Today, Senate Finance Chairman Max Baucus issued a “Call to Action” for Health Care Reform. And it is shockingly honest.
The bombshell in the plan is that it would require every American to purchase health insurance. There would be sliding subsidies for everyone under four times the Federal poverty level ($70,400 for a family of 3), but there would be no exemptions.
The individual mandate is necessary because Baucus is barring insurers from charging higher premiums or denying coverage outright to people with pre-existing conditions. (Today, in the vast majority of states, insurers can shun the sick–or charge them whatever it chooses).
As HealthBeat has explained here, if you insist that insurers must cover everyone, old or young, sick or healthy, at the same price, you must have the individual mandate. Otherwise, many young, healthy people would wait until they became sick to join a pool—safe in the knowledge that an insurer could not charge them more—and expect people who had been paying premiums into that program for years to now pick up their medical bills. If that happened, ultimately only the sick and the elderly would buy insurance—and prices would levitate to a point that virtually no one could afford it.
What Baucus doesn’t mention is that community ratings are likely to hike premiums in many states because suddenly, the very sick will be included in the insurance pool. As Time magazine reported in 1994: In 1993, [when] New York State tried community ratings, “thirty- year-old males watched their premiums soar 170%, according to the Council for Affordable Health Insurance, while men aged 60 enjoyed a 45% cut. The rate hike for 30-year-old women was 82%, and women twice their age saw rates slashed by a quarter.”
This does not mean that we would see similar hikes under Baucus’ plan.
Subsidies would soften the blow, especially for those under the Federal
poverty level. But those who have enjoyed very low premiums based on
good health and relative youth could expect to pay more.
When news of the Baucus plan broke, some observers thought this meant
that we will see universal coverage next year. But in a press
conference, Baucus just told his audience: “It will take time. At least three years. But some features can come in earlier, like Medicaid and Medicare eligibility changes.” (Hat-tip to Ezra Klein for attending the press conference).
That makes sense. In his clear-eyed summary of the problems in our
health care system—and his candid description of the obstacles—Baucus
makes it clear that overhauling the system, and providing healthcare
for all will probably require more than one piece of legislation. As he
puts it, “The solution will demand time and attention to make sure that
we get it right.”
Moreover, he emphasizes his plan “is not intended to be a legislative
proposal…This plan is most certainly a work in progress. But this Call
to Action is intended to encourage constructive input by policymakers,
stakeholders, and health policy thought leaders to move us forward. I
look forward to discussing this plan with President-Elect Obama, with
my colleagues in Congress, and with stakeholders in the health care
system, working collaboratively with all to enact effective health
reform.”
Baucus’ plan is generous. How much will it cost? “Many components
would require an initial investment,” Baucus concedes, “but, over time,
would vastly improve the quality of the health care that Americans
receive and reduce the cost of that health care.
“The policies in this paper are designed so that after ten years
the U.S. would spend no more on health care than is currently
projected, but we would spend those resources more efficiently and
would provide better-quality coverage to all Americans.” If we
wind up spending as much, ten years from now, as is currently
projected, this plan is not putting a brake on health care
inflation—at least not over the short-term. On the other hand, the
proposals, which range from allowing 55-64 year olds to buy-into
Medicare, to providing Medicaid and SCHIP to legal immigrant children
and pregnant women—are excellent. (Today legal immigrants must wait
five-years to become eligible for these programs).
In Part 2, I’ll go into more detail on Baucus’ proposals, the road-blocks he acknowledges, and reactions from others.
If coverage is mandatory, there could be some graduated increase of premiums with age in order to avoid large changes in premiums among age groups.
On the other hand, in principle, people should be putting money aside when they are young in order to pay for (predictably) higher health care costs as they age. This is different from paying for insurance to protect against the cost of a severe illness. Forcing younger people to pay higher premiums in order to subsidize older people seems unfair but would seem less so if the money appeared to be used to pay for their own future expenses, possibly as a (mandatory) contribution to a personal health savings account.
I have yet to read the full statement by Senator Baucus but he has been very good on understanding what we need to do to try and fix the broken healthcare system. However, and I admit I am biased as I am a family physician, what I cannot understand is why Sen Baucus, or anyone for that matter, just doesn’t state what to me is so obvious. We need to commit to doing whatever it takes to change the infrastructure of this country’s healthcare system workforce. We need to force, incent, cajole, or do whatever it takes to get the number of physicians in primary care — family physicians, pediatricians, and general internists — to the 50/50 level that it is everywhere else in the world where healthcare works, and not the 30/70 split that exists here in the US. As they are seeing in Massachusetts, we can pass whatever bills we want and change the sytem in any way we want to, but as long as we don’t figure out how to increase the number of doctors doing primary care, all the changes are doomed to failure. Every time I see something about how to fix the health care system like what Baucus is saying, if I don’t see some serious ideas on how to increase the numbers and pay for primary care doctors, I always feel like standing up and screaming. This really isn’t rocket science. Find ways to increase the number of family doctors and we will cut costs, improve outcomes, increase access, remove disparities of care — in short, we will be moving finally towards fixing the system!
RP
I have yet to read the full statement by Senator Baucus but he has been very good on understanding what we need to do to try and fix the broken healthcare system. However, and I admit I am biased as I am a family physician, what I cannot understand is why Sen Baucus, or anyone for that matter, just doesn’t state what to me is so obvious. We need to commit to doing whatever it takes to change the infrastructure of this country’s healthcare system workforce. We need to force, incent, cajole, or do whatever it takes to get the number of physicians in primary care — family physicians, pediatricians, and general internists — to the 50/50 level that it is everywhere else in the world where healthcare works, and not the 30/70 split that exists here in the US. As they are seeing in Massachusetts, we can pass whatever bills we want and change the sytem in any way we want to, but as long as we don’t figure out how to increase the number of doctors doing primary care, all the changes are doomed to failure. Every time I see something about how to fix the health care system like what Baucus is saying, if I don’t see some serious ideas on how to increase the numbers and pay for primary care doctors, I always feel like standing up and screaming. This really isn’t rocket science. Find ways to increase the number of family doctors and we will cut costs, improve outcomes, increase access, remove disparities of care — in short, we will be moving finally towards fixing the system!
RP
The Baucus plan appears to follow the Massachusetts mandate model which has indeed expanded access to coverage, but to what kind of coverage? Moreover, it is doubtful that the Mass plan, with its layers of bureaucracy, will be able to control costs going forward. Why? because the private insurers and big pharma will insist on their pound of our taxes to feed their shareholder profits. Senator Baucus and his reform team are dancing around the main problem with our US system.
Why can’t we learn from other free market democracies who cover all their people and do it equitably and well?
Let’s pass HR 676–the nonprofit single payer bill now co-sponsored by 94 Reps in Congress. Go to thomas.gov to read details of the bill.
Having universal insurance coverage is not a criteria for finding a doctor, it is that everyone in America can have access to health care. Do people have to suffer because they have a problem with their digestive tract and can’t find a gastroenterologist because the free market doesn’t pay enough for them to do their operations?
When one buys a Ford or GM vehicle, over $1000 of the price tag goes for medical care of Ford and GM employees and retirees. It does impale many other business organizations (including small businesses) around America. If America’s businesses did not have to worry about supplying health care to their employees and retirees, these same businesses could once again compete in a global market.
HR 676 is not the answer, IMO, as currently crafted. It is almost exclusively funded through payroll taxes, which means two things:
(1) Relatively affluent retirees pay virtually nothing toward their coverage;
(2) Additional taxes on payrolls create headwinds with respect to creating jobs, which may not fly well in an economy where it’s becoming clear that the three most important issues are going to be jobs, jobs and jobs.
I’m not necessarily against this kind of universal coverage, but I think the funding mechanism is terrible.
Marc and Robert–
Under Medicare, younger people pay the same percentage of their paycheck into the pool as older people–this may be what Baucus has in mind.
(And for decades, most people have felt Medicare is fair. After all, we all have parents, grandparents . . )
But you are right, today many younger people are opposed to this idea.
So the Democrats might
do some sort of “modified community rating” that gave younger people some sort of a break.
But if they do that, relatively affluent younger people (saying earning over $55,000 as an individual) are likely to have to pay more in taxes to support the subsidies.
However you pay for it,
Baucus plan is generous (in rational ways, I think) and therefore will be expensive.
He says that in 10 years we will be spending as much as we are now forecast to spend on healthcare 10 years hence.
That’s a lot of money.
Robert:
Baucus does call for paying primary care docs more: “The plan strengthens the role of primary care
and chronic care management. Primary care is the keystone of a high-performing health
care system. Increasing the supply and availability of primary care practitioners by
improving the value placed on their work is a necessary step toward meaningful reform.”
But unfortunately, medical students say that it isn’t just the low pay that makes primary care unattractive.
The pace is too hectic, the hours are too long, the working conditions just
aren’t appealing.
We’ve written about this on HealthBeat in the past.
I think we could increase the number of primary care docs in large multi-specialty practices if they are well-paid, have regular hours, and are able to spend, say 30 minutes with each patient.
Nice to see movement on health care.
A necessary corollary of any plan will be the need to cut costs. That means doing away with much of the structure and philosophy of the current non-system.
Here are some things, many under consideration already, that can be done immediately without cost:
1. Require the government and pharmaceutical companies to negotiate prices for patented medications purchased for government programs and beneficiaries. Including Medicaid, Medicare, the Federal Employee program and Tricare this would affect 100 million citizens (1/3 the population of the U.S.) Since we like transparency we should make the negotiated prices public.
2. Enforce the reasonably pricing provisions of Dole-Bayh. Retrieve the taxpayer’s contribution to drug development costs (approximately 20 billion a year to basic medical research) from patent holders and use these proceeds to defray pharmaceutical prices to consumers. This would also require the disclosure of the real development costs of pharmaceuticals.
3. Prohibit direct to consumer (DTC) advertising. In a 30 second ad full disclosure as outlined below is not possible. As a result patients do not fully understand the limits and costs of any given product. Few countries allow such advertising.
4. If we don’t wish to completely prohibit DTC advertising, require full disclosure. This would include mention of the risks of treatment and a summary of proven benefits and competing approaches in clear language that a lay person can understand. The price of the medication, with estimates of monthly and yearly costs as well as a measure of cost effectiveness (cost/unit of additional survival time or other approved measure) must be also be provided to fully inform the consumer.
5. Require clinical studies to include cost data as well as a measure of cost effectiveness (QALY-Quality adjusted life year or other) in the discussion of any phase II, III or IV study reporting positive results.
6. Monitor the FDA approval process to be certain that generics come to market quickly on patent expiration.
7. The Canadian system controls patented drug prices by not allowing marketing unless the drug is priced right. A similar program could be instituted here to decrease our pricing to the level of other industrialized countries.
8. Alternatively, link the length of patents to reasonable pricing. As part of the FDA approval process the proposed price of the new medication would be compared with similar medications already on the market and with the same medication in other countries. The same process that the Canadian patent drug review board uses. If priced a significant amount over the comparator, the patent length would be decreased by some period of time to be determined by the review process–there are many ways such a link could be structured. For unique innovative drugs the cost of development could also be factored into the pricing length of patent equation. Price increases during the duration of the patent would be tied to the rate of inflation. If they exceed that rate the patent length would be proportionally shortened.
http://www.medicynic.com
Tim, Gregory and Harriet–
Thanks for your comments.
Tim– I agree that payroll taxes don’t make sense as the funding mechanism for
healthcare.
This is one reason why I am attracted to Zeke Emmanuel’s proposal, in his book “HealthCare, Guaranteed.” He would fund
healthcare for all with a 10% VAT tax (a sales tax) on all consumer items.
Normally a VAT is regressive, taxing the poor and middle-class most, but not in this case which I explain on a poston his plan here
http://www.healthbeatblog.org/2008/05/a-fresh-look-at.html.
That said, we cannot have a VAT or any new tax in the midst of a deep recession.
This is the problem with trying to get to universal coverage next year, or the year after that. I’m even concerned that we won’t be able to do it in three years unless we are very succesful in fighting the lobbyists and containing health care spending.
It’s just extremely unfortunate that when we finally have a progressive White House we have no money–and are heading into such tough economic times. I agree that, in terms of the economy, jobs, jobs, jobs are going to be a first priority.
Gregory–
Usually, I agree with you, but here I have to say
gastroenterologists are very well paid. The average salary a couple of years ago was $350,000, with docs at the high end reporting $700,000.
Medicaid probably pays low fees for many surgeries.
But someone earning an average of $350,000 could
afford to treat some Medicaid patients for a low fee . . .
As for the automakers– they have had two problems: a) high cost of healthcare and b) they have been making terrible, gas-guzzling cars.
It was apparent to me, back in 2001, that the price of oil would be going up in coming years, and that automakers were crazy to be investing so much in SUVs. (I wrote about this at the time, predicting that, down the road, Americans would rediscover their love affair with smaller cars.)
There were other problems with SUVs– dangerous for the driver; dangerous for drivers around them.. .
During most of my adult lifetime, automakers in other countires have made better, safer, more efficient cars.
I’m very sorry for the auto-makers who are losing their jobs. But the industry has been extremely short-sighted and unimaginative for decades.
Harriette–
First, single payer does not automatically reduce the price of drugs.
Medicare Is single-payer for people over 65. And Medicare still pays far more than it needs to for drugs.
We actually have a law saying that Medicare CAnnot negotiate for discounts.
Passing single-payer would not suddenly revoke that law.
Moreover, a federal court recently ruled that Medicare Cannot refuse to pay for a more expensive drug when a less expensive drug is equally effective.
Single Payer would not overturn that ruling.
Also, you should realize that most developedcountires do Not have Single Payer.
Only the U.K. and Canada have single-payer.
All European countries has some combination of private sector and public sector insurance, and several of them (Sweden, Germany, France, Denmark)
have better outcomes than Canada and the U.K. (and Much better than the U.S.)
That said, I would be perfectly happy to have single payer (if it contained costs, refusing to cover marginally effective, sometimes ineffective and unnecessary over-priced
treatments.)
But it’s not going to pass Congress because the majority of Americans don’t want it. 85% of Americans have employer-based insurance. They don’t want to be forced to give that up for an unknown government plan.
This is simply a fact.
(And why would they? In many cases their employer pays 100% of the cost; in other cases, he pays 75% of the cost. They know that under single-payer, they would have to pay more than zero–probably through taxes.)
We live in a country where the majority rules. So, for now, we are not going to have single payer.
But if people are given an option between s gov’t plan and private insurance (as they would be under Baucus’ plan and under Obama’s) then over time, I suspect large numbers would
choose the govt plan.
I hope this isn’t a duplicate post.
Reply to Tim: Surely the well-off retiree contribution to a single payer plan can be resolved. My understanding is that 95 percent of individuals and employers will pay less under the HR 676 model. Consult the bill itself or visit http://www.pnhp.org for analysis.
As to creating jobs, see the following web site to compare the cost of doing business in Ontario, Canada as opposed to US regions. http://www.greatertoronto.org/investing_demo_08.htm
Imagine a world where an entrepreneur can start a new business without worrying about losing health care for his/her family. A world where every employee is covered, a world where health care comes off the management-union bargaining table. The Baucus plan sounds pretty complicated to me–Simplify! Simplify!
I’m using up my share of blog space today, Maggie. I know that the law prohibiting negotiation on drug prices needs to be overturned. We got ourselves into a fine mess with that one.
On the feasibility argument–It is precisely because we are in a recession that we need to enact single payer. HR 676 will require no new money. Unless–pardon my sick joke–the insurance companies morph into banks and demand a bailout!
Harriet–
Not a sick joke–See the Health Wonk Reivew post that we’ll put up in a half hour.
I’m afraid that single payer, like any plan for universal coverage, will cost more money.
Unfortunately, much as I admire many who lead PNHP, their numbers on administrative savings are not true. And many within the organization know this. A state director of PNHP admitted this to me about a year ago.
My guess is that whoever first put out those numbers didn’t understand healthcare economics very well, and after a while, they had repeated the numbers so often that they were stuck with them.
This, unfortunatley, has undermined PNHP’s credibility–and it’s “my way or the highway” insistence on Single-Payer as the Only Way has turned off a great many doctors.
As I’ve said many, many times, I would be happy with single payer. But I would also be happy with what all of Europe has–a hybrid. And the fact is that the majority of Americans do Not Want Single Payer.
All of the polls show this. What you want or I want or PNHP want isn’t the point.
This mnay be disappointing, but this
a democracy.
Harriet–
Overturning that federal court case will, I’m afraid be very very hard.
If Medicare appeals it (and this is not certain) and goes to the Supreme Court, how do you think the court will rule?
Consider who is on the court.
They will rule in favor of Big Pharma– I would bet money on it.
And then what recourse do you have?
I’m surprised that ruling didn’t get more attention.
It underlines how the court could undermine health reform–and other progressive efforts–much as the Court did its best to undermine FDR’s New Deal, even while he was building it.
The ruling also underlines how, if you only have single-payer healthcare, and the wrong people are voted into power . . . you might really wish you had a private sector alternative.
Would you really have wanted Single Payer with
George Bush appointing the commission who ran it for the last 8 years? Think of
Katrina.
Our elected leaders are not always more enlightened than your average for-profit CEO.
I fail to understand why we are going to re-invent the wheel for 85% of the population (people who already have coverage).
Of the 15% uninsured, a large portion of them are eligible for a government funded program. They either won’t sign up, don’t know they are eligible, or don’t know how to sign up for the coverage. Only a small percentage of that group is truly considered ‘uninsurable’.
Making coverage mandatory is not the answer (I question whether or not it is constitutional). Everyone has a family member with the ‘can’t tell me how to live’ attitude toward everything in life.
If the cost of healthcare is the problem – let us fix that issue and not muddy the water with ‘coverage for all’. The various proposals being brought up now are only going to fix symptoms – not cure the disease.
Until we as Americans are willing to wait a day or two (or a week) for that test, get up off the sofa and get some (gasp!) exercise instead of popping a pill or two, costs are going to continue to rise.
If I may quote Pogo, “I have met the enemy and it is us.”
“… payroll taxes don’t make sense as the funding mechanism for
healthcare.”
Maggie,
You consistently comment very positively about both the French and German healthcare systems. Both are financed primarily by payroll taxes – 13% in France and 14.5% in Germany with an upper limit on the wages to which the payroll tax applies. Even in the U.S., we have always financed Medicare Part A (hospital benefits) with payroll taxes. As I’ve commented before, payroll taxes have the virtue of clearly informing the public about how much their healthcare system is costing each of them individually. If payroll tax financing is good enough for the French and Germans and their culture of solidarity, why isn’t it good enough for us? I do think that we will never get rid of the tax preference currently afforded to employer provided health insurance unless and until we transition to taxpayer financing. I’ve expressed my concerns about the Value Added Tax as Emanuel proposed it before, and I don’t think progressive income taxes are the way to go either.
Barry–
Most European countries have some form of VAT to capture revenues from high-spending retirees (and other high spenders).
We need more variety in our taxes for them to be fully progressive.
That said, in coming years some high-spending upper-middle-class retirees will be paying high income taxes because they will be taxed on every penny they take out of tax-sheltered accounts . . .
On the other hand, most wealthy (upper-class) people have substantial savings that is not in a tax-sheltered account, and so they could pay no or very low income taxes while spending, say $800,000 a year. Should they then get a free ride while younger workers pay for their healthcare through income taxes?
Ultimately, I think we will have a VAT in this country as well as higher inheritance taxes.
Too much money is concentrated at the top of the income/wealth ladder–far, far more concentration than in the 1950s and 1960s–and this is bad for the country both politically (too much power concentrated in fewer than 1000 families) and economically (too much concentrated wealth chasing too few things leading to asset inflation) and socially (too little solidiarity between classes that live in completely seprate worlds.)
The European model, where you don’t have the extremes of wealth and poverty, and the vast majority of people are middle-class to upper-middle class does, I think, create a much more solid base for a society and an economy.
Maggie,
I think we will ultimately get a Value Added Tax in the U.S., but I don’t think it should be the primary vehicle to finance health insurance. I think a highly visible and transparent payroll tax is the best replacement mechanism for providing health insurance for the people who currently get their health insurance through an employer. This is the approach the French and Germans both use. For the unemployed, their children, and pre-Medicare eligible retirees, VAT financing might be OK.
I’m not all that interested in using a VAT to capture revenue from wealthy retirees if they are spending money from savings and investments from income that has already been taxed when the income was originally earned, as interest and dividend income was earned, and as capital gains taxes were paid when stocks were sold (at a profit). I AM interested in capturing revenue from millions of people who currently work in the underground economy and don’t pay taxes at all (including payroll taxes) as well as from those small business owners who don’t declare a significant portion of their income. I see it all around me. If your income doesn’t show up on a W-2 form, the opportunity to cheat is huge, and millions of people take advantage of that opportunity, at least to some extent.
As for income and wealth inequality, the recent stock market crash, which disproportionately impacts the wealthy who own most of the stocks, flattened the wealth distribution curve considerably. Of course, the crash also eroded the value of middle class 401-K and 403-B plans as well as both corporate and public sector defined benefit pension plans. With the unemployment rate likely to possibly approach the double digit level last reached in 1982, the middle class will suffer plenty of pain. I want to see prosperity widely shared too, but the middle class wage squeeze that you refer to is largely driven by the rapidly rising cost of health insurance. If the value of health insurance benefits were properly included in the analysis, people would see that total compensation growth has considerably outpaced wages alone in recent years.
Barry–
If you look at total compensation for all employees, you will find that the highest paid employest also have the richest health benefits–and pay less toward the premium. (in 15% of all caes, employers pay 100% of “better-paid employees”
preimums.
Exeuctives are also more likely to have employer sponsored insurance in retirement.
So the spiraling cost of health care has only further widened the gap between the middle class and the upper classes.
I agree that a VAT could capture wealth that is never taxed in the underground economy.
When it comes to wealthy retirees spending, you are right that the money was taxed. But insofar as much of their income is passive (capital gains) it was not taxed at the same rate as earned income.
Finally, I’m not sure how much the current market crash has narrowed the gaps between the wealthy, the upper middle class and the middle class.
Traditionally, the wealthy have more of their money in bonds that they hold to maturity. Of course interest rates have been so low, that they haven’t been making much on low-risk bonds–but they are not losing money either.
Moreover, the wealthy tend to have shrewder financial advisers. All of the financial newsletters that I read were warning about this crash early last spring. (I get these normally very expensive newsletters not because I’m wealthy but beause the people who write them are sources and friend.
People reading these newsletters began taking profits in the spring and early summer, then began selling losers, building up cash so that when this market does finally bottom (in two years, maybe?) they
will have cash to go back in.
I’m not saying people who read newsletters like these liquidated everything–though I know one wealthy person who did just that last March– but they definitely went heavily into cash.
The average 401-k investor, on the otoher hand, probably did not see this coming.
And the 50% of the country that doesn’t own stocks will take the biggest hit–in terms of unemployment, mortgage foreclosures, etc.
So rather than leveling the
Barry–
If you look at total compensation for all employees, you will find that the highest paid employest also have the richest health benefits–and pay less toward the premium. (in 15% of all caes, employers pay 100% of “better-paid employees”
preimums.
Exeuctives are also more likely to have employer sponsored insurance in retirement.
So the spiraling cost of health care has only further widened the gap between the middle class and the upper classes.
I agree that a VAT could capture wealth that is never taxed in the underground economy.
When it comes to wealthy retirees spending, you are right that the money was taxed. But insofar as much of their income is passive (capital gains) it was not taxed at the same rate as earned income.
Finally, I’m not sure how much the current market crash has narrowed the gaps between the wealthy, the upper middle class and the middle class.
Traditionally, the wealthy have more of their money in bonds that they hold to maturity. Of course interest rates have been so low, that they haven’t been making much on low-risk bonds–but they are not losing money either.
Moreover, the wealthy tend to have shrewder financial advisers. All of the financial newsletters that I read were warning about this crash early last spring. (I get these normally very expensive newsletters not because I’m wealthy but beause the people who write them are sources and friend.
People reading these newsletters began taking profits in the spring and early summer, then began selling losers, building up cash so that when this market does finally bottom (in two years, maybe?) they
will have cash to go back in.
I’m not saying people who read newsletters like these liquidated everything–though I know one wealthy person who did just that last March– but they definitely went heavily into cash.
The average 401-k investor, on the otoher hand, probably did not see this coming.
And the 50% of the country that doesn’t own stocks will take the biggest hit–in terms of unemployment, mortgage foreclosures, etc.
So rather than leveling the
Maggie,
You might want to check with your friends and sources in the private wealth management business about how much of a decline in account value their clients with $5 million or more to invest have experienced. Just to take two highly visible examples, Berkshire Hathaway closed on Friday approximately 33% below its 12 month high while Microsoft closed 45% below its high. I don’t think either Warren Buffett or Bill Gates liquidated much, if any, of their massive holdings. While both remain incredibly wealthy, their net worth took a significant hit, at least on paper.
For those who were shrewd enough to switch a lot of equities into cash before the crash, if the selling was outside of a 401-K, IRA, or family foundation, there are significant capital gains taxes to pay including at the state level. In NJ, for example, the maximum income tax rate (above $500K) is 8.97% and capital gains are treated the same as ordinary income. In other high tax states like NY, CA, IL and MA, income tax rates are high and add materially to the federal tax burden. At the same time, investors know that upon death, heirs receive a step up in basis to the then current market value. So, for people who intend to donate much of their wealth to charity, both the capital gains tax and the estate tax can be avoided if the assets remain unsold.
Senior executives, especially CEO’s, often have a large percentage of their net worth invested in the stock of their companies deliberately to demonstrate alignment of interest with shareholders. Indeed, many companies have stock ownership guidelines for senior executives which usually require the CEO to own at least 3 to 5 times his or her base salary in company stock. On Wall Street, neither Jimmy Cayne, former CEO of Bear Stearns, or Richard Fuld, former CEO of Lehman Brothers sold much if any stock before their firms imploded. Lehman was in business for 158 years and Bear Stearns for 83 years before going broke this year. I’ve heard numerous smart people who have been in the investment business for decades and been incredibly successful say that’s what is happening today are outside the range of their life experience.
Finally, for those who are wealthy but have most of their assets in commercial real estate instead of stocks, those values are getting hit hard as well. Just look at the recent performance of most Real Estate Investment Trusts. Even conservative real estate investors usually finance 50% of their investment with debt. A 25% move up in capitalization rates from, say, 6% to 7.5% with no change in net operating income will reduce the net equity value by 50% if the asset has a loan equal to 50% of the original value.
The bottom line is that when the figures for 2008 are pulled together, I would bet a lot of money that the percentage of the nation’s wealth controlled by the top 1%, 5%, 10% or 20% of the population will be materially lower than it was for the last five years or so. Since unemployment will increase sharply as the recession plays out, the flattening of the wealth distribution curve will not be especially good news for the middle class.