Fuzzy Math

FUZZY MATH….Despite the fact that Martin Peretz is its editor-in-chief, I respect the New Republic. They have a fine stable of writers and produce a considerable body of interesting journalism on a weekly basis.

This week’s cover story, though, left me breathless. It’s allegedly written by Niall Ferguson and Laurence J. Kotlikoff, but if their bylines weren’t at the top I would have guessed it was an entry in a high school essay writing contest. It’s called “The New New Deal,” and it presents a plan to deal with skyrocketing Social Security and Medicare costs in the future. The plan has three parts:

  1. Tax reform. All current federal taxes (personal income tax, corporate income tax, estate tax, and payroll taxes) will be scrapped. They will be replaced by a 33% federal sales tax. Poor people will get rebates to reduce their tax burden.

  2. Social Security. The current system will be frozen and eventually wound down. In its place, workers will be required to pay 7.15% of their wages (up to the current ceiling) into a private account, which will be invested by the government in a “market-weighted global index fund of stocks, bonds, and real-estate securities.”

  3. Medicare. Medicare and Medicaid will be abolished. They will be replaced by universal healthcare vouchers for everyone. Healthy people will get small vouchers and sick people will get big vouchers, which they will then use to purchase private health insurance.

This makes no sense. Let me just toss out a few problems off the top of my head:

  • A 33% sales tax on everything? Houses? Rent? College education? And they think this is somehow going to be more popular than our current tax system? Huh?

  • I don’t think there’s a tax expert in the world who thinks a 33% sales tax is feasible. The incentives to cheat are simply too great, which is why no country in the world has a sales tax higher than about 10%. There are lots of other reasons to think a 33% sales tax is unworkable, too, and you can read them here.

  • A 7.15% payroll tax for Social Security? Currently, Social Security is financed by a 12.4% tax, and as we all know, this is not enough to finance the system in the future. So how would a 7.15% tax do that? Are F&K assuming that investing in the stock market is so lucrative that it will double the returns we get through the current system?

  • Taken together, the sales tax ? which is equivalent to a flat 25% income tax ? and the payroll tax add up to the equivalent of a 32% income tax. Since an average household currently pays about 20% of its income in total federal taxes, this amounts to a massive tax increase for average families. For rich people, who don’t spend all their income, it would be a very nice tax cut.

  • How are those medical vouchers going to be financed? Via handwaving, apparently. I won’t excerpt the handwaving here, but even F&K say only that it would finance a “large part” of their voucher proposal. What about the rest of it? And how about a little more detail on how this plan supposedly reins in healthcare costs?

  • There’s more handwaving elsewhere, including what’s virtually a footnote at the end that their plan also requires us to “reduce federal discretionary spending by one-fifth.” Have fun with that!

I don’t get it. The numbers don’t seem to add up, the sales tax idea is unworkable, there’s no indication of how any of this reins in spending, and it doesn’t seem to solve any problems that our current system couldn’t solve. I’m all for universal healthcare, but I hardly see why we need this squirrelly plan in order to get it. What’s dorm room bull session stuff like this doing on the cover of the New Republic?