Steel City Cowboy

Wednesday, October 29, 2008

The Steel City Cowboy Tax Plan

I think that one of the major drivers of sector-specific inflation in healthcare and higher education is the near-removal of the need for the consumer to actually pay for the product in a way that registers to the animal part of their brains as payment. Consumer sentiment can act as a heavy downward pressure on pricing, and it almost does not exist in those two sectors.

For people who have health insurance "provided" by their employer, the cost is mostly hidden. Of course, health insurance is provided by your employer just like the Christmas presents that your kid buys your spouse (with your money) are provided by the kid. Employers actually act as resellers for health insurers' plans. You buy that plan in lost wages. In other words, if your employer weren't footing the bill to the tune of $400 per month for each employee on the family plan, they could afford to be paying everyone $400 more per month, give or take. But that cost is hidden from you, because you never had the cash in your hand in the first place. And, the small (but growing) amount that many employers deduct from your paycheck to "pitch in" for the health insurance is almost the same. You don't feel it, because you never had it.

If you were paid that money in actual wages and had to front the cash for the policy yourself, I believe that a whole lot of people would either opt out of the current raft of health insurance offerings or exert enough price pressure that insurance companies would come up with cost savings and innovative plans. But make no mistake -- the real problem is that most people with health insurance through their employer treat a very valuable service as though it were free (or purchased at a significant discount).

What it boils down to is that people are routinely receiving services worth, say, $200 for an "out of pocket" feeling of only around $20. They realize the value of the service, and will be willing to pay more for it up to a certain level. The net effect is that if people are actually even willing to pay $40 for that same service (whose value they perceive at around $200), the providers are of course going to raise their rates accordingly to obtain that payment. And so, a $200 visit rises in price to $400. The market wouldn't actually bear a $400 price, but it will bear a $40 price, which is how most people experience it. And so it happens.

I'm not saying there aren't other inflationary pressures at work in the health care industry. Clearly, rapid advances in diagnosis and treatment do not come for free. And I still haven't been able to decide whose side I fall on in the doctors vs. lawyers malpractice argument, although I certainly lean toward the doctors' side. But the point remains that the divorce of the value of the service from the felt cost by consumers has left things wildly out of balance, distorting the market price.

Taking a look at higher education, there is a similar inflationary pressure. People's out-of-pocket expenses for a college education are pennies on the dollar for the value they believe they are getting. Financial aid packages, including massive amounts of subsidized student loans, have wildly distorted the market in a similar fashion. In it's quest to make higher education affordable, the Federal government has dumped billions of dollars into that market with the result that people feel like they are paying $20,000 for something worth $100,000. So, that same inflationary pressure kicks in. Double that price and people still feel like they're getting a bargain. If we actually had to pay for it out of pocket, it would be a different story. People would opt for colleges and universities with a different price structure that provided more value.

So, how does this relate to taxes? I contend that working Americans face an onerous cumulative tax burden. Why do we put up with it? Because in general, we don't feel it. Our property taxes are paid through escrow accounts in our mortgages and are just perceived as part of our house payment. Our Federal taxes are not only taken out of our paychecks incrementally, but once a year many people feel like the government is "giving" them something when they get their refund check. And so, we tolerate increases in taxes that would never fly if we actually felt them.

My tax plan isn't an argument about flat taxes, national sales taxes or which type of tax calculation method works the best for whatever your social engineering cause du jour might be. It only involves method of payment.

The Steel City Cowboy Officially Endorsed Tax Plan
You pay your taxes to all taxing authorities quarterly. In person. In cash. No exceptions. Do you think we'd care a little more? Feel it a little more? You bet. Would it make a difference to how we feel about the taxation levels that we live under? Of course. I think a lot of people would be outraged when it came time to part with that giant chunk of cash and physically hand it over to a government bureaucrat. There would be tears and fist fights, I'm sure.

Will this ever happen? No. Would I push for it if I were in office? Don't be silly. It's easy to throw stones from a blog, and a lot harder to fix real problems in the real world. But it does serve to highlight how removing the feeling of paying for something, including out taxes, can lead to out-of-control inflation. So go ye, and be aware of how much of your money you pay every year in taxes. Do the math. Add up the total amount you pay in property, income, Social Security, Medicare and sales taxes per year.

Then, let's say that as a crazy rough figure, the government is overpaid by half. If you cut out the bullshit, the government could perform it's essential functions on exactly half of what it's taking in right now (and really, why should it do any more?). That's just a wild-assed guess, so don't hold me to the 1/2 figure. Anyway, slash that total dollar amount you paid in taxes last year in half. Now give that back to yourself. What could you have done with that money?

Maybe invested in a residential property, or even a beach house for yourself. Maybe a new car. Maybe get to some of that maintenance you've deferred on your house. What! you say? I'm crazy? Not really. We're talking beach house kind of money here. Or, if you don't have a house yet, then "first home" kind of money. But don't worry about it -- I'm sure the government puts your money to better use than you ever could.

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