The Agenda

Noam Scheiber on David Axelrod

In Noam Scheiber’s profile of David Axelrod in the latest issue of The New Republic, there is one section I found particularly depressing:

In the spring of 2009, White House officials gathered in the Roosevelt Room to discuss the direction of health care reform. One of the looming questions was the so-called tax exclusion. Under the status quo, a worker making $75,000 per year with no benefits would pay taxes on all his compensation. But a worker making $50,000 plus $25,000 in health benefits would only pay taxes on his income; the benefits would be untouched. This gave employers an incentive to provide generous insurance, which, in turn, led workers to consume too much health care. Pretty much every wonk in the administration believed that taxing benefits was essential. But the political team saw a problem: During the presidential campaign, Obama had criticized John McCain for a similar proposal.

Axelrod was especially concerned about reversing course. The campaign had run millions of dollars in ads specifically on the issue. To underscore the point, he screened a roughly ten-minute montage of every Obama ad blasting McCain as a tax-raiser. It was to little avail. By late July, when the president held an Oval Office meeting with several prominent health economists, it was clear he intended to endorse the tax (though it ultimately fell hardest on upper-income workers). Axelrod stood off to the side and said little.

It’s not quite right to say that the McCain health plan contained a similar proposal. Rather, the McCain plan eliminated the exclusion of health benefits from taxable income, as Kevin Sack and Michael Cooper explained in The New York Times in May of 2008:

To end the disadvantage to those who do not buy insurance through employers, Mr. McCain proposes to eliminate the exclusion of health benefits from taxable income. In exchange, he would provide refundable tax credits of $2,500 to single people and of $5,000 to families, with the goal of stoking competition in the individual insurance market. The elimination of the exclusion would generate $3.6 trillion over 10 years, according to the McCain campaign, and that money would pay for the tax credits.

To end the disadvantage to those who do not buy insurance through employers, Mr. McCain proposes to eliminate the exclusion of health benefits from taxable income. In exchange, he would provide refundable tax credits of $2,500 to single people and of $5,000 to families, with the goal of stoking competition in the individual insurance market. The elimination of the exclusion would generate $3.6 trillion over 10 years, according to the McCain campaign, and that money would pay for the tax credits.

In marked contrast, the White House and congressional Democrats eventually settled on a weak federal excise tax on “high-cost employer plans,” described as follows by the Journal of Accountancy:

 

New IRC § 4980I imposes an excise tax on insurers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse and any other primary insured individual) exceeds a threshold amount. The tax is equal to 40% of the aggregate value that exceeds the threshold amount. For 2018, the threshold amount is $10,200 for individual coverage and $27,500 for family coverage, multiplied by the health cost adjustment percentage (as defined in the act) and increased by the age and gender adjusted excess premium amount (as defined in the act).

The provision is effective for tax years beginning after Dec. 31, 2017.

The excise tax under PPACA is the product of a “compromise” with the president’s labor allies. As currently structured, the tax would only impact a small handful of plans. The expectation is that more plans will be impacted as medical inflation increases, but the delay in implementation will give organized labor and other opponents of the tax ample opportunity to roll it back. Compared to the McCain proposal, this excise tax is, to put it gently, a bad joke that is not nearly as likely to restrain cost growth.

Yet the McCain campaign failed to make the case for its proposal, and the Obama campaign’s demagogic attacks made it extremely difficult for the Democrats to devise a fiscally sustainable reform. Even very smart commentators like Clive Crook failed to understand how the McCain reform proposal moved the ball forward. Many observed that McCain’s refundable tax credits wouldn’t cover the cost of insurance for many people. And that, of course, is why the plan also called for strengthening high-risk pools, and for giving the states greater flexibility to meet the needs of their citizens. Moreover, scrapping the tax exclusion would lead to an increase in cash wages.

Regardless, it’s clear that Axelrod was serving as the conscience of the Obama White House by pressing the president to remain true to his profoundly wrongheaded campaign rhetoric. That is, in a sense, to his credit. 

Later in the piece, Noam describes a clash between Axelrod and Treasury Secretary Timothy Geithner over executive compensation at AIG:

 

In mid-March, the press reported that AIG owed executives at its financial products division $165 million in performance bonuses. Taxpayers struggled to understand why they owed anything to the people whose disastrous real-estate bets required a $170 billion government lifeline, much less tens of millions in performance incentives.

The development shattered the tentative understanding between Axelrod and the wonks. Geithner believed that you cease to be an advanced economy once the government starts dissolving contracts. Axelrod and other senior political aides, like Gibbs, felt the administration had to respond to the country’s legitimate outrage. They began to worry that Geithner’s principled caution, while noble, could bring the administration down. The president was exasperated but ultimately sided with Geithner on the letter of the law.

Politically, it didn’t work. “If you were going to pick a moment when the whole thing turned on Obama,” says a longtime Democratic consultant, “it was the moment the administration saved the AIG bonuses.” [Emphasis added.]

I find it extraordinary that Geithner’s view about dissolving contracts was not universally held in the Obama White House, or indeed in any White House. And I’m impressed by the decorousness of Noam’s language. Were Paul Krugman mouthing Geithner’s sentiment, which I can’t imagine he ever would, he’d express the same sentiment more tartly. 

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