NoSpeedBumps Major Reforms: RSA+HSA+EFT
NOTE: You may want to take a quick look at Table 1, Table 2, Tax Form 1, and Tax Form 2 before reading what follows.
NoSpeedBumps.com is about expanding freedom. More freedom means that the government has less power to tell you what to do. And it means that the government controls less of the total economy so that both economic growth and job creation are more robust.
But conservatives, libertarian-conservatives, and pragmatic-liberals are all for freedom and a strong economy. With that in mind, the following reforms are proposed in the spirit of striving to reach a new consensus among these three groups - without compromising the political principles of any of them. After reading the following proposals with an open mind, you be the judge if this can be done. Set aside current politics for a moment, and think about sustainable long term solutions.
NoSpeedBumps proposes three fundamental reforms:
#1 - Begin mandatory Retirement Savings Accounts (RSAs) and phase out Social Security
#2 - Begin mandatory Health Savings Accounts (HSAs) and achieve universal health care coverage, phase out Medicare and Medicaid
#3 - Implement a loophole-free Effective Flat Tax (EFT) that has a completely flat perceived rate
These policies all work together in a grand plan. They are not at all independent; they fit together like three pieces of a puzzle. The result is an extremely simple income tax, with an identical flat rate for all individuals and businesses - yet progressive revenue collection is still achieved. The idea of taxing according to ones ability to pay is retained in the tax code.
This at first may sound contradictory. How can you have both a flat rate and progressive revenue collection at the same time? This gets back to how the three policies work together. The tax rate is really a “tax & save” rate, instead of purely an income tax rate like in today‘s system. RSA and HSA money that you save goes into your personal savings accounts rather than being paid to the government as taxes. Since low income workers must save a higher percentage of their income to meet their mandatory RSA and HSA savings requirements, they will have proportionally less money left over to pay in income taxes.
HSAs are maintained by all workers. Everyone that makes more than $7000 per year will have equal funds saved in their HSAs. Now how can this be achieved for the lowest income workers who can‘t afford this? For the perceived “tax & save” rate to remain totally flat, there is no escaping the need for federal subsidies. Federal subsidies are the only concession to big government in the RSA+HSA+EFT reforms. However, Social Security, Medicaid, and Medicare - which collectively make for much bigger and intrusive government than the HSA subsidies - are all to be phased out.
The government, via taxpayers, today directly pays all Social Security retirement checks and directly pays nearly half of all medical bills in the US by way of Medicaid and Medicare. These programs are structured purely as pay-as-you-go systems. There are no mechanisms for generational equity; it is the luck of the draw to which generation you are born. Some generations get a much better deal than others (although, overall everyone gets a lousy deal with Social Security).
Social Security and Medicare are set to explode in terms of revenues needed when baby boomers start retiring - the welfare state will continue its historically relentless growth. The RSA+HSA+EFT policies have the advantage that government will get much smaller and less powerful if these policies are adopted. Instead of more centralized government control, individuals are empowered by having significant personal savings to spend according to their needs. And at the same time universal health care is achieved, and progressivity in tax collection is maintained.
RSAs take advantage of the high rates of return achieved by the stock market over a span of 45 years (your working lifetime). The stock market provides much higher rates of return than today’s pay-as-you go Social Security system.
Table 1 shows a summary of how the RSA+HSA+EFT policies work together. You can see that workers have the same HSA savings regardless of income (equal health care dollars) once they make $7000 per year. You can also see that the tax & save rate is flat for all income earners. The amount of HSA federal subsidy needed for low income workers is set by whatever amount is needed to meet the HSA savings requirements while simultaneously achieving the tax & save flat rate. Table 1 also shows the significant progressivity in tax revenue collection.
Your HSA will be divided into two sub-accounts, as shown in Table 2. HSA-W (where W stands for Working) is to be used on an annual basis during your working years. And HSA-R (where R stands for Retirement) is an account that accumulates savings during all of your working years to buy private health insurance and medical care during retirement. Thus it is a similar account to the RSA except it is used solely for health care. With all workers having HSA-R accounts, this allows for the phase-out and eventual elimination of the Medicare program.
Portions of the savings in the RSA and HSA-R accounts are used upon retirement to purchase life annuities. This assures that the money does not run out in case you live longer than the average person.
In Table 1, low income workers pay no taxes and instead get a subsidy if they make more than $7000 per year. Their net income tax rates, when considering the total flow of money between them and the government, are actually negative. But their tax & save rate remains flat - they perceive the same effective rate as all other workers. It is just that all of their withheld income is being diverted into their savings accounts rather than to government as taxes.
Of great importance, the high marginal tax rates experienced by millions of Americans today are eliminated. The government-created speed bumps on the road to economic upward mobility are eliminated from the income tax code. This is especially important for low income workers who face steep marginal tax rates that act as disincentives to earn more.
Every worker will be treated the same by the tax & save flat rate. And there will be zero loopholes in the income tax code. Tax forms for individuals and businesses will each be on a single sheet of paper as shown in Tax Form 1 and Tax Form 2.
In summary, RSAs, HSAs, and the Effective Flat Tax all work together in a tightly integrated system. This system achieves universal health care coverage, provides for income support and health care during retirement based on the highest rates of return achievable, and has a flat tax & save rate for all workers and businesses. All of this is done while retaining significant progressivity in the collection of tax revenues - yet with zero loopholes in the income tax code. And the perceived marginal tax & save rate is flat such that the incentives to work and improve oneself economically are the same for all workers. There are no speed bumps.
As you ponder these reform proposals ask yourself what is the most free, most just, and most fair system to pass on to future generations. Will Social Security, Medicaid, Medicare, and today’s loophole-ridden income tax be here forever? Can’t we do better?
NOTE: For a much more detailed discussion of all of the above, see this.
May 3rd, 2005 at 9:30 pm
[...] suming some political magic occurred, and such a thing became possible, how do you quickly convert Social Security and Medicare into a system of private savings accounts? If next year every worker establ [...]
May 5th, 2005 at 12:27 am
[...] ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Table 1 is the Key Last Sunday I posted NoSpeedBumps Major Reforms: RSA+HSA+EFT which summarizes some central ideas of this blogsite. The key to unders [...]
May 5th, 2005 at 1:26 pm
[...] d for a New Consensus I sent an email to Ezra Klein linking to my proposals for RSA+HSA+EFT. He emailed back: “I detest HSA’s, I think they’re a terrible, terrible, terrible [...]
May 7th, 2005 at 10:46 pm
[...] n this issue was so good, I ‘m re-linking to Krauthammer. I’m also linking to No Speed Bumps who has a SocSec plan based on major reforms. I don’t know if I understand it all…but i [...]
May 8th, 2005 at 10:25 pm
[...] I will post a reminder regarding the NoSpeedBumps Major Reform Proposals. Read about them here! This entry was posted on Sunday, May 8th, 2005 at 10:17 pm [...]
May 15th, 2005 at 12:43 pm
[...] arginal Tax Rates The concept of an Effective Flat Tax was introduced in the NSB Major Reform Proposals: RSA+HSA+EFT. The Effective Flat Tax (or EFT) is a critical piece of the 3-piece NSB r [...]
May 19th, 2005 at 1:54 pm
[...] ies in slides 46-53 here. The concept of “Freedom Ledges” is introduced. The NSB Major Reform Proposals (RSA+HSA+EFT) are all based on this concept of Freedom Ledges. [...]
May 19th, 2005 at 6:27 pm
[...] counts and mandatory Retirement Saving Accounts. When these policies are implemented as an integrated group of policies, many new and unique advantages are gained for society, citizens, and businesses: &# [...]
May 20th, 2005 at 11:02 pm
[...] you have major medical bills one year, then the high-deductible insurance kicks in. The NSB Major Reforms take this idea one step further and make HSAs mandatory (like in Singapore as discussed here and [...]
May 22nd, 2005 at 7:18 pm
[...] ax wages, salaries, bonuses, and pension income. Line 2 is easy too. Since the mandatory Retirement Saving Accounts (RSAs) are used to save tax-free during your working years, it is only fair to pay taxes [...]
May 25th, 2005 at 8:43 pm
[...] he big picture. All posts after that are meant to add detail to this first summary post. NoSpeedBumps Major Reforms: RSA+HSA+EFT Phasing Out Social Security and Medicare The Effective Flat Tax: Steamrolli [...]
May 28th, 2005 at 8:03 pm
[...] not become at risk of losing their Medicaid coverage. With the HSA plan from NoSpeedBumps, everyone has the same HSA funds regardless of your income. This entry was posted [...]
June 12th, 2005 at 3:11 pm
[...] the big picture. All posts after that are meant to add detail to this first summary post. NoSpeedBumps Major Reforms: RSA+HSA+EFT Phasing Out Social Security and Medicare The Effective Flat Tax: Steamrolli [...]
July 3rd, 2005 at 11:05 am
[...] ite a book based on these ideas. Any suggestions on the approach to do this are welcome. NoSpeedBumps Major Reforms: RSA+HSA+EFT Phasing Out Social Security and Medicare The Effective Flat Tax: Steamrolli [...]
July 18th, 2005 at 11:36 pm
[...] Reform Proposals Quick summary of links to NoSpeedBumps Reform Proposals: NoSpeedBumps Major Reforms: RSA+HSA+EFT Phasing Out Social Security and Medicare The Effective Flat Tax: Steamrolli [...]
September 18th, 2005 at 12:42 pm
[...] little bit of work to understand the EFT idea, but once you see it, it is very simple. See here for further explanation. It should also be pointed out that the federal Earned Income Tax Credit, which is a [...]
October 26th, 2005 at 11:37 pm
[...] Here is a quick updated summary of links to NoSpeedBumps Reform Proposals: NoSpeedBumps Major Reforms: RSA+HSA+EFT Phasing Out Social Security and Medicare The Effective Flat Tax: Steamrolli [...]
March 4th, 2006 at 5:28 pm
[...] e is an updated summary of links related to NoSpeedBumps social policy reform proposals: NoSpeedBumps Major Reforms: RSA+HSA+EFT Phasing Out Social Security and Medicare The Effective Flat Tax: Steamrolli [...]
May 13th, 2006 at 11:33 am
[...] will be offering them to employees more also. At NoSpeedBumps, I see them as a long term means to achieve universal health care. Ultimately, they could be used to phase out Medicare and Medicaid which tod [...]
May 25th, 2006 at 8:50 pm
I was wondering why you didn’t ramp up the HSA subsidy from 0 to $2,500 on a single person instead of doing an all or nothing at $10,000. In otherwords having a subsidy of say $1,250 at say $5,000.
I was also wondering how you came up with the $4,000 maximum for a single and $9,000 for a family? Are their different amounts for married and the more kids you have?
May 25th, 2006 at 11:38 pm
Terry,
Good questions.
Regarding having no ramp from 0 to $2,500, the idea is to only give HSA subsidies to workers who are full time or near full time. The reasons are:
1) If someone in a household (say a teenager or spouse) works only part time, but there is a full time worker in the household, the full time worker already has full HSA coverage for everyone (with or without a subsidy). It makes no sense to give the dependent a subsidy. This would use taxpayer dollars when they are not needed. Or it may be that a dependent’s part time income counts toward the total household income for determining how much HSA subsidy is received. So the HSA funds all go into one family account and the subsidy is only included if still needed.
2) People shouldn’t expect large subsidies if they only work a few hours a week.
3) It motivates people, who may be participating little in the workforce, to work more hours to obtain full coverage.
Regarding the $9000, yes the amount increases with family size. A spouse and the number of children increases the amount needed for health care expenses. The goal is to get comparable coverage for everyone regardless of family size.
May 26th, 2006 at 10:00 am
What amounts are you using for different family sizes? single w/child, married no kids, etc. do you get these figures from some source?
May 26th, 2006 at 10:14 am
I’ve had very similar ideas. I beleive that HSA’s and RSA’s are about the only way to pull us out of the mess we have with entitlements. I also agree that we need a flat tax for all other expenses. I prefer a direct consumer sales tax as there are some things that it will do that an income tax cannot do. First it brings in the people who haven’t been paying taxes such as drug dealers, prostitures, illegal aliens, foreign travelers, etc. into our tax paying system, which an income tax does not. Also if you eliminated the corporate tax with the sales tax you would make our bz’s very competitive worldwide as they will not have any embedded income tax in the price of their products. Any products sold in the US would have the sales tax added including foreign products. It would also make the US a haven for foreign businesses to locate.
May 27th, 2006 at 12:36 am
Terry,
The $9000 number is shown on slides 80 and 81 here:
http://nospeedbumps.com/?page_id=22
Original source is here:
http://www.healthsavingsaccount-hsa.com/
I don’t recall where I found the $4000 number for a single person.
The way that I have proposed HSAs to be subsidized, the subsidies do not alter the effective tax rate perceived by workers. The advantage is that everyone has the same perceived marginal tax rate regardless of their income. So while the perceived tax rate is flat, the actual tax collection rate is progressive due the HSA subsidies. The HSA and tax policies are integrated.
I understand the appeal of a sales tax in place of the income tax. However, the US tax revenue collected is so high that I don’t think it is feasible. To eliminate the income tax, including on business, the sales tax rate would be very high. This would invite tax cheating and a black market. It would also depress sales of new products.
Also, with a sales tax, the tax rate is regressive. Lower income workers pay a higher percentage of their income as tax than with an income tax. It will be hard to build a national consensus around this.
I like this aspect you mention: “Any products sold in the US would have the sales tax added including foreign products.”
January 2nd, 2008 at 9:03 pm
Hey this is a great idea!! But who really thinks that anything like this could get off the ground?
I remember watching a State of the Union with President Bush. He’d been trying FOR TWO YEARS to get a REPUBLICAN MAJORITY CONGRESS to allow FOR THE MERE POSSIBILITY of private Social Security Accounts. When he mentioned that his attempts were blocked EVERY SINGLE DEMOCRAT CHEERED AND APPLAUDED!!
Everyone wake up. Congress doesn’t give a crap about us, our retirement or our health. Because how they responded to Bush is how they respond to anyone who will try to take a damn dime out of their Coffers.
Sorry folks, we’re on our own. Good luck.
January 3rd, 2008 at 12:56 am
Chris P,
“But who really thinks that anything like this could get off the ground?”
Yes, these are ideas for another day. But sometimes very large political changes do occur, even if they seem impossible today.
January 28th, 2008 at 11:55 pm
[...] The American health care system needs a much bigger dose of the free market. What I have proposed from the beginning at NoSpeedBumps is that HSAs provide a path to universal health care - but without all of the big-government that everyone assumes. [...]
December 19th, 2008 at 9:21 pm
(I realize I am late to the party by about 3 years but) I LOVE the idea of universal HSA’s. I think they are the way to go, and the plan is interesting, but here is the problem with the flat tax being that low.
Whether we philosophically like it or not, we need higher taxes on the very wealthiest. What happens when we don’t have that is what we are seeing now - bubble baths. In the 1920’s the tax rates lowered, there was a housing bubble and then the country took a bath.
In the 40’s through the early 70’s we had tax rates as high as about 90% and we had the highest peacetime growth that our country has ever seen.
In the 80’s tax rates came down and we had black Monday in 87, in the 90’s it was the internet bubble, and now we had the real estate bubble, followed by the bath, and the short-lived oil bubble, which began as the realestate bubble was bursting but could not sustain itself because of the larger situation.
Why? When tax rates are low on those in the very top percentages, instead of investing more in the business that they own, they look for ways to grow their money more quickly. This creates empty wealth, based on leveraging and other financial instruments that are not creating any new real value - a central characteristic of a bubble.
This is instead of improving a central business that is actually producing something of value, including giving workers more money or security in exchange for loyalty and thus better service and quality, which translates into more sales, AND a more robust economy as more people have more money to go out and buy the goods that they and others are making.
That leads to more profit for the business owners, based on creating value.
Paradoxically then, higher taxes become the engine for growth, not lower taxes.
So have a flat tax, make it progressive, but keep it higher.
December 20th, 2008 at 12:32 am
Robert,
With the proposed Effective Flat Tax, the Collection Tax Rates are actually quite progressive. See the table here: http://nospeedbumps.com/?page_id=78
The rates are progressive because of the HSA subsidies built into the income tax code. The rates are made more progressive by the caps on the RSAs and HSAs.
“Paradoxically then, higher taxes become the engine for growth, not lower taxes.”
Do you have a link to some research on this? I would be interested.
March 28th, 2010 at 9:07 am
Yo Yo super post