Tag Archives: taxes

Obamacare and the CBO Report: The Truth Is in the Middle


800px-Capitol_Building_Full_ViewLast week’s kerfuffle over the Congressional Budget Office (CBO) report on Obamacare, like most kerfuffles, had some truth on both sides of the debate. The CBO report says that the equivalent of 2 million full-time jobs will disappear by 2017, and 2.5 million by 2024, in part because people choose not to work at all or to work fewer hours. Is this a liberation of the oppressed American workforce or a death-knell to the American work ethic? Obviously, it is neither completely.

The Affordable Care Act grants subsidies to lower and middle income families to buy health insurance on the exchanges. Subsidies are just a way to give people money, albeit money with restrictions. In this case, people get the money (the subsidy) only if they buy insurance.

If you give people money, they have more choices. People will always choose to use the money in ways that they think will benefit themselves. Some of their choices also benefit society, and other choices do not.

Source: National Cancer Institute

Source: National Cancer Institute

With respect to healthcare, most people have had their health insurance subsidized by someone in the past.  Many received subsidized health insurance from their employers. Many others were covered by Medicare or Medicaid government subsidies. Only those on the individual market who could not tap into a high-risk pool paid for the insurance entirely on their own.

The Affordable Care Act now grants many people another government-subsidized option—health insurance purchased through the federal and state exchanges. So what choices are likely to make as a result of this new option? And will those choices benefit society or only the individuals involved?

  • People will quit jobs they don’t like because they no longer need employer-subsidized healthcare. This is the “benefit” described in the CBO report that the Democrats are touting.

It is true that many employees have stayed employed at a particular workplace only because they need health insurance. Prior to the ACA, employees younger than 65 may only have had the choice of employer-subsidized health insurance or unsubsidized private insurance that they thought cost too much. A second earner in a household might have been working primarily to provide health insurance, rather than because the family needed the salary. Those with pre-existing conditions didn’t feel they could get insurance if they changed jobs or quit work.

So “job lock” is real. Anyone who has worked in Human Resources or managed a workforce knows that many employees would rather be doing something other than working, and often their motivation for staying is related to insecurities around healthcare.

To the extent that the ACA has de-linked health insurance from the workplace, Republicans should extol this benefit. The problem is that the ACA doesn’t de-link insurance and employment. The ACA in fact imposes substantial penalties on employers if they do not continue to provide health insurance to employees. The ACA provides subsidies to employees but increasing costs on employers.

  • People will work less to keep their ACA subsidies. This is the impact of the ACA described in the CBO report that Democrats ignore and Republicans squawk about.

Many government programs give money to people but reduce the amount they receive as their income increases. Most of those programs therefore cause people to question whether they are better off maximizing their government payments or maximizing their income. Some will choose to work less to receive a larger payment from the government. Clearly, ACA subsidies will cause some of this behavior.

Moreover, it appears from the CBO report that lower income workers are more likely to decrease their work hours in response to the ACA. That is because they receive the greater subsidies, and the trade-off between their salaries and their ACA subsidies is more likely to favor the subsidy.

These choices to take the subsidy rather than work more for pay may benefit the individual, because non-working hours are valuable for family, hobbies, and other personal priorities. But the choices do not benefit society, unless someone else performs the same work for less pay or more work for the same pay. If productivity from new workers does not increase sufficiently to cover the cost of the subsidy, then society is worse off.

Even most conservatives believe that some redistribution of income to the poor through government programs is desirable; the question is how much. While I don’t think the ACA itself is the tipping point, I do believe that it will incent some people who could work more to instead work less, and in many cases, that will not benefit society.

So the CBO report contains ammunition for both sides of the Obamacare debate. While I believe the conservative arguments in response to the CBO report are over the top, I also believe that the liberal arguments are ignoring the very real likelihood that the ACA subsidies will decrease productivity.

The bottom line is that after the CBO report, the political argument around the ACA remains what it always has been—a debate on the role of government. Is it better for people to work less and receive more government support at taxpayer expense, or is it better to spend less on government programs and make people cover more of their expenses themselves? Should we redistribute income or not?

For employers, however, Obamacare is still bad news. Employers remain on the hook to provide subsidized health insurance to their workers or face substantial penalties. Moreover, the disparate taxation of employer-provided healthcare and privately purchased healthcare continues. In these ways, the labor market continues to be skewed, and therefore I still believe that the ACA has not moved healthcare in this country in the right direction.

For one of the more reasoned discussions of the CBO report, see Obamacare: ‘Job-killer’ or freedom from ‘job trap’?, by Linda Feldmann, Christian Science Monitor, February 6, 2014.

For a good articulation of the philosophical arguments on the role of government, see Leaving Work Behind, by Ross Douthat, New York Times, February 8, 2014.

What are you hearing from your employees about the Affordable Care Act these days?

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Seeking Diversity of Thought


business teamWe don’t need to look any further than the current government shutdown to see the problems with polarized thinking. One of the first things I have to do when mediating a dispute is to get the parties to think differently about their problem, so they can move off the rigid positions they often bring to the table. Typically, they can’t think differently about their own position until they start to see the other party’s point of view.

How often do you go out of your way to understand how the other side in a political or social issue feels? It is too easy with today’s polarized media to read and hear only people who think as we think. And that is not healthy, if we want to resolve disputes, rather than perpetuating them.

Although I am conservative on most issues, I make a point to read columnists who are more liberal than I am. I am white, so I try to read a variety of commentators from other racial and ethnic backgrounds. I have worked primarily as a defense attorney and a member of management, so I seek out what plaintiffs’ attorneys and union leaders have to say.

I seek out other points of view to help me understand their perspective. I try to treat them with the respect and attention I want them to treat me with. Sometimes I even learn something. At the very least, I begin to see the complexity of the issues that face us all.

Here are a few complex questions to think about from the spheres in which I have operated. You could probably develop similar questions for the political and social camps you find yourself in and your most frequent opponents:

For liberals: Is there a limit to the amount you think the government should spend as a percentage of the gross national product? How much redistribution of income is appropriate? Is there a maximum marginal income tax rate that the government should impose to support its spending?

For conservatives: What type of social safety net do you believe is appropriate? If government does not provide it, how do you insure that private entities will? How progressive do you think the income tax system should be?

For union leaders: If you think employers should give more to their workers, what will you and your members do to help businesses thrive so they can improve salaries and benefits for your members? How do you justify supporting political and social causes that many of your members do not agree with?

For management: If you do not think union representation of employees is worthwhile, how will you manage your workforce so that employees agree with you? How will you allocate resources between shareholders, investors, workers, and customers?

For plaintiffs’ attorneys: When do you acknowledge that bringing a lawsuit is more likely to result in enriching you rather than your clients? When are you browbeating defendants with the cost of defense to get a settlement when liability is questionable?

For defense counsel: How should people who are wronged be compensated when there is an unequal distribution of resources and power? Do you browbeat plaintiffs with fewer resources to limit their access to fair recompense?

Business HandshakeThese are just a few of the difficult questions facing our nation and its leaders across the political spectrum. Most of the big issues of our day are polarizing because they raise complex and sometimes diametrically opposed perspectives on how our society should look. Only by trying to understand each other’s perspective, by acknowledging there is some validity to both perspectives, can we move toward compromise and creative solutions.

When was the last time you deliberately sought out a perspective different than your own with the intent to understand? What did you learn?

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Filed under Diversity, Law, Leadership, Management, Mediation, Politics

Navigating Obamacare


Like Every Function, To Be Strategic, HR Must Bring Expertise to the TableMost Human Resources professionals have been through a benefits open enrollment season at some point in their career. Many have presented at numerous open enrollment meetings to explain to employees what their benefits options are.

Employees always have more questions about their health benefits during these meetings than HR has thought about in advance. And this is particularly true when a company is changing insurance carriers or making substantial revisions to what is covered or to the costs to employees.

HR can never anticipate every nuance or issue that might apply to a particular employee’s situation, even though those who present at open enrollment meetings have usually been involved in the benefit plan design and/or have had substantial involvement in negotiating plan terms with their carriers.

Pity the poor “navigators” who will have to explain Obamacare to the millions of people who will need to enroll through the healthcare exchanges so they do not incur a penalty (which the Supreme Court called a “tax”) for failing to have insurance come January 1, 2014.

According to Amy Schatz in the Wall Street Journal on August 7, 2013,

“Grants to hire and train the workers aren’t expected to be released for another two weeks for the 34 states where the federal government is running all or part of the marketplaces, which will offer insurance to those who don’t get it on the job or from Medicare or Medicaid. That leaves just 32 business days to hire and train thousands of helpers in these states.”

As an HR professional, would you want to hire and train people in the intricacies of enrolling millions of people in plans that are newly designed – and maybe still in design – using a new online enrollment system? All in thirty-two days?

What are the odds of being able to hire “navigators” who can explain the enrollment system to enrollees who may never have used a computer before? Or who can explain the terms “co-pay” and “third-tier drugs” to people who have never had health insurance before?

HHS sealAnd with only twenty hours of training, what are the odds these poor navigators will know what to do when the first customer calls?

HHS had better hope that the scripts written for their new hires are well-written. But if the scripts are anything like the HHS regulations, the system is doomed from the beginning.

Or perhaps the Administration will rewrite the Affordable Care Act to delay implementation of the individual mandate until 2015, as it has the business mandate.

What do you think the impact of the Affordable Care Act will be on your organization, as of January 2014?

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Filed under Benefits, Human Resources, Law, Politics

Obama’s Plan to Cap Retirement Savings — How Much Is Too Much Income or Too Much Taxation?


????????????????????????????????????????????????????????????????????????????????????In addition to limiting itemized deductions for higher income taxpayers, President Obama’s recent budget proposal also includes a cap on the amount that individuals can accumulate for retirement on a tax-deferred basis. For years, taxpayers have been advised to save as much as possible for retirement in 401(k)s and IRAs. The President’s proposal limits the tax-deferred nature of these plans.

The President wants to limit the tax advantage of all retirement plans to the amount needed to buy an annuity of $205,000/year. Under current interest rate and inflation assumptions, this amount is about $3.4 million. See Blake Ellis, Obama: Limit retirement tax breaks for the rich, CNNMoney, April 10, 2013. The proposal combines pensions, 401(k) plans, and IRAs – all forms of retirement savings accounts – in reaching this cap.

While $205,000 is a very nice income for a retiree, why should the President dictate the standard of living for anyone in retirement? Why should $205,000 be the maximum income that people can accrue through tax-deferred savings? What is his philosophical underpinning for this amount, beyond the President’s frequent theme of “the rich have too much”?

As Robert Lenzner, wrote for Forbes on April 14, 2013, in Obama Goes Against the Grain of What America Represents,

“The whole thrust of this recommendation goes against the grain of becoming self-sufficient, taking care of your own finances rather than depending on handouts.”

presidential sealThe intent of President Obama’s cap on tax-deferred retirement plan savings is clearly to bring more money into the tax system sooner rather than later – and, like many of his proposals, his proposal is aimed at the top 1% of wage earners.

One consequence of President Obama’s proposal may be for employers to reduce their support for retirement savings of any type.  An April 14, 2013, editorial in Investment News, titled Limiting 401(k) tax advantage is unwise, explains the problem. Defined benefit plans (pensions) decreased each time Congress capped the maximum salary on which employers could make tax-exempt pension contributions.  Each reduction led to more defined benefit plans being terminated, and accelerated the move to defined contribution 401(k) plans. Now, 401(k)s will be limited, too.

Moreover, depending on the returns in 401(k) plans over time and the assumptions made about what an inflation-adjusted annuity of $205,000 would cost, the savings cap in the President’s proposal could be as low as $2.2 million. At that level, 6% of young workers could be cut back in their retirement savings before they turn 65. If interest rates increase – which they are likely to do over time – even more young employees could see their ability to save for retirement on a tax-deferred basis limited.

For more analysis, see Could Obama’s Plan To Curb The Boss’ Tax Breaks Hurt Workers’ Retirements?, by Janet Novack, in Forbes, on April 10, 2013, or the Wall Street Journal editorial on April 12, 2013, Now He’s After Your 401(k).

Employers and HR executives should watch the development of the President’s proposal carefully, to determine what the impact is on employees at all levels of their organization.

President Obama isn’t the first politician to advocate limiting tax deferrals on retirement savings. But combined with his other attacks on wealthy Americans, he appears dead set on reducing what top earners can save in any way he can – by taxing more of their income now, and by limiting tax-deferred savings in the future.

I am not entirely opposed to increasing taxes on the top earners, nor even on the middle class. But before we increase taxes further, I think it is important to ask ourselves how much taxation is too much. President Obama has never answered that question. I can’t tell if he has even asked it of himself or his advisors. All he talks about is wanting more from the top 1%.

The President’s  answer to how much is too much taxation might define the philosophical difference I have with him and his supporters.

How much do you think is the maximum that the government should take of anyone’s income? Should the government set limits on tax-deferred retirement savings?

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Tax Reform Still Needed, But Not As Outlined in Obama’s Budget Proposal


I reported last year that my tax returns and supporting worksheets were 297 pages. This year they were 308 pages. We have not had tax reform in the last year (though we’ve had increases in some tax rates). Tax reform is still desperately needed.

The income tax has become a part of the modern economy. I don’t have a philosophical objection to income taxes per se. But I believe in lower tax rates, fewer loopholes, and broader participation by the citizenry.

Every choice made to tax some things and not tax others skews people’s decision-making. They will seek more of what is not taxed, and less of what is taxed. For example, not taxing employer health insurance means more people want health insurance through work, rather than individually purchased insurance. As another example, permitting deductions for mortgage interest means people seek home ownership and mortgages. In the absence of the tax laws, people might choose to rent a home rather than buy.

presidential sealThe decisions on what to tax also show philosophical differences between politicians. President Obama’s recent budget proposal is an example. I disagree with two of the choices he has made – the limitations on the deductions that upper income Americans can take when they itemize deductions on their tax returns, and the lifetime limitations on contributions to 401(k) and other retirement plans.

The rest of this post discusses the limitations on itemized deductions. Next week I’ll cover limitations on retirement plan contributions.

The major categories of itemized deductions on Schedule A are medical expenses, state and local taxes, home mortgage interest, and charitable contributions.  The rationale for limiting these deductions is that taxpayers in higher tax brackets get a bigger percent deduction than middle income taxpayers.

Here’s what will happen if upper income taxpayers are limited in what they can deduct on Schedule A:

  • 1.      Medical expenses

In past years, deductions for medical expenses have been limited to those expenses that are over 7.5% of income. Congress has already passed legislation increasing that limit to 10% in 2013. This means that higher income Americans have to incur much higher medical expenses than other taxpayers before they get any deduction on their Schedule A.

Now the President wants to limit them to a 28% deduction, instead of a higher percent if they are in a higher tax bracket. This means that not only is their threshold higher, but they won’t get a deduction for the full amount they paid.

The Affordable Care Act has already put other taxes on this group of people. Has anyone in the Administration stopped to think about the total tax impact of the ACA on this group of citizens and whether it is the right level of taxation for healthcare?

  • 2.      State and local taxes

One could argue that when people choose where they live, they choose their state and local taxes, and that people can live if they don’t want to bear this tax burden. Still, taxpayers should be ready for double taxation on a part of their income – the states and municipalities will take their share, and with the Schedule A deduction limited, the IRS will take a part again. I would predict more people will leave high-tax states and municipalities if this proposal is passed.

   3.      Home mortgage interest

I actually think a limit on the home mortgage deduction is appropriate, though I’m not sure a percent limitation is appropriate. A dollar limit might be more appropriate.

And given that the real estate market is only just beginning to recover and home purchases and mortgages are long-term decisions, phasing whatever limit is adopted might be better than a sudden change. People can’t adapt to this change overnight.

  • 4.      Charitable contributions

This is the item in the President’s proposal that I disagree with most strongly, because I have a philosophical difference with the President. It seems clear that President Obama believes that the federal government should redistribute wealth in this country, and he wants to use the tax code to assist in that redistribution.

I believe that that Americans should not only decide themselves whether to give away their income, but also that they should be allowed to decide where to give it. If I want to make charitable contributions to a local hospital and my neighbor wants to support a museum, why should we not make these decisions? I do not think the government is better equipped to decide which causes to support than each citizen acting on his or her own beliefs.

Those like the President who disagree with me might say that Americans are still free to give to the charities they want to support. This is true, but as tax rates go up, taxpayers have less after-tax income to give. And if a taxpayer in the 35% tax bracket is limited to a 28% deduction, he or she will have to have $1.25 in pocket to give a dollar to charity. We will have less giving to charity, which is not the result I think this nation wants.

That’s my perspective on itemized deductions.

I also disagree with the President’s proposal limiting lifetime contributions to 401(k) plans. More on that next week.

In the meantime, I hope we can all agree that the tax code is too complex, and start supporting overall tax reform by both Republicans and Democrats. Probably no one will agree with all the changes made; there will be winners and losers. But if we can reduce the overall complexity, and hopefully reduce rates as a result (or at least not raise them), perhaps in the long run we will have a fairer system.

At least it won’t take 308 pages to complete a tax return.

Do you think Americans with higher incomes should face limits on their itemized deductions?

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Negotiation and the Fiscal Cliff


U.S. CapitolAs an attorney, mediator, and Human Resources executive for the past thirty-plus years, I’ve participated in a lot of negotiations. I have to shake my head as I watch our politicians trying to avoid the looming “fiscal cliff” of tax increases and spending cuts. Congress and President Obama are operating in the worst possible circumstances to find a workable compromise to resolve the pending cataclysm.

Here are a few of the problems with how this negotiation is set up:

     1.  Too many parties.

I’ve been in several multi-party negotiations. With every faction added, the difficulty of reaching agreement grows exponentially. It’s like a family with many children – with each child, the family adds relationships between that child and every other already existing family member. With one child, there are only three relationships; with two, there are six; with three, there are ten.

To pass any legislation, the House of Representatives, the Senate, and the President all must agree.  But the House and Senate each has two parties, and there are factions within those parties. We actually have 536 votes involved in any legislation, and we need 217 House representatives, at least 51 Senate members (or 50 and the Vice-President, or 60 Senators with the current filibuster rules), and the President to agree before any bill gets passed.

In fact, our Founders designed this system of checks and balances to require lengthy deliberations before laws are passed. I believe that’s a good thing most of the time, except when it’s not – such as now, when the stakes are high and deadlines threaten.

     2.  Lack of confidentiality

There are reasons that settlement negotiations are usually kept confidential and cannot be used in later legal proceedings between the parties. In order to convince the other side to moderate its position, the parties often need to make disclosures and admissions against interest that they wouldn’t want held against them during trial (or later election campaigns).

We may say we want transparency from our lawmakers, but if they are on the record as being for or against something, it is very difficult for them to back down without losing face. The nature of negotiations requires posturing – no one starts by presenting a bottom-line position. But once someone draws a line in the sand publicly, it is hard to change positions.

Yet in legislative negotiations, we hold our legislators accountable for representing their constituents. This means they have to make their positions public to some extent. Otherwise, how can “we the people” decide if they are representing us well? We don’t want our representatives working in a black hole and then announcing the outcome.  But transparency places our elected officials in a very awkward position in the negotiations.

As Mark Twain said, “Those that respect the law and love sausage should watch neither being made.” They are both messy processes. But a strong representative democracy requires that we watch.

     3.       A long history of arguing, and no mediator

MP900289068The factions in Congress and the White House have been in place for four years now, and the November election didn’t change anything. The current Democrat and Republican leaders in Congress and the President have a history of distrust. Their positions are set in concrete, and it will take a bulldozer to budge them.

Both sides say they want a settlement, but moving away from firmly stated positions is difficult. Both sides need to get something to save face. Yet their history of distrust may mean that they are more interested in seeing the other side lose than in reaching a settlement.

In this situation, there is no mediator, no neutral to bring the parties together. In the past, when the two houses of Congress have been at impasse, a statesman-like president could work to break the logjam. But President Obama maintains a partisan perspective in this debate. There is no one with the stature or trust of both parties who can broker a deal.

It doesn’t help to have non-parties to the negotiation (the media, etc.) who favor one side or the other, and who all pontificate about what their side and the other side should do. Yet that, too, is part of our democratic process under the First Amendment.

Because of these factors, the fiscal cliff negotiations are as difficult as they are important to our economic future.

At the time I write this, we don’t know what will happen. Will we fall into the abyss through inaction or find a way around it? Regardless of the outcome, remember that our political system is perfectly designed to get the result we get.

What else do you see getting in the way of effective negotiations?

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Why Not Use Conjoint Analysis To Determine Citizen Preferences?


I recently participated in a couple of online surveys that used conjoint analysis techniques to determine my preferences as a consumer.  Conjoint analysis is a statistical technique used to determine what combination of features or attributes people prefer and how those attributes influence people’s decision making.
So, for example, one of the recent surveys I answered dealt with choices a company could make about new products they could offer – which would I be more likely to buy at what price? The other survey I participated in was about transportation services, and which services I would value at what cost. The questions got harder. As I made choices, I was shown packages of products and services that I valued more and more similarly, or where the costs got closer to what I was willing to pay. Still, I had to choose, and that gave the survey sponsors more information about what I valued.
These surveys and my memories of other conjoint analysis surveys I’ve taken in the past on employee benefits and other topics got me thinking about use of this technique to address many of our nation’s problems.
Do we really know what choices our citizens would make, how they weigh various options? Why don’t we ask?
Conservatives assume everyone would rather pay lower taxes and have less government intrusion in their lives. Liberals assume everyone wants more even income distribution and a higher level of subsidized or free government benefits. But has anyone ever asked the citizenry what they want? And been willing to deal with the responses?
Obviously, we would all like to get more for less, the most goods and services for the least payment. And ideally, we would all like to live on a generous dole without having to lift a finger to work nor to pay a dime for our comfortable leisure.
But we know that is not an option. So which, among the many realistic options our society could choose, would you prefer?
Should we leave our federal government spending at its current level and raise taxes to cover it, or should we reduce federal spending and keep taxes the same? Or reduce spending further and reduce taxes as well?
Then let’s talk about income redistribution. How much should a billionaire pay in taxes? How much a millionaire? Someone making $250,000? Or $50,000? Or $20,000?  What is raised by each of these levels of taxation? What does that mean for spending? Are you satisfied with that level of spending? If not, whose taxes would you raise by how much in order to cover the level of spending you desire?
The technology exists today with conjoint analysis to put a variety of baskets of government goods and services and taxes and regulations in front of people and ask which they prefer. With a conjoint analysis survey, as I indicated above, the choices get progressively harder, as people are asked to differentiate between things they value more and more equally.
But at the end of the survey, you would have a pretty good idea of what our citizens really want. There would be a range of what people want, but you’d know where some consensus might be found. Wouldn’t that help our hidebound politicians on both sides of the aisle?
The issues of government taxation and spending are complex. But so are the issues we address in our daily lives. Only the dollars are smaller in our households than in our government. Maybe we should treat our citizenry as responsible adults and let them have a voice.
What is stopping our lawmakers and think tanks from asking what people want? The fact that they don’t want to know, because then they would have to try to address the citizenry, rather than satisfy their own predilections.
Would you like to make your choices known?

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