Tuesday, April 26, 2011

A Progressive Scale?

Running the numbers for the Medical Savings and Loan is made even more complex because the numbers are based on income and not just medical expenses.

The idea behind the Medical Savings and Loan is that those who can self fund their medical care should pay for their care.

Let's say a person with ten million dollars in life time earnings has five million dollars in health care expenses.

In my opinion, that person should pay, out of pocket, the full five million dollars.

Insurance is regressive. It would have the millionaire pay the same health care premium as a middle class worker. Since the wealthy have better lawyers and demand better care, insurance transfers wealth from the working class to the wealthy class.

This is why the ruling class in both the Republican Party and Democratic Party give unwavering support for insurance.

The Medical Savings and Loan looks differently at the person who makes $500,000 life time earnings. One will see grants kick in after just a few thousand dollars in health care expenses.

The medical savings and loan is like the progressive tax system in that the rich are expected to pay substantially more than the poor.

The Medical Savings and Loan is a free market solution. It is about as close to a free market health care system as one can get. Progressivism proper refers to the progress toward socialism. It is interesting that the anti-market programs for funding health care all focus and power on the ruling elite to the cost of the people at large.

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Running the Numbers

RD claimed to have run the numbers on the formula for the Medical Savings and Loan and found it lacking.

I found his statement odd because I have never published the formula for the Medical Savings and Loan. The current formula consists of three parts: savings accounts, a loan reserve and grants. In early version of the program, I called the grants catastrophic insurance or re-insurance.

I have not published a formula for the amount of money to put in each slot because the formula would be based on real world data, and is likely to change with economic forces ... just as insurance premiums change each year.

It would be fun to sit down with a team of actuaries and examine claims and income data to calculate the formulas. The actuarial analysis needed to gather the information and publish the formula would cost a pretty penny. (Actually one could start a program simply by overfunding the grants and loan components ... any excess put into the grants and loans eventually falls into the savings accounts.)

The first step I would take if I found anyone interested in the concept of the Medical Savings and Loan would be to gather data and start doing serious simulations of different formulas.

Considering that I am a pariah (a non-Mormon living in Utah) I can't procede in the way that I would like. Because I have absolutely no resources I can do nothing more than talk about the logical difference between funding health care with a savings program opposed to funding it with a Ponzi scheme.

Insurance is a theoretically stable ponzi scheme. A ponzi scheme lavishes benefits on the initial investors ... in the long run a Ponzi scheme pays off less than a real investment would have.

As we see with insurance, the first generation policy holders was lavished with benefits that went way beyond the premiums. The second generation of policyholders ends up struggling against massive premium increases each year. The third generation of policyholders is left holding a bag with a flawed product that costs more than the benefit received ... and the only way to maintain the scheme is to mandate participation.

Switching from a savings based paradigm for health care to a pay-go paradigm dramatically reduced the savings rate in the United States. The switch from a savings paradigm for health care to pay-go played a significant role in the reduction of our savings rate and in the massive debt built up by our nation.

Switching from a pay-go mechanism for health care back to a savings based system could help reverse the trend and might help our nation ease out from under its massive debt load.

Now, it is true that I cannot give you good figures on how the Medical Savings and Loan would affect savings without access to good income and medical expense data. Logically, switching from a pay-go to a savings plan would reverse the effect that occurred when we switched from savings based health care to a pay go scheme.

Monday, April 25, 2011

A Freedom Centric Dialog

The worst mistake ever made by America was depending on Conservatives for defending our freedom.

Conservatives are notorious for defending freedom only up to the point that it gives them a political or economic advantage.

Even worse, the primary tool of the conservative is obstructionism … creating the false impression that freedom is somehow on obstructive obstacle to progress.

The reverse is true.

Freedom unbinds the creative spirit of the common man and ushers in prosperity for the community at large.

Utah, supposedly the most Conservative state, was the first to implement the exchanges from Obamacare.

Republicans have a nasty habit of supporting the freedom of the ruling elite to trample on the little people, while ignoring the plight of the little people getting trampled upon.

As long as America depends on obstructionist Conservatives to defend freedom, the most we can hope for is progressive legislation administered by conservative power brokers. In such a world, we will see the vast majority of our children diminish into subsistence while our once great nation turns into a political has been.

The one and only way for us to restore our freedom is to drop the stance of conservative obstructionism and create a dialog to reaffirm liberty.

The liberty envisioned by the Founders of the United States was part of a dialog which combined the best of the classical logic and the Judeo/Christian world view in a discussion about liberty.

Instead of talking about which group dominates the collective (big business or big government), we should engage in a dialog about the nature of individual liberty.

Conservative obstructionists failed to stop the passage of ObamaCare. Republican obstructionists, like those in Utah, bowled over each other in the rush to implement ObamaCare. There is zero chance of restoring our freedom as long as we depend on the conservative obstructionists in the Republican Party to lead the way.

To restore liberty, somebody, somewhere has to engage in an authentic discussion about the nature of liberty.

This game, where a corrupt Left and Right use branded terms from the discussion of freedom in their culture war, is bound to lead us to ruin.

Thursday, April 21, 2011

Risk Profiles

RD brought up the discusion of risk profiles in a recent comment on my post about the difference between medical and auto insurance.

RD spoke quickly and was wrong. He claimed the difference between health and auto insurance was the risk profile. His claim was:

"the primary difference is the distribution within the dataset. Auto insurance costs having a fairly even distribution of costs through its dataset and a comparative marginal worst case cost cap, No insurance will pay to fix a car where the cost of fixing is higher then replacement."

The opposite is true. The distribution of claims with auto insurance is absolutely wild compared to health insurance. There is a large number of people who never have a claim against their auto insurance. A person driving a car through a crowd of pedestrians or causing a multicar pile up can rack up millions of dollars in liability in an instant.

Since everyone needs to spend money to maintain their health, there is less of a deviation in health expenses over one's life than with auto insurance.

There is often a great deal of variance per year throughout a person's life, however, the variance in medical expenses over a person's lifetime is not that great ... especially if we were to adopt preventive medicine.

The whole point of the Medical Savings and Loan is that, when you look at people from a whole life perspective, there is not as much variance in expenses as one would first suspect. When I did this experiment before, I discovered that there was a very nice bell curve with most people's life time health expenses sitting between reasonable figures like $300,000 to $600,000. With guidance, all but a few people could self fund their care.

This is not true of auto insurance where there is a wild difference in expenses. Each year only a fraction of people have claims. A small number of claims reach into the stratosphere.

The primary difference between health and auto liability insurance, as far as public policy is concerned, is that auto liability insurance is driven by the court system. Liability go through the court. If not for insurance, health care would be a matter of private contracts between patients and providers. Buying health insurance invites the court system and government into the care of one's health.

I know this for fact because, when I buy health care from my own pocket, I pay a bill negotiated with the doctor. When I use insurance I file a claim against a pool. Paying a bill is different from filing a legal claim. The first involves direct negotiation. The second is controlled by a court.

When I run a widow with an SUV full of orphans off the road, I am not involved in negotiation. I am involved in a court case. The amount paid gets decided by claims adjusters, appraisers and a judge with greater sympathy to widows and orphans than overweight computer dinks.

There is another substantial difference between health care and auto insurance. Auto insurance is about the liability of a single instance. Health insurance involves the whole series of things we do during our life to maintain our health.

I will write a second post on this matter in the near future.

Tuesday, April 19, 2011

A Simple Consumption Tax

Taxes tend to discourage the thing taxed. An income tax discourages job growth and a capital gains tax discourages capital improvement.

For this reason, there are many people who would like to change America's tax system from an income tax to a consumption tax.

There is a simple way to do this.

This simple plan has the odd name: "The Object Oriented Tax."

I developed this idea while studying object oriented programming. My goal was to apply system engineering techniques to complex systems like tax collection.

This new system taxes an abstract object between income and consumption. As such, the tax allows designers to combine the best of an income tax with the best of a consumption tax.

Because the OOT taxes an abstract object between income and consumption, it is possible to implement the tax with an minimal amount of disruption.

The tax is surprisingly easy to implement.

In its simplest form, a taxpayer would have a savings account and checking account. All income goes into the savings account tax free. The taxpayer must pay a tax to transfer money from the savings to checking (or to cash).

The OOT is essntially a personal consumption tax.

As it a personal tax, one can easily make it progressive. The state could implement a standard deduction by allowing people to transfer a set amount from savings to checking without tax. It is also possible to use a progressive tax rate.

The OOT makes banks the point of taxation.

This makes a lot of sense. The income tax makes employers the point of taxation. Tax compliance is expensive and reduces demand for labor.

The fairtax makes stores and businesses the point of taxation. Stores and small businesses have problems with compliance and collection.

Banks, by their nature, are set up to handle large amounts of money and extremely large numbers of financial transactions.

Because banks are institutions specifically set up to handle financial transactions, collecting taxes at the bank would have significantly lower compliance costs than either the income tax (where taxes are collected at the place of employment) or the fairtax (where taxes are collected at stores).

The OOT also helps protect your privacy. The income tax invites the government into your place of business to scrutinize your employment. The Fairtax invites the government into stores to scrutinize your purchases. The OOT restricts the government to looking at your bank statements.

One intriguing aspect of the OOT is that it encourages people to develop a budget as part of their day to day life. The tax is not collected at the point of consumption, but at the point when a person prepares for consumption.

This process of preparing for consumption is called budgeting. The OOT would encourage large numbers of people in the lower middle class to start budgeting which would move them into the middle class.

Separating the tax collection from employment would encourage people to develop multiple streams of income ... which would improve the lot of many Americans.

The OOT is a little bit more complex than a simple account tax. As mentioned, the system taxes an abstract object between income and consumption. In the example I gave, the abstract object was the transaction between savings and checking.

The OOT assigns to all financial instruments a tax attribute. This attribute has two states: "pre-tax" and "post-tax." While the system is likely to be used in an accounting system, the OOT goes beyond simple accounting allows people to track the taxation on any object of value.

The OOT has many interesting implication for things like capital gains and inheritance taxes.

The OOT would eliminate the current capital gains tax. People could buy and sell stock or other goods without paying tax. However, they would have to pay tax whenever they transferred money from their investment accounts into a spending account for consumption.

BTW: I noted that the OOT is progressive. I would actually design the trigger so that it considers both income and capital assets. A millionaire would have to pay the high tax rate even if the millionaire had a low income.

The OOT also simplifies inheritance tax. When a person dies, the assessor would determine the tax status of all of the items in the estate.

The heirs would inherit things along with their current tax status.

Assets in a pre-tax state would be inherited into pre-tax accounts. Items in a post tax state would be inherited into a post tax account.

For example, lets say a person had a wide screen TV bought with post tax dollars. The heirs would inherit the TV with no taxes. They could sell the TV with no tax penalty.

Let's say the deceased had a farm. The heirs would inherit the farm into a pre-tax state. If the heirs sold the farm, they would pay taxes.

This structure allows for the continuity between generations without a big tax hit.

There would be some complexity with art collections and antiques. Such items were purchased with post tax dollars but had a substantial financial gains in which case the heirs would need to pay a tax on the difference to maintain their post tax status.

I confess that the name "Object Oriented Tax" is awkward. However, this notion of taxing an abstract object between income and consumption allows the government to develop a robust progressive tax that is easy to implement.

Taxing an abstract object between income and consumption allows the government to develop a fair an

Why the Fairtax is Foul

Conservatives are often a fount of bad ideas. One particularly bad idea in the news is a thing called "The Fair Tax." This tax replaces the income tax with a national sales tax.

The goal of the tax is to replace our income tax with a consumption tax (which is a good idea).

The Fairtax would have the sales tax collected at the point of sale. To make the progressive, the government will send checks to people called "prebates."

Both of these things are really bad.

The prebate is bad for several reasons. The first problem is that one has to collect taxes to pay the prebates. If you are going to pay out a hundred billion dollars in prebates, then you must collect an extra hundred billion in taxes ... taxes which distorts the pricing mechanism. The prebate system will create an extra entitlement in a system drowing in entitlements. Finally, this system where the government writes out rebate checks from money taken from businesses re-inforces the notion that government is good and business is bad.

The really big problem with the Fair Tax is that it turns America's small businesses into the tax collectors. Small businesses already have enough problems. Lumping the responsibility of tax collection on their shoulders will break many small businesses.

Collecting payment is the hardest task of any small business. Making small businesses collect taxes along with their payments is untenable.

FairTax.org defends turning small business into tax collectors with the weak jusification:

"80 percent of all retail sales now occur at large retail chains like Wal-Mart. The point is oversight will still reside under the Treasury Department but the government's responsibility will be over a far smaller "universe" of tax collection points making compliance oversight far less costly and far more effective than the current system."

The fact that chains have taken over 80% of retail does not eliminate the fact that the tax adds prohibitive costs to the remaining 20% of small business.

As FairTax points out, the compliance costs for collecting taxes from enormous chains is significantly lower than an small mom-and-pop store. The mom-and-pop store will have to absorb this additional burden and will no longer be able to exist.

The fact that gigantic firms already dominates retail does not justify a tax law that will utterly destroy all other stores and small businesses.

The Fairtax will immediately destroy half or more of the remaining independent small businesses in this nation. The cost of complying with the new law will be three to four times higher for a mom-and-pop store than the beloved Wal-Mart. These stores are already marginal. The Fairtax creates a paradigm where they simply cannot exist.

The sales tax system that currently exist in each state already favors big retailers over small.

It once was possible for Americans to start their own little store. This idea that we will turn small business into the nation's tax collector will destroy this dream.

The Fairtax is correct that transitioning from a income tax to a consumption tax is a possitive direction. There are better ways to do this. (Which will be the next post).

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Friday, April 15, 2011

Trading v. Consumer Economy

Modern America is a consumer economy. We are conditioned to buy cheap stuff then toss it out. I look at the garbage heap surrounding me and figure that the plastic clothes bin and garbage can are only two possessions I own that are likely to survive me. All of my clothes, my rusting car, furniture and electronics will be in the landfill on my passing.

America was not always like this. Traditional America was more of a trading economy. People were engaged in trade ... not just consumption. People bought goods eying both the current utility and long term value of the good.

My parents tell me about how their parents lived in world where businesses would actually take goods in trade for other goods. My mother owns a rocking chair that was made to pay for a month's rent then used by the landloard to pay my grandfather for an odd good.

A chair was actually used as part of commerce.

People trading goods amongst themselves, of course, is an irregular activity. This freedom to trade is something that progressives cannot stand.

FDR and other progressives set forth to stop on the throats of the people with a vision of a world where people were reduced to cogs living as consumers who bought highly regulated products from highly regulated companies.

The progressives created a tax and regulatory structure that is weighted against individuals and businesses that attempt to trade goods.

The local tax code demands a sales tax on all transactions (Utah is around 7%). Federal law requires a 28% capital gains if the price of a product changes in relation to the dollar.

A 1964 silver dime provides a good example of our corrupt system.

In 1964 dimes were still made of silver. People could buy a hamburger for a dime or a full meal for a quarter.

The silver in a dime is currently worth about $3.00 (which is the price of a hamburger). A quarter is worth about $7.50 which is the price of meal at a restaurant.

Despite the fact that a dime did not increase in purchasing power, a person who saved a dime from 1964 and sold it for $3.00 in 2011 is legally required to pay 28% tax on the inflation plus whatever local and state taxes apply.

BTW: If you ever bought or sold collectibles without paying the capital gains tax, you are a tax cheat.

This complex tax structure doesn't just apply to dimes. It applies to all products that have intrinsic value. If you bought a bottle of wine, put it up for a few years then resold it at a higher price, you would owe capital gains tax on the transaction.

There is a strong and growing black market in the United States where people trade goods with paying the apropriate taxes.

What happens is that that the tax code makes it next to impossible to form a vibrant business plan around trading goods.

By taking away the ability of people to trade goods, progressives are systematically reducing Americans to slaves.

If the common man was allowed to legitimately engage in the trade of goods, there would be less waste and less disparity between rich and poor.

Our progressive overlords (Obama included) have engineered a dystopia that reduces the mass of people to poverty and dependency.

Sunday, April 10, 2011

But, What is Right for America?

While watching Book TV, I learned that there's a new book produced by leading conservative think tanks titled "Why ObamaCare is Wrong for America" (buy at Overstock). The book is co-authored by leading scholars from the Galen Institute, The Public Policy Center, The American Enterprise Institute and Heritage Foundation.

The book talks in details about the many faults of ObamaCare and the corrupt process that created one of the worst monstrosity in legislative history.

The authors chimed in on Conservatives ways to force more people to buy insurance.

The book looks interesting and I ordered a copy (fortunately it in paperback & kindle).

I am upset at the direction of the Conservative movements. Yes, ObamaCare numbers among the worst pieces of law ever drafted by big government.

Rather than trying to figure out what is best for America, the Conservative think tanks are unified in criticizing one of the worst health care laws ever conceived to support extremely bad laws.

Rather than harping on the worst forms of health care to justify bad systems, I want to engage in a fundamental discussion about what is the best form of health care.

Such a discussion would not begin with the assumption that a group pool are the best way to fund individual consumption.

Such a debate would notice that using a group pool to fund individual consumption is inherently corrupt.

Such a discussion would discover that if we looked at each person as a whole being, we would find that a system with savings supplemented by grants and loans would do a more effective job at providing care.

All of the questions about pre-existing conditions, portability and regulation that cloud the current debate vanish.

Discussing the fundamentals of health care also shows why insurance leads directly to inequitible society with an untenable gap between rich and poor.

Yes, taking a half million dollars during the lifetime of every worker has the predictible effect of concentrating wealth in the hands of the few people who own banks and insurance companies.

The second people realize that insurance (group funding of individual consumption) is inherently flawed, the debate changes. It explains both the faults of the status quo, the faults of ObamaCare and the faults of socialized medicine.

Were conservatives to ever deviate from their formula of using the worse to justify the bad, we could start a real conversation about substantive free market health care reform.

Insurance is not free market reform. Insurance was created by progressives for the specific purpose of regulating health care costs. Insurance demands government intervention in every single health care transaction. We know this from the terminology. With insurance, a patient does not pay a doctor. A patient files a legal claim. This legal claim is regulated by the local courts.

Every single transaction for medical care is a lawsuit.

The reason for the unreasonable cost of health care in the status quo is that every single transaction is legal claim against a pool.

For the last three years I have been clamoring, to closed ears, to have a real meeting where people discussed real free market reform. I gave my plan the title "The Medical Savings and Loan."

The MS&L uses a whole life analysis of individuals to create a structured savings program. The MS&L supplements savings with loans and grants.

I am buying Why ObamaCare is Wrong for America, but leave open the challenge to conservative think tank to host a discussion about what is right for America. I contend that the system best in keeping with the classical liberal tradition of our nation's founders is a structured savings program like the Medical Savings and Loan.

Until Conservatives are willing to address real free market reform, the best they will be able to do is offer a bad system in place of a worse.

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Friday, April 01, 2011

Health v. Auto Liability Insurance

A disussion about health insurance invariably brings up a comparison with auto insurance which is required by law.

The primary difference between auto and health insurance is that auto insurance is for a liability that one incurs when driving a vehicle. Health insurance pays for personal consumption.

Being involved in an accident automatically involves the legal system. If I ran you down in the crosswalk and you suffer a broken leg; there would be a legal claim to determine your compensation.

You and I will have different ideas about just compensation for a broken leg. I think you'd heal up well if you put your leg on a pillow with an ice pack. You are likely to want a doctor's visit, and might throw extra costs in the mix just for spite.

The legal liability (not the risk) is the driving force behind the requirement of auto insurance.

Auto accidents, by their nature, involve courts.

Health insurance is a means for funding personal consumption. When one buys health insurance, one invites the legal system into personal health insurance. Health insurance works as follows: a person buys into a group pool. In times of need, the policyholder places a claim against the pool. An insurance claim is a legal action defined by the courts.

The big difference between health and auto insurance is that health insurance invites the courts into decisions about personal consumption. Auto insurance, on the other hand, covers liabilities in which courts are already involved.

There are some aspects of health insurance that involve liability. For example, workers' comp covers liabilities of an employer. If you suffer an injury during work, that injury is the legal responsibility of your employer. A restaurant that serves unsafe food is liable for food poisoning. A toy manufacturer is responsible for product liability, etc..

The difference between standard liability insurance for an automobile and health insurance is that liability insurance, by its nature, involves the legal system. Health insurance invites the court system into questions about personal consumption.

As I do not want court involvement in my health care, I have been working on developing a viable alternative to insurance.

Insurance is the proper way to fund liabilities that involve third parties and the courts. The system fails with personal consumption because it invites the courts and government into regulating personal consumption.