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President Obama misses the mark on tax reform - James A. Baker III

VIEWS: 14 PAGES: 1

									                                                                                                                                                                  Coming Monday:
                                                                                                                                                                  Medicare celebrates
                                                                                                                                                                  a birthday.

houston Chronicle | chron.com | Sunday, July 29, 2012 | Section B                 xxx




InSURAnce


To fix the mess at TWIA,
focus on the fundamentals
By Seth J. Chandler                                                                                                                                             successful. One solution is to
                                                                                                                                                                reduce the magnitude of corre-
    Texas has been spared a major                                                                                                                               lated risks. There is an awful lot
tropical storm so far this hur-                                                                                                                                 of research showing that we can
ricane season, but that doesn’t                                                                                                                                 lessen the damage hurricanes
diminish the fact that the state is                                                                                                                             cause through hardening: very
woefully unprepared to deal with                                                                                                                                tough building codes and other
potential losses. If a significant                                                                                                                              infrastructure improvements. A
fraction of possible Category 4                                                                                                                                 hardened site in Galveston, after
or Category 5 hurricanes were                                                                                                                                   all, is currently considered safe
to strike, the Texas Windstorm                                                                                                                                  enough to house the smallpox
Insurance Association (TWIA)                                                                                                                                    virus. Burying power lines al-
would not be able to fully pay                                                                                                                                  lows people to return to their
claims in Harris, Galveston, Bra-                                                                                                                               homes sooner, which reduces
zoria and possibly other Texas                                                                                                                                  the losses from a storm. Limiting
counties. Since 2009, neither the                                                                                                                               publicly subsidized insurance
state of Texas nor insurers in                                                                                                                                  plans to lower levels of cover-
Texas are legally responsible to                                                                                                                                age and requiring individuals to
make up the shortfall. In 2013,                                                                                                                                 obtain private insurance for the
let’s hope the Legislature stops                                                                                                                                excess also reduces the magni-
rearranging deck chairs on the                                                                                                                                  tude of correlated risk held by
Titanic and explores more funda-                                                                                                                                government plans. Lessening
mental reform.                                                                                                                                                  the economic consequences of
    It’s not just a major hurricane                                                                                                                             hurricanes could attract private
problem or a Galveston problem.                                                                                                                                 insurers back to the Texas coast,
Right now, TWIA will not be                                                                                                                                     make state schemes less expen-
able to pay with cash on hand or                                                                                                                                sive, and make people feel more
reinsurance funds many claims                                                                                                                                   secure. The biggest bang for the
throughout Texas — not just the                                                                                                                                 buck will come from hardening
most densely populated counties                                                                                                                                 the densely populated counties.
— in the event of a serious storm.                                                                                                                                 A second approach is to try
Instead, TWIA will be forced to                                                                                                                                 to decorrelate the risks. Texas
borrow a limited sum, possibly at                                                                                                                               could pool its windstorm risk
high rates, to pay the claims. The                                                                                                                              with California’s earthquake risk,
state will then have to impose                                                                                                                                  Washington state’s volcano risk
significant surcharges on various                                                                                                                               or windstorm risk from another
forms of insurance over a num-                                                                                                                                  region. Alternatively, Texas could
ber of years to pay the loans back.                                                                                                                             pool its risk in, say, 2013 together
Running insurance in reverse                                                                                                                                    with its risks in 2014 and 2015 by
and forcing policyholders to                                                                                                                                    requiring coastal residents who
pay higher premiums just when                                                                                                                                   purchase insurance from TWIA
they have been hit with losses                                                                                                                                  to commit to three-year contracts.
is seldom a recipe for economic                                                                                                                                 There are many challenges with
stability.                                                                                                                                                      each of these plans, but given the
    Unfortunately, as many coastal                                                                                                                              absolute magnitude of the issue,
states are learning, there is no                                                                                                                                even modest gains are worth
easy solution to this problem.                                                                                                                                  exploring.
Even those who like the free mar-                                                                                                                                  And the third approach is,
ket must admit past difficulties                                                                                                                                frankly, to develop a greater toler-
in providing complete insurance                                                                                                                                 ance for the high rates that come
along the coast for windstorm                                                                                                                                   with insuring correlated risk.
at rates that homeowners and                                                                                                                                    Hardening the coast and looking
businesses find tolerable. Special                                                                                                                              for opportunities to pool our ca-
and explicit government sub-                                                                                                                                    tastrophe risks with uncorrelated
sidization of more complete                                                                                                                                     catastrophes will help. But Tex-
windstorm insurance for the                                                                                               David J. Phillip / Associated Press   ans on our coast need to let it sink
coast has its own financial costs,    Ben Higgins sits among debris outside his destroyed Galveston home in the aftermath of Hurri-                             in that they are holding property
political problems and moral          cane Ike in September of 2008. If a large hurricane were to hit Texas this year, the Texas Wind-                          that is unavoidably expensive to
shortcomings. And the under-          storm Insurance Association may have difficulty paying a large number of claims for damage.                               insure and budget for the higher
insurance engineered into the                                                                                                                                   premiums that result. And their
current law, coupled with some        likelihood that neighbor B will        takes in won’t be enough to pay       are correlated, insurers and                 legislators who deny this reality
disguised subsidization, leaves       have an accident with her car at       claims.                               reinsurers have to stockpile lots            do their constituents no service
Texas insureds at serious risk,       the same time. So auto insurance          Windstorm risk along the           of safe, liquid assets in order to           by leaving them catastrophically
particularly in the more densely      works well. Uncorrelated risk          Texas coast, by contrast, involves    pay claims in timely fashion. And            underinsured.
developed areas of our coast.         means that insurers do not have        correlated risk with uncertain        keeping assets under the mat-
    The problem is tough because      to stockpile a lot of liquid capital   magnitudes. The fact that A’s         tress hurts insurers and reinsur-            Chandler is Foundation Professor
insurance works best where risks      in order to pay expected claims.       house in Galveston is blown           ers in providing a decent return             of Law at the University of Houston
are known and uncorrelated. The       Something known in mathemat-           down by a hurricane informs           to their shareholders.                       Law Center, former co-director of its
fact that A has a fender bender       ics as the law of large numbers        greatly the likelihood that neigh-       There are fundamental ways                Health Law and Policy Institute and
with his car in Galveston County      makes it unlikely that the amount      bor B’s house will be similarly       of addressing high magnitude,                director of its Program on Law and
provides no information as to the     of revenue an automobile insurer       destroyed. When insured risks         correlated risk that can be more             Computation.



The economy

President Obama misses the mark on tax reform
By John Diamond                the incentive to work and                                                                          more efficient and simple           rate income tax reductions
                               invest at exactly the time                                                                         tax system as revenues as           having the largest positive
   President Barack            our economy needs it. At                                                                           a share of GDP will have to         effects. On the other hand,
Obama made news re-            the same time, a signifi-                                                                          rise from current levels.           the increase in personal
cently when he called for      cant amount of spending                                                                               What would an efficient          tax credits and deduc-
extending tax provisions       hidden in the tax code — in                                                                        and simple tax system look          tions decreased economic
that reduce taxes on those     the form of tax credits and                                                                        like? It would start with a         growth. This does not bode
making less than $250,000,     deductions — would be                                                                              permanent reduction in              well for the effects of the
while allowing a roughly       maintained.                                                                                        tax rates, and a broader tax        president’s plan.
$800 billion increase in          The policy is consis-                                                                           base that asked a greater              It’s tempting to push
taxes on wealthier Ameri-      tent with the president’s                                                                          number of Americans to              difficult and amorphous
cans.                          propensity to move the                                                                             contribute to the services          policy proposals like tax
   The president is right to   U.S. toward a narrow-base,                                                                         they’re consuming. That             and expenditure reform off
be concerned about these       high-rate tax system in                                                                            doesn’t mean the wealthy            until after the election year.
tax provisions expiring at     the name of fairness. But                                                                          get a break however, it’s           But with everyone focused
the end of the year, which     what’s fair about a tax code                                                                       essential that reductions           on avoiding the fiscal cliff
— coupled with planned         that permits 46 percent of                                                                         in tax rates are offset by          at the start of 2013, now is
spending cuts — would          households in the United                                                                           decreases in spending else-         the time to begin laying the
cause a poorly timed fiscal    States to use government                                                                           where in the tax code (e.g.,        groundwork for serious
contraction. Unfortunately,    services but pay no income                                                                         by reducing tax credits and         fiscal reform, such as plans
though, his specific plan      taxes? According to the                                                                            tax deductions that benefit         for reducing expenditures,
would harm the economy         Congressional Budget                                                                               the rich and others.)               reforming entitlements
and moves in the opposite      Office (CBO), the bottom                                                                              Economist Alan                   and moving to a broad-
direction from the critical    20 percent of taxpayers                                                            Dean Rohrer     Viard and I analyzed the            based, low-rate tax system.
overhaul of the tax system     face an average tax rate of 1                                                                      macroeconomic effects of            In doing so we must
necessary for the U.S. to      percent; the top 20 percent      The president’s plan           of GDP are allowed to              a permanent reduction               weigh the realistic benefits
maintain its competitive       of taxpayers face a 23.2         maintains our increasingly     increase to unprecedented          in tax rates on different           of short-term stimulus
edge.                          percent rate and the top 1       unworkable status quo.         levels (for example, if all of     types of income, as well as         against the long-term costs
   If the president’s plan     percent face a 28.3 percent      U.S. economic growth has       the tax cuts expired), CBO         the effects of a permanent          of additional debt to eco-
to extend just the tax cuts    rate.                            slowed in the last several     projects that our debt-to-         increase in tax credits and         nomic growth and future
on individuals making             It is widely recognized       months, as job creators        GDP ratio will rise to a           deductions. We found                generations.
less than $250,000 is          that a tax system charac-        nervously eye an impend-       Greek-like 200 percent by          that rate reductions led to
adopted, marginal tax          terized by a narrow base         ing raft of tax increases,     2037. Clearly, cutting and         an increase in economic             Diamond is the Edward A.
rates on various types of      and high marginal tax            new regulations and            reforming government               growth in the long run              and Hermena Hancock Kelly
income would increase          rates negatively affects         shrinking global demand.       expenditures should be a           (providing that transfer            Fellow in Public Finance at
significantly, especially on   growth and job creation.            Disturbingly, even if       fiscal priority, but it also       payments were reduced),             the Baker Institute at Rice
dividend income, reducing      Just ask Western Europe.         tax revenues as a share        is imperative to adopt a           with dividend and corpo-            University.

								
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