Denis Kleinfeld comments on the potential pitfalls facing the US in light of the recent supreme court ruling on Obamacare and suggests the shockwaves may be felt elsewhere around the globe.
The importance of the impact of Obamacare on the United States is simple to understand. If the United States economy and consequent social fabric fails because it has finally become so overburdened politically, socially, and economically, then the rest of the global economic community, and its civil stability, will also fall. Obamacare is an experiment in governance whose severity of risk is nearly unimaginable.
What is the condition of the world's economy?
The BRIC superstar economies are in crisis themselves. Russia has a Czar for government and an economy which looks more like a feudal estate. The European Union is, like a steam engine running out of steam, slowing and may just unexpectedly stop. It is difficult and politically painful to slow the EU welfare state enough to reverse course, and embrace a free-market economy. The UK is lost.
The unappreciated threat to the world is Japan. It is the global sleeping economic time bomb that has not garnered much news coverage. South America is, well, as you would expect South America to be. The politically connected upper economic classes prosper, the peasants remain peasants, while drug cartels wield enormous influence.
The Middle-East is being taken over by anti-west religious forces. When the United States becomes energy independent there will be economic repercussions. Indonesia, Malaysia, and all the "Stans" are in much the same position politically and economically. Iran is currently the most dangerous state in the world.
Africa is a big continent with an incredible depth of resources. The North African states are in the same danger of economic collapse similar to other religiously dominated countries.
What countries seem to be doing well economically? I like the economies of Israel, New Zealand, Australia, Tasmania and Canada too. They are all democratic countries, a culture of personal liberty, an appreciation for individual success, and intolerance to the anti-west forces that are growing if not dominating in many other parts of the world.
What are the conditions in the United States?
The United States today is no longer in any position to save the other economies. It is like somebody drowning and only the will to survive keeps him from going under. Obamacare, however, is essentially adding an enormous anchor of costs to this situation instead of a life preserver.
The United States has been a victim of incredibly poor governance for a very long time. The roots of the current economic crisis can be traced to President Wilson who, among numerous other grievous policies, was behind both the establishment of the income tax system (1913) and the Federal Reserve (1914). Both of which the signers of the Constitution specifically did not want.
The United States has reached a point which is widely described as the "Fiscal Cliff." Any more spending or a drop in tax revenues and, as they say the economy falls off the cliff. Virtually 100 per cent of projected tax revenues of some three trillion US dollars, are already committed to being spent by the government while requiring borrowing ever more to meet ever increasing governmental expenditures. The government is currently, to be kind, disconnected from any kind of economic reality.
Programs and other governmental outlays will require the federal government to borrow some 40 per cent of its total spending to cover the annual deficit for just next year. The debt of US$15 trillion is now equal to nearly a quarter of the US GDP. Shortly it may not be possible to raise enough money from tax revenues or borrowings to pay for all the promises made by the government to the voters. The smallest rise in interest rates or slow down of tax revenues will cause a fiscal disaster in very short order.
The vastness of the federal governments control over society can be understood by the mind-numbering proliferation of spending programs that impact every person from cradle to grave. When it comes to income, gift, and estate tax, even death does not stop the government.
The official compilation of all federal aid or subsidies is the Catalogue of Domestic Assistance. The publication lists all the federal aid, subsidies, grants, loans, insurance, scholarships and a whole host of other types of benefits. It is approximately 2300 pages long and contains over 1800 programs. Every single one of them generates for Congress constituent votes or campaign contributions or both, as well as bigger bureaucracies.
Federal law requires the Congress produce a budget every year. In the three years Obama has been President, there has been no budget passed. The latest proposed budget that Obama sent to Congress was defeated in the Senate by 99-0 and in the House of Representatives by 414-0. Not a single Democrat or Republican voted in favour of the budget as submitted by Obama.
Basically, the United States has no economic leadership and hasn't had any for a long time. Politics trumps all other considerations, especially in an election year. With governmental spending out of control, borrowing as if the debt created will never have to be repaid, the Federal Reserve and the Treasury creating money out of thin air, and the major spending welfare programs being nothing more than Ponzi schemes, to name but a few, explains why the United States finds itself at the edge of a Fiscal Cliff.
The Fiscal Cliff is now unavoidable as it describes the likely catastrophe that the United States faces in 2013. That’s when income and estate tax rates are by law increasing dramatically, spending programs automatically increase, borrowing to cover the spending deficit will increase (with additional interest adding to the deficit), and a dramatic increase in the ability by which the President has unfettered rule over the American economy as well as the personal liberties of every person in the United States Congress has delegated its authority away and is now almost irrelevant in the operation of the government.
The economy is not headed to a double dip recession since it still has not come out of recession in the first place. More Americans are effectively unemployed than ever. Poverty has grown. Virtually 50 per cent of Americans do not pay income tax at all. The top one per cent of taxpayers pay 37 per cent of all income taxes. Double of what it was not too long ago. It is weird that the politicians claim in their campaign strategies that their voting supporters are being subject to the oppression of tax injustice when those voters are not even paying any tax.
The Obama tax rate increases (the flip side of the so-called Bush tax cuts that brought the US out of the Clinton recession) that will become effective in 2013 can be understood by a simple comparison of tax rates. The capital gain rate will go from 15 per cent to 39.6 per cent plus the 3.8 per cent Obamacare tax resulting in a 43.4 per cent tax rate. Obviously, those with investable money will restructure to avoid incurring punishing taxation. As observed by noted economist Art Laffer of the Laffer Curve fame, as marginal tax rates go up, tax revenue goes down.
Even more troublesome is that in order to enforce this tax and healthcare system, the individual liberties of the taxpayers will be diminished or even sacrificed. Any form of privacy will disappear. Everybody will be tracked, videoed, photographed, finger printed, and subject to questioning all on the pretext of cracking down on tax evaders for the public good. Any movement of money will be viewed as a money laundering transaction until the taxpayer proves to some bureaucrat that the transaction is fully taxed even if the activity is criminal.
What then is Obamacare?
Perhaps it can be understood in the following terms. The Patient Protection and Affordable Care Act is commonly now known as Obamacare. It was passed because the Democrats controlled the House of Representatives, the Senate, and the Presidency. It took a technical legislative manipulation, which violated any form of comity and parliamentary courtesy that the Congress has always followed in passing legislation.
Even then, a significant number of Democrats would not have voted in favour of Obamacare except for backroom deals, bribes, political arm twisting, and extreme political coercion. It was an obscene exercise of raw political power. The enactment of Obamacare was an historic moment in American history and in the worst possible way.
Of all the Democrats who voted for Obamacare, there was not a single member of Congress who had read it. Neither did the President. Then Speaker of the House Nancy Pelosi stated (and you can Google the video to hear it yourself) "We have to pass the bill so that you can find out what is in it."
What was passed was a 2700 page law, consisting of an enormous amount of cross references, containing some 500,000 words. It creates some 123 new agencies and commissions--bureaucracies---all of which have the power to issue regulations that will have the force of law. There are 23 new taxes. Obamacare, however, doesn't have one word about the delivery of medical services.
The entire enforcement and administration of this so-called health care law is under the Internal Revenue Service. The IRS is already overburdened, undermanned, and under-budgeted. Its computer system can't be programmed, even if it had the vast capacity required until after all the regulations have been promulgated and, of course, the forms and instructions have been drafted.
Obamacare will require the hiring of some 16,000 new IRS agents but does not have any mention of hiring 16,000 new doctors. With anything as complex as Obamacare it should be expected that it will take a long time to adequately train the new agents, assuming that qualified persons can be found to begin with.
As the entire health care system will be administered by the IRS, the information collected will be needed by yet an unknown number of government agencies and Congressional oversight committees. Now, not only will all of a taxpayer’s financial records be accessible to the vast bureaucracy of federal and state government, but also everybody’s medical and psychological records as well.
It is the goal of Obamacare to provide health insurance coverage for the people under Medicare and Medicaid plus an additional 43 million people. The Obama Administration, and Democrats in Congress, claim that Obamacare can do so while controlling costs and even reducing the share of healthcare costs as a percentage of GDP. They tout the amount of savings that will result. Governmental spending before Obamacare is 24 per cent of GDP so how will they reduce spending when the number of persons and their medical needs will be going dramatically up?
The Patient Protection and Affordable Care Act --Obamacare--is absolutely incomprehensible except for one part in particular. On page 114 of the Act Congress and the Administration exempt themselves from its provisions. It leaves one to wonder. If Obamacare is good for all Americans then why isn't it good enough for Congress, the President and the rest of his Administration?
There are provisions that represent complete uncertainty. The Independent Payment Advisory Board is among, if not the, most scary part of the law. The IPAB consists of 15 appointed "experts" who will restrain Medicare spending. Medicare is the government's health insurance plan essentially intended for those 65 and over. Where spending on healthcare exceeds certain targets, then Obamacare requires that the IPAB issue "legislative proposals" to reduce future spending. What that means is that medical services will be rationed.
Obamacare requires that the Secretary of Health and Human Services to implement the proposals. The current Secretary's views are, to understate matters, controversial. In reality, the "proposals" are not proposals at all, but law. Obamacare requires that for Congress to override an IPAB proposal that will require a majority vote in the House of Representatives, a three fifths majority vote in the Senate, and the President's signature.
On the flip side, if eight or more members of Congress propose a bill to repeal, then all that is needed to block it is a majority of either chamber or one-third of either chamber or the President's signature. Given Congress' extraordinary reluctance to do anything except campaign for re-election, it is not likely that any change would come out of Congress in any event.
Prohibitions against the IPAB on raising taxes or rationing health care (caustically sometimes referred to as "death panels") are, on examination, simply unenforceable and essentially non-existent. The truth is that the IPAB, those 15 politically appointed bureaucrats, will have the absolute power to raise taxes, spend money, place conditions of federal money given to the states, and exercise many of the powers that the Constitution says may only be exercised by Congress. If Congress fails to repeal IPAB in 2017, then in 2020 Congress is prohibited from exercising any power to control these "super-legislators."
What is the impact of Obamacare on the United States?
The fact of life is that no matter how horrific the debt crisis and Fiscal Cliff are to the United States, the impact of Obamacare only exacerbates the repercussions. Costs are growing at the rate of 1.5 times the rate of growth of the GDP. At close to a quarter of the US economy, health care costs are projected to exceed the entire federal budget within 20 years. There will be no money for social security, defense, or any other spending by the federal government.
The idea that raising tax rates will raise tax revenues is ludicrous. The idea that government can provide health care to 43 million presently uninsured while lowering spending is absurd. Currently it is estimated that as much as a third of all government spending for health care is lost to fraud, waste, mismanagement, and diversion to other programs. Obamacare does not address this.
While the demand for more health services will increase if for no other reason than the demographics of the United States show a dramatic rise in people over the age of 65. Currently, the majority of all health care costs are expended for people in the last six months of their lives.
At the same time as the federal government gains full control of the medical economy, the number of doctors currently and in the future will decline. About a third of the doctors in the United States are over the age of 55. They are ready to retire and there are not enough doctors in training to replace them. Becoming a doctor, with all the exposure to liability, with increasing financial disincentives, and inability to treat patients freely but only with permission of non-medical government employees, is not an enticing prospect to America's best and brightest.
The effects, benefits and detriments of government financing of medical expenses and setting what medical services can or cannot be provided to patients is already demonstrated in Medicare and Medicaid. Medicare is the program that covers people over the age of 65. Medicaid is a program provided by the states with some money from the federal government that covers the poor, disabled and others who do not qualify for Medicare.
Passed in 1965 as part of President Johnson's "Great Society", these two programs were the first great assault against doctors and their patients. While it started as a modest supplemental program, both have morphed into a drain on the economy that is so ominous that the cost of health insurance is a dominating economic factor, for example, in deciding whether to have employees or not.
If employers stop hiring because the cost of providing government mandated healthcare, certainly employment will not be expanding. Without employment in the private sector there is no productivity and hence no growing economy.
Obamacare can be viewed as the strangulation of the medical profession. The doctor with all his or her ability to observe, evaluate, diagnose, act, and cure will become merely a cog in the wheel of some government operation. I recall reading a pamphlet which observed that doctors can either take their place in the system or face reprisals.
Further, the hostility caused by Obamacare is not expected to decline. In addition to all the victims of this forced labour program who are currently fighting to repeal Obamacare, there are others who viciously fight for even more government medical programs as well, Medical bureaucrats, public employee unions, lobbyists, legislators, and malpractice lawyers to name but a few. All get unearned benefits, money, jobs, fame and or power by being parasites on the body of the medical profession.
Obamacare provides the means to end free-market capitalism in the United States and concomitantly whatever remains of it in the industrial world. A free-market does not mean a free-for-all market. However, the effects of unyielding and draconian governmental control and regulation of a dominate part of both the economy and the social fabric of any country has always, without exception, lead to the destruction of the state. If this happens in the United States, it can reasonably be predicted that similar effects will be felt throughout the globalised world.
All is not to be doom and gloom, forlorn and hopeless. The reality is that Obamacare is so overreaching that it likely can never be implemented. Massive amounts of the regulations will not be understood nor will they be enforced. The backlash from the productive business community, representing both votes and campaign contributions, likely will be overwhelming to politicians in Washington, D.C. and every state capital. If nothing else, the agency responsible for enforcement and administration, the IRS, will also be overwhelmed. They will be victims of Congress as well as everyone else.
What can be concluded from all this?
The economy of the United States is estimated to be over US$15 trillion. It is still the largest manufacturing country in the world. It stands alone in being a country whose founders were educated men who believed in personal accountability, personal independence, and personal freedom. The United States began as a nation that did not like taxes or government interference. The United States has been successful because entrepreneurs and risk takers, since its creation, have been encouraged and their successes rewarded.
The United States lost its bearings around 1913 under President Wilson. It has suffered through nearly 100 years of bankrupt politics, nefarious policies and legislation, and corrupt politicians. The resulting problems created have affected every part of its society. With that said, Obamacare may well be the big spark that is needed for another revolution, without violence to be sure, to have far less government and regain the principles on which the United States and its people have achieved success.
Denis Kleinfeld is highly regarded as a lawyer, teacher and author. His private legal practice, Kleinfeld Legal Advisors, is located in North Miami Beach Florida. He is an Adjunct Professor at the LLM Wealth and Risk Management Program, Texas A & M School of Law. His private practice focuses on strategy planning of domestic and international tax, legal, financial, matters involving the wealth and risk management for private clients and private businesses. He is co-author of the two-volume treatise, “Practical International Tax Planning,” 4th Ed. published by Practicing Law Institute. He is the contributing author on Foreign Trusts published in “Administration of Trusts in Florida” by The Florida Bar and authored chapters for the American Bar Association’s in “Asset Protection Strategies: Wealth Preservation Planning with Domestic and Offshore Entities Vols. I and II.” He is a contributing author to the “LexisNexis Guide to FATCA”.