Half of Police Homicides are Justified – A Data Analysis

Analysis of all 2019 US police homicides indicates that half are not justified – over 500 individuals per year die unnecessarily at the hands of police.

In 2019, police in the United States killed 1,099 people – and US police are tracking toward 1150 for all of 2020 [1]. While there is no uniform government database for police homicides in the United States, non-profit efforts like Mapping Police Violence have emerged to track the issue. While great work has been done collecting data, I’ve seen no analysis as to whether the homicides are justified. At one extreme, police unions argue that the police are always right – they believe that police homicides have a nearly 100% justified rate. BLM protesters and others argue the opposite – but where does the truth lie? If all police violence were justified, then there’s no reason for concern. As hundreds of videos and photos now show, it appears that the fraction is much lower – necessitating this analysis.

I analyzed fifty 2019 police homicides by hand, reading media reports, reviewing video evidence, and reading police reports. All 1,099 police homicides in 2019 were then analyzed using an automated approach – see the spreadsheet at bottom for the full details [2]. I used calendar year 2019 data, and manually scored 50 homicides using a list of rules as follows:

Rules Used in Manual Scoring: (51% of police homicides determined to be justified using these rules)

  1. Was the deceased provably (video, non-police witnesses) attacking officers or a victim with a firearm? If so, set to 100% justified
  2. Did the deceased kill anyone else prior to or during police intervention?
    If so, set to 100% to justified
  3. Was the deceased armed with a firearm or knife? If so, add 25% to the probability. (Cars, tools, and other implements are not counted here)
  4. According to the police, was the deceased threatening the police or a victim with a weapon? Is so, add 25% to the probability.
  5. According to non-police witnesses or footage, was the deceased threatening the police or a victim with a weapon? If so, add 25% to the probability
  6. Was the deceased shot in the back, while running away, or while driving away? If so, set the probability to 0%. (Shooting at drivers in cars has been proven to be extremely dangerous to the public and to officers, and is outlawed in many countries)

For the automated data analysis, I used only data available within the Mapping Police Violence spreadsheet.

Rules Used in Automated Scoring: (54% of police homicides determined to be justified using these rules, with all data per police reports)

  1. Was the deceased armed in any fashion? If so, add 25% to the probability.
  2. Was the alleged weapon a firearm? If so, add 25% to the probability.
  3. Was the deceased attacking the police or others at the moment they used lethal force? If so, add 25% to the probability.
  4. Was the deceased holding their ground and not fleeing? If so, add 25% to the probability.
  5. Was the deceased fleeing at the moment the police used lethal force, whether by car, foot, or other means? If so, subtract 25% from the probability.
  6. Did the deceased exhibit symptoms of mental illness? If so, subtract 25% from the probability.

Both analyses show that roughly half of all police homicides were found to be justified. When reading through and scoring individual homicides, I noted a wide range of cases ranging from truly heroic action to absurd and ridiculous [3]:

  • Heroic: Killing active assailants engaged in firing on officers or the public
  • Dubious: Shooting suspects in the back or in a car while they were trying to run away or drive away, even when they posed no threat
  • Absurd: A mentally ill person called 911 too many times, resulting in 911 dispatching officers to arrest him for excess calling, leading to his death unarmed and in his own home, after struggling with police

If half of all police homicides are not justified, then police are responsible for over 500 preventable deaths per year. This result cries out for change, even before potential racial inequities are studied! For those who think the police deserve the benefit of the doubt – the numbers indicate that the problem is real, and needs real attention. For those who think the police are always wrong – there are hundreds of instances in 2019 where the police rightly used lethal force. As usual in America these days, the solution is not binary – we need to acknowledge this and take reform seriously, but not to absurdity.

[1] Through August 24th 2020, policed had killed 751 people, according to Mapping Police Violence – that’s through the first 237 days of the year. Multiplying by 365 / 237 to normalize for a full year yields a rate of 1157 homicides per year for 2020 thus far.

[3] It’s important to note that the vast majority of the data for this analysis comes directly from the police. By 2019 anti-police violence protests movements had already gained traction across much of the country, leading police departments to proactively provide evidence when shootings are justified. When a police department refuses to comment or provide evidence on a shooting, the innocent-until-proven-guilty standard should be applied, meaning that the justification percentage is 0% in the absence of evidence.

Could The Fed replace QE with a Basic Income?

Should the Federal Reserve provide liquidity via bank deposits for all Americans instead QE?

The purpose of quantitative easing is to lower interest rates, inject liquidity into the economy, and prevent the collapse of financial markets. It’s the ultimate top down approach to the problem – funnel money into too-big-to-fail financial institutions, and hope that this settles the market’s nerves and trickles down into the real economy.

In a sense, quantitative easing is the ultimate form of trickle down economics – inject money into the wealthiest parts of the  economy to keep them wealthy during a downturn, and hope that this trickles down to Main Street.

During the 2020 COVID19 pandemic the Fed has taken a broader view of its powers than ever before, instituting over a dozen new programs in record time. The Federal Reserve balance sheet hit $7 trillion in 2020, far exceeding total Fed intervention in the financial crisis, and unleashed at unprecedented speed. This has stabilized the stock market, with essentially zero downside for the year after a sharp tumble and equally sharp recovery from February to April. The Fed made this recovery possible by pledging to buy unlimited quantities of securities, and for the first time stepped into multiple new roles, buying individual bonds, buying ETFs, creating a Main Street lending program, and more.

All of this begs the question – why not dispense with all the hijinks and provide liquidity directly to the people, where it’s much more likely to be utilized within the real economy? Various proposals like Andrew Yang’s freedom dividend and others peg the cost of providing $1000/month to American adults at around $2T per year. If the Fed were to engage in such a program, how might it work, and what are the potential benefits and risks?

Potential Structure of a Federal Reserve-Funded Basic Income:

  • The Fed would offer funding for deposits at 0% interest to the banks.
  • Any bank that deposited these funds in equal amounts in every individual account at the bank would receive a 10bp servicing fee for providing this service. The bank would also not be required to repay these funds to the Federal Reserve.
  • The total amount offered to a bank would be dependent on the number of individual customers served by the bank.
  • Safeguards would have to be established to ensure that individuals with accounts at multiple banks only received funds once.

Potential Benefits of the Program

  • Given that individuals have a much higher marginal propensity to consume than banks or corporations, these funds would get spent, thus powering the real economy and GDP growth
  • Banks would be empowered to lend against the deposits on their balance sheet – this is the opposite of what’s happening with reserves that banks have parked at the Fed earning interest
  • The Federal Reserve would still have QE and control of the yield curve in its toolbox, but could use these tools much less, which would result in more normal interest rates across the yield curve.

Potential Risks and Downsides

  • Inflation is the principle risk of such a program – give the people money, and inflation will run wild – right? A basic income of about $500/month would cost $1T per year – this is the same rate of money supply expansion since 2008. The Fed could also use higher interest rates to keep overall money supply growth in check.
  • The Federal Reserve could simply swap this form of money supply expansion for its current use of QE. But individuals might expect this to be a stable, recurring payment – would this rob the Fed of flexibility?

Now that the Federal Reserve has opened Pandora’s box with numerous programs not codified within its charter, it’s time to reexamine a fundamental premise – are these the best ways to inject liquidity into banks? Or should the Fed put the reserves in checking deposits at banks? This serves a dual purpose of both capitalizing the bank and the public at the same time, and with a direct and dramatic impact on the economy. It may sound like heresy, but the ZIRP alternative was not exactly showing great economic growth prospects even prior to the pandemic.

The US is the world leader in innovation – can the Fed break out of the box and consider a program to help all Americans?

Real Change: Push for a DOJ Ban on Hiring Killer Cops

Protesters across the nation (and the world) are expressing their rage, anger, and frustration at the killing of George Floyd and so many others at the hands of police in the United States. I have no issue with the rage against injustice – I have written about how over 20% of all random homicides in the United States are committed by the police! But as I watch events unfold, my instinct is to try to grasp for solutions. The protesters ask for the arrest of all involved officers – but surely this anger, this protest, can further be channeled toward institutional change? Protests and movements end, and without actionable demands, they often end empty-handed.

Here’s a simple actionable demand to make of both President Trump and Democratic Presidential Candidate Joe Biden:

Direct the Department of Justice to instruct police departments that they will receive $0 in federal funding if they hire any officer previously terminated or disciplined for killing a civilian:

  • Newspapers and non-profits have already compiled substantial lists of officers involved in killing unarmed civilians and other misconduct.
  • If any officer has been involved in such an incident, and is terminated, disciplined, they should be placed on a Department of Justice list. If a jurisdiction pays out a civil settlement with respect to an incident involving an officer, the officer’s name should likewise be placed on the list.
  • Any police department continuing to employ officers listed should no longer be eligible to receive any federal funding or benefit of any kind.

Some have argued that the federal government cannot change the behavior of individual police departments. This policy approach changes that equation – if a department wants to keep employing dangerous officers, they can do so without federal funding. Billions are sent to local police by the federal government annually, through programs including the Department of Defense 1033 program, the COPS Hiring program, the NHTSA’s funding support for traffic safety, and more. This idea is not new, as this Congressional Research Service article indicates.

In economics, we often talk about how incentives drive behavior. The federal government does not directly control the 18,000 law enforcement agencies in the United States – but changing the incentives will change their behavior. No department wants to risk its grant funding, its equipment donations, or other federal support. While everything is politicized these days, this need not be a political football – who wants bad police on the street? If a doctor losing his medical license in one state is unable to practice in another, why is a police officer fired for misconduct able to be re-hired in the same state? I don’t think most police officers want to work with the small minority who engage in criminal conduct either – so this is a simple step to cleaning up law enforcement across the country.

If, as a people, we want real change, let’s come up with concrete solutions. This is my attempt to do that – I hope we can channel the rage on the streets toward solutions, so we don’t find ourselves in the same place in another decade’s time.

The Great GOP Stimulus

The 2018 Trump stimulus exceeds the Obama-era stimulus package in size – will it pay off at the top of the economic cycle?

In 2010, when Barack Obama pushed for a stimulus package to help boost the American economy, it was decided by many in the GOP as wasteful spending. While there are more productive (infrastructure) and less productive¬†(tax rebates) ways to stimulate the economy, any form of spending (or tax cut) is a form of economic stimulus – this is a point agreed by both economists and businessmen like Warren Buffet. In fact, any form of budget deficit is a form of stimulus, as the government borrows (or prints) money that it doesn’t have to spend it into the economy.

The past year has seen the GOP enact not one but two stimulus measures – first a budget which ended Obama-era budget caps and boosted spending by roughly $150B per year, and second the tax cut which reduces taxes by another $150B per year. Taken together these measures are adding roughly $300B per year in stimulus to the US economy, potentially adding 1.5% to GDP for each of the next few years. Adding this stimulus to a core GDP growth rate of 2-2.5% might thus make 4% possible in the near term, with the bill due much later. The total federal (non-central bank) stimulus under President Trump’s first will hit at least $1.2 Trillion, exceeding President Obama’s 2010 stimulus package by $350 Billion [1], but this time at the top of the economic cycle!

What does this tell us? A few key takeaways emerge:
  • While most economists agree that it’s better to do fiscal stimulus when the economy is at or near recession, democracies don’t work this way, and there’s little correlation between economic need and actual governance.
  • When either party has complete control of government, they take the opportunity to spend on favored initiatives – in Trump’s case the DoD received most of the benefit, while in Obama’s case a variety of energy efficiency, infrastructure, and other initiatives were funded.
  • Budget deficits haven’t been a major issue over the last decade, but the tax cuts in particular will layer on top of Social Security and healthcare spending trends to drive debt-to-gdp well past 100% [2].
  • The best stabilizers in the US economy (unemployment insurance) are effectively automated – extending this sort of stabilizer to infrastructure spending (spending more on transportation funding etc as unemployment rises) would not just help buffer downturns – it would also get taxpayers a better deal.

Time will tell whether the GOP’s late-cycle spending will extend the business cycle substantially, but in the long run US policy will improve if more of these decisions are put on auto-pilot, removing the uncertainty of the political winds and the desire to spend at the least opportune times.

 

[1] The Obama administration stimulus plan cost around $850B in the end, including only the 2010 Stimulus measure and its implementation. Extension of Bush-era tax cuts and similar are not counted here, as these were extensions of existing measures, rather than new tax cuts or new spending as in the Trump administration’s recent moves.

[2] Many charts and news reports on the debt refer only to the publicly-held portion of the US debt, but when debts to the Social Security trust fund are included as in this data from the Federal Reserve, the US debt-to-gdp ratio already exceeds 100%.

A Better Estate Tax Reform

Replacing the estate tax with fair (no step-up) capital gains taxation at death could raise revenue for tax reform, and get rid of complex tax avoidance schemes

Among the many changes proposed among the Trump and GOP tax plans is the end of the estate tax – long a cherished Republican goal. Today’s Republicans decry the estate tax as a form of double taxation, while proponents (including Republican President Teddy Roosevelt) view it as a means to prevent an aristocracy formed through inter-generational wealth transfer.

What’s overlooked in the estate tax debate is that there’s a simple solution at hand, if we just look north, to Canada. This may be surprising to many Americans, but in the early 1970s Canada repealed its estate tax, replacing it with a simple application of capital gains taxes.

Canada applies its capital gains tax to an estate by assuming that the assets have been sold on the date of the owner’s death. Instead of taxing an estate in a special way, a consistent application of the existing capital gains tax serves to eliminate loopholes (in particular by eliminating step-up basis) and raise revenue while also substantially lowering the top rate of tax on estates. If transfers of ownership are treated as taxable for capital gains purposes, this eliminates the use of trusts and step-up basis as a multi-generational tax avoidance scheme, since tax would be paid on any change of ownership, including when assets are transferred into the trust.

Instead of exempting substantially all estates (as with current law), a capital gains tax-based approach could simply apply current capital gains brackets. The top rate of 23.8% would represent a reduction of over 50% from current rates. This change could generate substantial revenue to enable other aspects of tax reform – in the year 2000, when the estate tax exemption was $1.3M for a couple, it generated $25B per year in revenue (after substantial exclusions, credits, and deductions). With the economy today 90% larger than in 2000, it’s likely that a similar tax would generate nearly $50B today. Elimination of step-up basis could double this figure by adding another $50B – and $100B per year would pay for a huge chunk of current Republican plans on business tax reform, without penalizing most individuals.

Unfortunately, Republicans are fixated on ending the “death” tax and ramming through their current plan, while Democrats are interested in keeping top estate tax rates in place – when a broader capital-gains based approach would be fairer and would generate more revenue. Hardly the last time a good moderate approach is left to die in our polarized political climate!

The Only Gun Control That Would Have Helped in Vegas

In the wake of major mass shootings like that in Las Vegas, gun control supporters have brought attention back to a wide range of gun control measures. Universal background checks, assault weapons bans, and numerous other measures are floated, and end up going nowhere given the heated opposition of gun rights supporters.

But while many of these measures would help with day-to-day gun violence (which, along with suicide, is responsible for 99% of all gun deaths) – none of them would have helped in Las Vegas. What might have helped?

A high capacity magazine ban, banning magazines with a capacity over 10 rounds, would have reduced casualties in Las Vegas by over half, and perhaps by as much as 90%.

After the Sandy Hook shooting, I analyzed every mass shooting in the US between 1980 and 2012 – and in each case I reviewed what forms of gun control, if any, might help. One finding stood out – the majority of mass shooters commit suicide, and they tend to commit suicide after running out of bullets and being forced to reload.

The Las Vegas shooter committed suicide as well. If mass shooters commit suicide as a result of the brief thoughts or impulses that occur during the reload cycle, then how many lives would have been saved by forcing the shooter to reload 10 times more often? In studying previous mass shootings, it turned out that a high capacity magazine ban could have saved over 50% of all lives lost.

Many Americans have absolutely no interest in gun control – Bill O’Reilly recently posted that “This is the price of freedom.” But for those with an interest in improving upon the status quo, there’s a lesson here: rather than wasting energy on a wide range of proposals, those interested in curtailing mass shootings should focus on EFFECTIVE measures, not feel-good measures. A high capacity magazine ban is unlikely to pass anytime soon – but placing the focus on a single effective policy instead of broad, sweeping measures helps set the stage for eventual success.

 

Cue the rebuttals:

There are millions of high capacity magazines in the US already! A ban would stop further sales, and since magazines are cheap a buyback could reduce the volume available while driving up the price of those remaining (making them harder to obtain)

Bad guys don’t follow the law! – Ending the public sale of new magazines will rapidly diminish their availability to the black market. Magazines are simple, but need to be machined precisely or they will tend to cause jams.

Shooters will just reload more often! – Analysis of over 60 mass shootings shows that the vast majority of shooters commit suicide after reloading a handful of times. Limiting the amount of damage possible per reload cycle thus reduces the overall damage.

You’re depriving individuals of their 2nd Amendment rights – No less a figure than Antonin Scalia held that the 2nd Amendment is subject to limits and regulations. Bump stocks aside, fully automatic weapons have been banned for individual ownership since 1934 (as a result of misuse of Tommy guns by Al Capone and other mobsters). The question has never been about unfettered access to arms – in this case suitcase nukes would be an arm that one could bear. The question has always been one of striking the appropriate balance between gun rights and the dangers they introduce in society.

AHCA Update: Let Red States Secede from Universal Healthcare

The House is likely to vote today on an updated version of the AHCA (the GOP’s Obamacare replacement) today. I’ve written previously about the bill, and noted that for a GOP-introduced bill, it was originally quite moderate – it embraced the notion of universal healthcare.

The latest AHCA update is considerably more conservative, as it effectively allows states to eliminate most of the ACA’s universality. By bringing back medical underwriting, states will be able to roll the clock back to 2013 (pre-ACA exchanges), when individuals with pre-existing conditions generally could not obtain health insurance.

But several forces combine to make it highly unlikely that pre-existing conditions coverage will disappear from any American state:

  • Once the bill makes it to the Senate, it will likely have to be made considerably more moderate, as the GOP can only lose two GOP Senate votes, and a number of Senators have expressed reservations about the latest changes.
  • The bill will still have to pass through reconciliation between House and Senate, and might die in that process, or might emerge more moderate in that process. It appears unlikely that it will pass through Congress as currently written, or in more conservative form.
  • Even if the bill does become law as written, the 31 states that expanded Medicaid are unlikely to seek to remove pre-existing conditions coverage. Within the 19 remaining states, it’s unclear that state officials are willing to take the blame for rescinding that coverage.

At this point, assuming the bill does make it through the House, it’s the Senate modifications and reconciliation process that will determine whether the final product is worthwhile. If the Senate is able to preserve universality, while strengthening tax credits for older age groups, a credible final product may emerge.

AHCA: Insured to Rise by 7M by 2026 – CBO Misses Power of Free Plans

The CBO generally performs careful, in depth analyses – but their approach is susceptible to inaccuracy when policy proposals differ sharply from existing norms. The CBO projects that over 24m individuals will lose insurance coverage as a result of the AHCA, as older individuals and Medicaid recipients lose insurance faster than younger individuals gain it. This projection misses the power of free plans, however. The table below shows how much different age groups might pay for coverage under the AHCA, with prices based on 2017 ACA exchange prices for states with low (Oregon), medium (Ohio), and high (Nebraska) insurance costs [1]. As the table shows, the AHCA tax credits can provide catastrophic coverage to the majority of Americans below age 45.

Monthly Cost after AHCA Tax Credit
(Plan cost as found on healthcare.gov, cheapest available plan)
State Age 20 Age 30 Age 40 Age 50 Age 60 Family Ages 40,10,8 Family Ages 30,30,5,3
Oregon (Low Cost State, Zip 97035 Used) Free ($112) Free ($208) Free ($234) $35 ($327) $160 ($493) Free
($466)
Free
($648)
Ohio (Medium Cost State, Zip 43004 Used) Free ($121) $12 ($216) Free ($244) $49 ($341) $186 ($519) Free
($487)
Free
($677)
Nebraska (High Cost State, Zip 68010 Used) Free ($131) $66 ($274) $59 ($309) $139 ($431) $323 ($656) $33 ($616) $105 ($855)

Using the information compiled above, we can estimate the change in uninsured rates for each of the groups in the chart below. For age groups below 40, the uninsured rate is projected to drop close to the same level as that of children below 19, since these groups will have access to free plans paid for by tax credits (and insurance companies will market these subsidized free plans mercilessly). For age groups above 45, the uninsured rate will rise, though not quite to pre-ACA levels, when no support was provided.

Projected Uninsured Rate Under AHCAThe CBO estimates that 14 million Americans will lose Medicaid coverage, and that 9 million more will lose either individual or employer-based coverage.

Using population estimates for 2026, I calculate that the number of insured Americans aged 19-34 rises by 7 million, aged 35-44 rises by roughly 2 million, and aged 45-64 drops by roughly 2 million [2]. While it’s important to note that these plans will be much less generous than ACA-subsidized plans, the total number of insured actually rises by around 7 million under these estimates. The GOP will have installed universal, nearly-free catastrophic plans as the future of American health care – if the AHCA passes, as Mssrs. Trump and Ryan continue their struggle to get it through Congress.

P.S. If you are interested to find out more about how the AHCA might impact you or your clients’ investments, my company HiddenLevers has modeled that in our TrumpCare scenarios. Have a look through one of our free demo accounts.

 

[1] The 2017 ACA prices are a reasonable guide as the Trump administration plans to relax the essential benefits associated with plans, and to widen the max price differential between plans for young and old. The risk pool under the AHCA will also likely be healthier, as young, healthy Americans will be drawn into free AHCA plans – because they are free.

[2] Roughly 23% of the population is aged 19-34, and a 9% point drop in uninsured rate for this group in 2026, translates to a rise of 7m more insured Americans. A similar calculation for the 35-44 group yields another 2m insured Americans, while the 2.5% rise in uninsured among older Americans yields a loss of insurance for 2 million. The CBO appears not to contemplate that many of those losing Medicaid will receive tax credits sufficient to provide them with free catastrophic plans, as shown in the table above. This mitigates the Medicaid cuts to some extent.

[3] The original chart above can be found here at the CommonWealth Fund.

TrumpCare (AHCA) – Welcome to Universal Catastrophic Health Insurance

The AHCA would move the USA toward universal catastrophic healthcare coverage, by enabling insurance companies to sign up individuals to $0 monthly premium plans with high deductibles and limited coverage.

While healthcare analysts have been in overdrive commenting on the new GOP health plan, it appears that some key points have been lost in the noise. Whether on Medicaid, total enrollment, or tax credits, it seems that many analysts fail to understand the large-scale implications of the bill. As written, the AHCA has the potential to be transformative – it would retain the goal of universal coverage, while shifting tax credits toward universal high deductible insurance. If fully implemented, the AHCA could actually lead to gains in coverage – but the US healthcare market would be transformed by a move toward high deductible catastrophic coverage.

AHCA Key Changes:

  • Covered Benefits: The AHCA does not change the essential benefits list, but Secretary Price is interested in reducing essential benefits to lower costs.
  • Tax Credits: Tax credits will be less generous, but will cover more of the population, potentially leading to a shift toward catastrophic plans.
  • Medicaid: The Medicaid expansion ends after 2019, but tax credits will be available to all lower and middle-income Americans.
  • Employer Coverage: AHCA creates a strong incentive for employers to drop coverage, since most American workers will receive tax credits.
  • Universality: AHCA provides tax credits to virtually all Americans without other coverage, cementing the goal of universal health care in the USA.
Detailed Findings:

Covered Benefits:
With the exception of abortion coverage, the AHCA does not change the essential benefits under the ACA. HHS Secretary Tom Price has indicated that he will reduce regulations that increase costs – he can do this by limiting the definition of essential benefits.

Tom Price has indicated on multiple occasions that HHS will seek to reduce regulations on health insurance markets, and recently both he and President Trump indicated that these changes would be part of “phase 2 & 3” of their healthcare overhaul. In the past Secretary Price has indicated that he will seek to specifically limit the essential benefits requirement while at HHS.

The AHCA is particularly punitive towards abortion, barring the use of tax credits for any plan that covers abortion services (page 72 of bill pdf).

Tax Credits:
The AHCA offers up to $14k in tax credits per family, at 2k-4k per person depending on age (pages 90-92 of pdf). It also enables insurance companies to claim tax credits on behalf of enrollees, enabling them to offer cheap or free plans to the public.

Much has been written on winners and losers with the proposed tax credit changes. Analysts both left and right fear many will lose insurance. But look at page 106 of the bill: “Not later than January 1, 2020, the Secretary … shall establish a program … for making payments to providers of eligible health insurance on behalf of tax payers eligible for the credit under section 36C.”

Consider what this means – insurance companies will be paid between $2000 and $14,000 per year for each enrollment. In a similar situation in the for-profit university industry, tuition essentially matched federal loan programs, creating a no-money-down product for students. With the AHCA, insurers will be strongly incentivized by the market to offer $0 premium plans in order to maximize their signups of younger individuals in particular.

With the change of young-old ratio to 5:1 (page 66), and Tom Price’s expected reduction of essential benefits, new catastrophic plans will likely flood the market, providing a no cost option for many. See Appendix I for specific examples using 2017 exchange pricing.

Medicaid:
The AHCA ends the Medicaid expansion in 2019, but states may have some incentivize to jump in now, because the future funding they receive is based on the number of enrollees at the end of 2019. Beginning in 2020 the Medicaid expansion will be repealed, and only those enrolled under pre-ACA rules (with stricter income and asset tests) can be newly enrolled into Medicaid.

The AHCA does close a gap caused in non-Medicaid expansion states, where many workers make too much to qualify for traditional Medicaid, but too little to qualify for ACA subsidies. These individuals will qualify for the new AHCA tax credits.

Employer Coverage:
The AHCA removes penalties for not providing insurance (page 84 of bill pdf), and could encourage employers to drop coverage as it provides tax credits to a much larger range of working age Americans.

Per the Kaiser Foundation, the average employer contribution to individual employee healthcare is around $4800, with the employee contributing around $1200. At a 25% federal tax rate, this leads to a tax deduction value of $1500, versus a tax credit of $3000 for the median-age American worker. For family coverage, a tax deduction value (25% tax bracket) of roughly $4500 compares to a tax credit of $9000 for a family of four with adults in their 30s. In both cases, both the employer and employee would benefit if the employer dropped coverage, raised wages, and let the employee take advantage of the tax credit.

Appendix II presents a fully worked example for a family of four making $100k per year, and shows that the family would likely benefit under AHCA changes.

Universality:

The AHCA offers tax credits to all Americans without employer-based healthcare (except those with higher incomes), and as a result the AHCA accepts the ACA’s premise of universal health insurance.

The only Americans excluded from the new AHCA tax credits are those already receiving healthcare from a government program (Medicare, Medicaid, VA, etc) or from employer-based coverage (page 97 of bill pdf).

The GOP has produced a plan that implicitly accepts that universal healthcare is here to stay. The end game (relative to the ACA) will look very different, however, with large swaths of the population covered by high-deductible catastrophic plans.

Appendix I: Are $0 premiums for catastrophic plans really possible?

Is $2000 ($166/month) sufficient to offer a “free” plan to a young adult, or $10,000 ($833/month) sufficient to offer a “free” plan to a family of 4?

Using Healthcare.gov, in the Atlanta area the current cheapest plan for age 21 is exactly 1/3 of the $597 charged to a 64 year old, as a result of the ACA 3:1 limit on costs for older Americans. A bronze plan for age 20 is only $126/month in Atlanta, since the 3:1 limit doesn’t apply below age 21 (even in New York City, individual catastrophic plans are available from around $165/month). Since the AHCA raises the ratio limit to 5:1, this shows how $0 plans will fit within the $2000 tax credit.

How about for a family of four ages 31, 31, 4, and 2? This priced out at $713/month in Atlanta, below the $10k AHCA annual tax credit. Since the AHCA allows excess tax credits to be placed into an HSA, the family could bank around $1500 per year toward future medical expenses while paying $0 in premiums. In New York City, the family premium would be around $1050/month, leaving the family bearing around $200/month in premiums – but this is before accounting for the impact of the new 5:1 ratio and curtailment of essential benefits, which would likely bring net costs to $0 even in NYC.

What about older Americans? A $4000 ($333/month) tax credit will not cover a single 64 year-old’s $600/month premium in Atlanta. If HHS substantially reduces essential benefits, that may close the gap, but with a corresponding loss of benefits. Pre-Medicare age older Americans are clearly the biggest losers under the AHCA reform. But if the AHCA is able to substantially increase enrollment by the young and healthy due to $0 premiums, this may enable more affordable plans further up the age spectrum.

Appendix II: Why Employers May Drop Coverage – A Specific Example

Let’s consider again a family of four, ages 31, 31, 4, and 2. Using Kaiser numbers, on average the family and their employer spent a total around $18,000 on health insurance premiums, with the employer contributing roughly $13,000 of that amount. In the 25% tax bracket, the family is receiving $4500 in value from the existing tax deduction. In total, the family is spending about $500 out of pocket on health insurance when employer assistance and tax deductions are considered.

What if the employer were to drop coverage, enabling the family to receive a $9k AHCA tax credit, and to raise the employee’s salary by $13,000 instead? The employee would receive $9750 in new after-tax income (considering only a 25% federal rate) plus $9000 in tax credits, or $18,750 total. Assuming similar premiums, the family would then spend $18,000 on health insurance, leaving $750 unspent. In total the family might come out $1250 ahead versus the existing system, and the employer would be able to offload the risk and expense of managing benefits.

The GOP Civil War on Taxes

Republicans love tax cuts, and both President Trump and Speaker Ryan have set their sights on lowering both personal and corporate income tax rates. But some Republicans also like controlling the budget deficit, while others favor defense spending or immigration control. How can the GOP cut tax rates, raise defense spending and immigration enforcement, and control the budget deficit? Here’s the heart of the problem: the federal government gets roughly $1.4T from income taxes, $440B from corporate income taxes and capital gains,¬†$1.1T from payroll taxes, and smaller amounts from other sources [1]. The tax plan under consideration will substantially cut the first two sources, without raising the other categories. How can such a tax plan be implemented without blowing up the budget deficit?

The evolving Trump-Ryan plan bridges this gap by introducing a new category: a border adjustment tax on imports. If all 2.7T in US imports were taxed at 20%, this could raise over $500B per year, providing a source for big tax cuts (though still not enough to pay for the tax cuts proposed). But there’s a problem with this idea – will 50 Republican senators vote for it?

The National Retail Federation has come out strongly against the plan, as have the Koch brothers, whose companies participate heavily in international trade. The Kochs are focusing their battle charge in 15 states where they may be able to sway Senate votes. Meanwhile, with retail giant WalMart strongly opposed, will the senators from Wal-Mart… err Arkansas be on board?

Hence we have a GOP civil war, pitting major exporters like Boeing, Oracle, and GE against retailers and other importers, and pitting nationalist Republicans versus traditional free-trade Republicans.

Trump and Ryan can only spare two votes in the Senate – will they be able to keep everyone on board? While the plan could stimulate US growth through tax cuts and favoring US production, it may also trigger a trade war that nullifies much of its benefit. There’s also the essential nature of the import tax – it is effectively introducing a new US consumption tax for the first time. Consumption taxes have been on the GOP radar for some time, as they tend to shift tax burdens down the income scale, and to reduce taxes on the wealthy. But is Trump’s base ready to pay an extra 40 cents at the pump every day, when many of them won’t see a huge tax cut [2]? Let the Republican tax civil war begin.

[1] The CBO provides a detailed breakdown of revenues here. I have combined corporate taxes and capital gains into one category, as both are taxes on capital.

[2] Roughly 50% of oil is still imported into the US, so a border adjustment tax could disproportionately increase oil prices.