The energy legislation emerging from Congress in recent weeks is a sterling example of the kind of government action that makes us poorer as a society.
It is chock full of unnecessary subsidies to nuclear power and the petroleum industry. Plus, this useless expenditure is matched by ethanol and wind power subsidies deemed necessary because other energy sources already are subsidized.
The idea that we need government to decide which parts of the energy industry need subsidies is the kind of mercantilist thinking that was popular in France in the days of Louis XIV. Adam Smith demolished that logic in 1776 in “The Wealth of Nations,” but his insights have not yet penetrated the thinking of either major political party here in the United States.
The bill does, however, contain one provision that is a distinct improvement from the past. The feds historically subsidized ethanol by exempting fuels containing the substance from federal motor fuel taxes. As use of such fuels increased, federal revenues for road construction and repair fell relative to total gallons of fuel used and miles driven.
In other words, subsidies to ethanol came out of highway funds. In the new bill, that is changed. Ethanol fuels will still get a tax exemption, but any resulting decrease in highway fund revenues will be made up from the general Treasury.
This is an improvement. If we think that some technology is so beneficial to society that it should get a general subsidy, the funds should come from taxpayers as a whole — not from taxes dedicated by statute to other purposes.
Having gotten this small detail right, Congress should apply the insight to another subsidy that is still in the legislative works — the drug benefit for seniors. Congress probably will pass a bill that adds a prescription drug benefit. If it does, it should fund this benefit out of general revenues rather than out of the portion of FICA withholdings designated for Medicare. FICA is the Federal Insurance Contributions Act.
It should take this step because it is creating a new entitlement that will transfer substantial sums of money to senior citizens. Income redistribution of this type is fairer when it comes out of the more progressive income tax rather than out of the regressive FICA.
FICA, which has no zero bracket amount, no progression of rates with income, and a cap on income taxed, is perhaps the most regressive of all federal taxes. It is not a fair source for new income reallocation programs.
I question the wisdom of creating a new across-the-board entitlement like the one under debate in Congress. Yes, high drug bills do impose severe hardships on significant numbers of seniors. But the average expenditure on prescription drugs for retirees still is under $1,000 per person per year, and more than 60 percent of retirees already have a drug benefit of some sort.
Erecting an entitlement for everyone, regardless of actual drug expenditures and actual household income, is a disproportionate response to a problem that could be solved with more targeted approaches. Broad entitlements are politically popular, however, and we probably will go down this road one more time.
The cohort of people who will benefit from this program in its initial decades largely is one that already is getting a better deal from Social Security and Medicare than any other that preceded it or is likely to follow.
They spent most of their working lives paying FICA at the low rates prevailing before the mid-1980s and are getting the higher benefit levels ushered in by President Richard Nixon and House Ways and Means Chair Wilbur Mills some three decades ago.
Despite the fact that some households in this group are poor and that some have inordinate prescription bills relative to income, current retirees on Social Security as a whole have higher disposable household incomes than the nation as a whole.
If we are going to tax someone so as to transfer more income to retirees, we should do it with as fair a tax as possible.
Just as subsidies from ethanol should come from general revenues rather than at the expense of highway construction funds, subsidies in the form of pharmaceutical benefits administered through Medicare should not come from withholdings taken from current workers. Use broader-based general Treasury revenues instead.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.