The front page of today’s Washington Post reports on President Obama’s determination to forge ahead on his plans for health care reform, despite Republican attacks and a lack of consensus among even Democratic proponents as to how to pay for it:
Several House Democrats in the conservative Blue Dog Coalition have already said they will not vote for the current House bill, citing the risk of raising taxes in this economic climate. The House bill would expand insurance to 97 percent of Americans but would add a surtax of 1 to 5.4 percent for families earning more than $350,000 a year. Democrats are considering raising the surtax so that it applies only to individuals making at least $500,000 and families making $1 million a year or more, aides to Speaker Nancy Pelosi (D-Calif.) said Monday night.
In my mind the surtax–essentially an increase in income tax rates on the very rich (mostly millionaires)– is such a bad idea as a means of financing health care reform, for the following reasons:
- Too tiny a base and thus tax rates that are too high. According to the Tax Policy Center (TPC), this is a tax increase limited to just 1.3 percent of households. Limiting ourselves to such a narrow tax base while needing to raise a large amount of revenue (on the order of $600 billion over just the first ten years) means that tax rates have to be set quite high. The TPC calculates that the effective marginal tax rate on millionaires would rise from 33.6 percent under current policy extended (Bush Administration tax rates) to 44.6 percent under the Administration’s budget proposals along with the health surtax. The more-than-10-percentage-point increase in the marginal tax rate (an increase of about one-third) is significant and can be expected to have a disincentive effect on work and saving, even if not so large as to on net reduce revenues (I’m not talking Laffer Curve here…).
- A very narrow distribution of taxpayers funding a program with broadly-distributed benefits. I see two problems in taxing only the very rich to pay for broader health care coverage: (i) so few people “paying for” the new health benefits means so few people will feel they have a “stake” in it, and there will be so little pressure on the government to “get our money’s worth” out of the new health spending; and (ii) when it’s only the very rich that pay for benefits that are distributed progressively (disproportionately to lower-income households), it can create a perception that the funded program is a “welfare program”–which can undermine support for the program. Or at least that’s the argument that many liberals make against raising the Social Security taxable maximum as a way of closing Social Security’s (relatively small) fiscal gap. (What is the distinction here, anyway?)
- A revenue base that can’t possibly keep up with the rapid growth in health care spending. As I (and Donald Marron) explained in an earlier post, health care spending is likely to keep rising considerably faster than the economy grows, even with considerable success in achieving cost containment via health care reform. It’s really hard to imagine a revenue source that could rise as rapidly, unless what you tax happens to be well correlated with health care spending–such as is the case with taxing employer-provided health benefits (that idea that the Administration is reluctant to endorse). Taxing the richest households only, at tax rates designed to offset the cost of health reform over the first ten years only (and when the expanded coverage only slowly phases in), means that revenues will fall increasingly short of the cost of expanded coverage over time.
The CBO’s most recent cost estimate of the House “tri-committee” bill is a tale of three trajectories. It shows that the cost of expanded coverage doubles from 2014 to 2019. It shows scorable savings from changes in Medicare and Medicaid payment policies growing at a much slower rate from 2014 to 2019 (by about a third). And it shows the revenue from the surtax rising at a similar slower rate. Put these together and you have a recipe for an unsustainable government program–just based on the sheer mathematics. Add in the political challenges of the surtax looking like a “soak the rich,” anti-growth tax that will make health care reform seem like a new “welfare program,” and I just don’t see the current House proposal as a reliable route to achieving the reform.
Bruce Bartlett has the idea that this “Robin Hood” tax policy in the surtax will eventually get us to higher taxes on everybody:
I remain convinced that just down the road major tax increases will be needed to avoid national bankruptcy. When that day comes, it will be harder for Democrats to go back to the same well and demand that all the burden fall upon the wealthy, especially if it is clear by then that the surtax didn’t raise nearly as much revenue as expected. Congress will have no choice except to look for ways to tax people who have much more limited opportunities for tax avoidance: those who have only wage income, which means the middle class.
Historically, increases in the top rate have tended to pave the way for higher rates on the middle class…
But if we’re going to have to get to a broader-based but still-progressive tax base eventually, there’s a much easier way than leading off with that ugly and inefficient surtax. Just let the Bush/Obama tax cuts expire.