Wednesday, July 15, 2009

Paying for Health Care

The Washington Post correctly states,
Pretending that "the rich" alone can fund government, let alone the kind of activist government that the president and Congress envision, is bad policy any way you look at it.
The thing is, even in the context of its discussion of paying for health care, it's senseless hyperbole. Nobody has suggested any such thing.

In terms of paying for health care, the Post continues to be excited about a middle class tax hike:
A far better way to pay for health care would be to end the tax break for employer-provided health benefits, a subsidy that not only artificially pumps up demand for expensive treatments but also disproportionately benefits upper-income earners. Eliminating or, at least, capping it would be good health-care policy as well as good tax and budget policy.
This is a two-pronged argument, first that because people have good health insurance they are able to take advantage of treatments they could not otherwise afford, driving up the cost of healthcare. But isn't that the whole point of having insurance - so you can get the "expensive treatments" you need without going broke? The second prong suggests that this could be fashioned primarily as a tax increase on the wealthy, even though the target is a benefit that goes primarily to the middle class.

The first prong has nothing to do with paying for healthcare reform. It's great to propose a social experiment where working people pay more taxes while simultaneously getting their health benefits slashed, but it's not at all clear that this is fair, or even that it would work. It won't much affect one of the leading areas of healthcare expenditure - end of life care - as that's normally covered by Medicare and Medicaid. If it affects another huge area of expenditure, payment for the management of chronic health conditions, it's not clear that it would do so without simply shifting that cost onto the taxpayer, with the government being forced to provide care to prevent people from becoming disabled, or to pay disability benefits and healthcare costs when their unmanaged chronic health conditions leave them unable to work. Accident victims will still get care at the emergency room. People who become seriously ill will still require expensive treatments. So how does the Post imagine that taking people who are adequately insured and shifting them into the category of the underinsured will reduce healthcare expenditures?

The Post complains about directly taxing high income people to pay for healthcare reform:
The traditional argument against sharp increases in the marginal tax rates of a very narrow band of Americans is that it could distort their economic behavior -- most likely by encouraging them to put more of their money into tax shelters as opposed to productive investments. This effect could be greatest in certain states, such as New York, where a higher federal rate would add to already substantial state income taxes. The deeper issue, though, is whether it is wise to pay for a far-reaching new federal social program by tapping a revenue source that would surely need to be tapped if and when Congress and the Obama administration get serious about the long-term federal deficit.
Another two-pronged argument. The first prong is silly. Sure, the wealthy may shelter their money to avoid taxes. But they already do that. Whether they're paying more taxes due to the taxation of their healthcare benefits or because of a surtax, higher is higher. More to the point, let's take somebody making $500,000 per year. Let's assume that means, under the surtax, they will pay a 1% surtax on $150,000 of their income - $1,500. Now let's assume they have a pretty good healthcare package, worth $24,000 per year. Let's say they're currently paying 23% in taxes (using the Post's figure for the "average rate paid by the top 1 percent of households"). If their healthcare benefits become fully taxable, they would face a tax increase of $5,520. Paging Fred Hiatt: Which tax increase is higher? Whatever argument you can make that a middle class tax increase is better than a surtax on the wealthy, it's a bit silly to argue that the latter is more likely to inspire the sheltering of income until we're talking about stratospheric income levels - where it's difficult to believe people aren't already maximizing their use of shelters.

The second prong is just as silly. Money is fungible. If the Post imagines us raising taxes on the middle class today, and taxes on the wealthy in a year or two, what difference does the order make? Further, why even raise the sheltering argument if you're going to turn around and suggest that we use a surtax on the rich to balance the budget? If the Post believes that taxing the middle class is truly better policy than taxing the rich, it could at least strive for some internal consistency.

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