Monday, July 20, 2009

Should the rich finance healthcare reform?

Bill Gale of Brookings:

Choosing to finance health care reform by taxing the rich is bad economic policy, bad health policy, bad budget policy and poor leadership.

It is bad economic policy because, coupled with the scheduled expiration of the Bush tax cuts, it would raise marginal tax rates by 10 percentage points for high-income households. While I object to the general hue and cry that occurs anytime anyone discusses any potential tax increase for the rich, it is nevertheless quite fair to say that a 10 percentage point increase in taxation on the return to labor and capital income is a lot and shouldn’t be the first choice. (But please spare me the small business arguments.)

It is bad health policy because we need to fix the structural problems in health care in order to cut costs and be able to expand coverage. One of the biggest structural problems is the non-taxation of employer-provided health care. Fixing that – converting it to a refundable fixed credit a la Furman and McCain – would not only raise a lot of money, it would improve incentives for health care. Taxing the rich does not address this issue at all – it may raise the same amount of revenue but it does not address the incentive problem that arises from nontaxation of employer provided health care.

It is bad budget policy because we are using up one of our options on the revenue side not to cut the deficit but to finance new spending. We need to save our powder for deficit reduction activities – use the change in tax treatment of employer sponsored health care to finance health care and use general revenue increases to finance general deficit reductions.

It is poor leadership because it furthers the myth that we can solve our fiscal problems by taxing “other” people or with gimmick taxes. It has been said many times already and will be said many times again: we are going to need broad based tax increases and spending cuts to bring the fiscal house into order and the more politicians continue to act as if we can just foist the financing on a small group (be it rich people or foreign corporations or obese people or people who drink soda, etc.) the worse are our prospects for solving the problems.

Jeff Frankel of Harvard's Kennedy School (and a veteran of the Clinton CEA) agrees:
a clearly more efficient way of getting the necessary revenue would be to eliminate employers' tax exemption for health care benefits, at least for upper income workers, as proposed by Furman, McCain and others. And another would be auctioning off most emission permits rather than giving most of them away, at least after the first five years or so. It is just another case of good economics getting steamrollered by politics.
I highlight these comments because they both come from well respected, slightly left-of-center, mainstream economists, which only goes to show how far leftward congressional healthcare reform efforts have drifted.