime value of taxes” is based upon the value of accumulated taxes, as if those taxes were put into an account that earned a 2 percent real rate of return (that is, 2 percent plus inflation). The “lifetime value of benefits” represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for those benefits. Values assume a 2 percent real discount rate and all amounts are presented in constant 2012 dollars.
While no major changes in Social Security or Medicare law have occurred since the last update, these estimates reflect alternative assumptions provided by the Center for Medicare and Medicaid Services (CMS) actuaries that lawmakers will cancel a draconian scheduled cut in Medicare payment rates to physicians and other scheduled spending reductions. The result is significantly higher projected lifetime Medicare benefits than current law assumptions would indicate.
Below is a sample table from the brief, for a two-earner couple both earning Social Security’s average wage measure. This set of calculations assumes that workers retire at age 65.
More background information on these calculations can be found at: http://www.urban.org/socialsecurity/lifetimebenefits.cfm.
As the economic coordinator of the Treasury study that led to Tax Reform Act of 1986, I’ve always found it fascinating to read and listen to stories about the law. Many seek the linear trend from cause to effect to secondary cause to enactment, as if there was some logical series of events that made the dominoes fall. History books, of course, are often written as a series of “A led to B” scenarios.
Thus we are tempted to say, ““Let’s repeat A, then we’ll get another great B,” to which three responses are almost inevitable:
- “A isn’t repeatable.” [The historians]
- “B wasn’t all that great.” [The contrarians]
- “B isn’t the right target today.” [The realists]
Let’s start out by stating the obvious. Heraclitus was right, you can’t walk in the same stream twice. But saying that A isn’t repeatable or B didn’t change the world misses the point.
If there is any lesson from TRA86, it is that real reform requires channeling forces and information in the right direction.
Put more broadly, it isn’t helpful to try to recreate historical circumstances to get the same outcome. It is far more useful to understand how to convert luck into serendipity to increase the odds that good things will happen.
In a recent testimony and a Tax Notes article, I outlined ten steps that increased the chances of reform in 1986 and for the most part are repeatable today. These include; seize today’s, not yesterday’s opportunities; rely on principles like equal justice under the law to determine what should be done; make reform comprehensive, in part, because the political cost is likely to be the same in any case; shift the burden of proof to those opposing the better system; form liberal-conservative coalitions in areas where both sides can gain something; plan strategies in advance for how to best present the proposals and their effects to the public; empower nonpartisan staffs like Treasury’s Office of Tax Policy and the Joint Committee on Taxation (who really assembled the ’86 reform); establish leadership on a variety of fronts; insure accountability so that very specific political leaders bear a significant cost if reform fails; and empower someone to run with the ball and strategize on how to make reform happen.
In 1984 through 1986, much of the political leadership came late to the game. And some of the lessons of 1986 were learned, not planned. For example, one key to passage was that at each step in the process, first Treasury Secretary Don Regan, then House Ways & Means Committee Chair Dan Rostenkowski, and finally Senate Finance Committee Chair Bob Packwood feared they would be blamed if the bill failed. As a result, each worked extremely hard to make sure that tax reform did not die on their watch.
Actual reform is seldom random. It often requires real hard work, perhaps not too different from what a household must do when it changes its way of living or how a business moves forward with a new product that displaces an old one. The failure to reform so many of our government programs and institutions, therefore, rests not solely with the power of the status quo, special interests influence, or weak political leaders. It also involves a real failure to plan how to increase the odds that real reform will take place.
We’ve updated earlier estimates of how the various subsidies in the health reform law affect the insurance market for both employers and workers. And the results remain quite dramatic: It appears that the new law will make it beneficial for many employers to drop their insurance coverage. In 2014 and beyond, once federal money is available through the insurance exchanges, switching from employer coverage to the exchanges may benefit both employers and workers in a wide range of income levels.
The employer-provided system subsidizes health insurance mainly by exempting from tax the health benefits offered by employers. Before reform, unless you were elderly, disabled, or poor, this exclusion was probably the only health care subsidy available. But under the new law, the subsidy tied to the insurance exchanges will significantly exceed the tax benefit that low- and middle-income households get now. Our analysis does not consider the implications for Medicaid, which creates a third subsidy system at the low-income end of the exchange.
How will the new law work? A worker whose household cash income is $60,000 in 2016 and who gets no health benefits from her employer would receive a subsidy equal to approximately $9,000. Because the firm provides no health insurance, it must pay a $2,200 penalty, leaving a net gain of about $6,800. By contrast, a worker earning equal compensation who receives employer-provided insurance would receive a subsidy around $3,500 from the exclusion of health benefits from his taxable wages, leaving him more than $3,000 worse off than his counterpart whose employer offers no insurance. This pattern holds until compensation reaches about $84,000, at which point the two subsidies are about the same. Workers earning more than $84,000 do better under the current employer-provided system than they will under the new system.
Except for the employer penalty for larger firms mentioned above, there are only limited mechanisms to stop employers from dropping coverage and allowing their employees to enter the exchange. Of course, some firms may be reluctant to switch because they are uncertain about changes to the health law or because some workers will insist on keeping their existing plans, at least until they see how the new exchanges work. But new firms, which over time grow and absorb larger shares of the labor force, will not face the demands posed by longtime employees. And the exchange doesn’t fully go into effect until 2014.
Congress could have avoided many of the problems that will result from this shift from employer-sponsored insurance to the exchanges by providing the same subsidy to all households with equal incomes. Perhaps it will move in this direction as the law is refined over time.