Looks like Democrats’ gift horse on Medicare, if it is anything at all which is far from a given, is going to be “means testing”:

Rep. Emanuel Cleaver (D-Mo.) on Friday proposed means testing Medicare benefits as a way to reduce the deficit, an indication that Democrats may be warming to the idea as a way to compromise with Republicans on the so-called fiscal cliff.

Cleaver, the influential chairman of the Congressional Black Caucus, suggested Friday that more aggressive means testing would be a good alternative to cutting program benefits for seniors.

“I think most rational people, including Democrats, agree we have to make some cuts and deal with Medicare,” Cleaver said on MSNBC’s Morning Joe.

“Let’s have some means testing because I don’t think that cutting benefits at this time is going to go over well. We can do means testing and reduce the payments [to the wealthy],” Cleaver said.

As of late November, Obama was non-commital on means testing.  Dick Durbin and Max Baucus have come out in favor of means testing.

By no means is means testing a purely Democratic concept.  John Boehner is for it and it was part of his counter-offer to Obama on the fiscal cliff.  Means testing is part of various premium support proposals proposed by Republicans.

But it’s just the type of hidden implicit tax which reduces the incentive for people to work more, a concept we have discussed many times as the implicit marginal rate. 

That implicit marginal rate makes it economically irrational for people making $30,000 per year to increase their earned income to $50,000, because for every dollar they earn they lose more than one dollar in government benefits through direct payments and tax breaks.

If the test is set for the truly rich (way,way above Obama’s $250,000 threshold) then too few people will be affected to make much difference on total Medicare costs.  If you drop the threshold to Obama’s definition of rich, you are hitting professionals and small businesses, who already appear headed for higher marginal rates and/or caps on deductions which will push their implicit marginal rates through the roof. 

Even then, to make a big difference in total cost, you have to move beyond the hated top 2%.

If means testing turns into an asset test, it punishes savers over spenders.  This is a concept any parent applying for college financial aid understands.  Parents who have no savings because they spent everything and lived the high life get help, while parents of similar income history who saved pay full freight and see their savings dwindled without the “benefit” of those years of big living.

Means testing sounds good in theory, but it’s a gift horse which deserves a check-up.

It’s bipartisan, and it doesn’t address the heart of the problem.  Sounds like a Washington, D.C., plan.

 
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