Health Care and Taxes

The worst idea candidate Barack Obama had during the presidential campaign was his pledge to finance health reform with taxes on capital.  To be fair, he didn't word it that way.  Instead, he promised to pay for universal health care in part by rescinding George Bush's "tax cuts for the rich." 

Bush didn't cut taxes for the rich, however.  He lowered the tax rate on capital gains income and substantially lowered the tax rate on dividend income for all taxpayers, many of whom have high incomes.  Bush also lowered the top rate on wage income; but for high-income earners this is also frequently income from capital (pass-through profits to owners of small businesses, for example).

Obama is now proving that he keeps his word and then some.   Overall, his new budget includes a slew of new taxes on businesses and investors totaling almost $1 trillion over the next 10 years (and that doesn't even count the $646 billion "cap and trade" tax).  He proposes to "bank" a portion of this for health care to be matched by difficult-to-make health care spending cuts and by health care "savings" that virtually all independent analysts agree are unlikely to materialize.  The only thing certain so far is the taxes.

What's wrong with paying for health reform by taxing investment income?  It is always bad to tax capital to pay for consumption.  Capital is the seed corn that grows businesses, creates jobs and generates the income that makes consumption possible. Taxing capital to pay for health care consumption is especially bad, considering that health care spending at the margin is already very wasteful.

Stormy Weather

In his proposed budget, Obama proposes to sequester $318 billion for health care reform over 10 years — not from capital gains or dividend taxes, but from revenue produced by new limits on itemized deductions for those with incomes of $250,000 or more.  This doesn't sound as bad as raising taxes on investment income, but those tax breaks are in the budget, as well. Since tax dollars are fungible, it really doesn't matter which revenue dollars are targeted to pay for which spending program.  The damage is the same, regardless of the labeling.

Strangely, while restricting what Bill Gates and Warren Buffet can deduct for mortgage interest and charitable gifts, Obama would leave them free to spend an unlimited amount on health care — all of it subsidized by Uncle Sam.

Given a combined federal and state tax rate of close to 50 percent, Bill Gates (through Microsoft) will be able to continue to buy health insurance at 50 cents on the dollar.  This means his incentive is to buy coverage until its value to him is about half of what it really costs.  Then, because the tax system subsidizes third-party insurance relative to self-insurance, he will likely have the kind of insurance that leaves him with few out-of-pocket costs.  At the national average of only 12 percent of health care spending out of pocket, Gates will have an incentive to consume health care until its worth to him only 12 cents on the dollar.

The Obama administration has released no specifics on what a detailed health reform plan would look like.  But if it is anything like what candidate Obama talked about on the campaign trail, it will ignore other commonsense incentives, from top to bottom.

For example, candidate Obama threatened a pay-or-play mandate on employers that would compel them to provide health insurance or pay a hefty payroll tax.  This would combine Obama's new taxes on capital with a new tax on labor — precisely what we don't need in the middle of a deep recession. Also, candidate Obama envisioned an outside-the-workplace health insurance exchange that would threaten to unravel the employer-based health care system.  He also promised a permanent expansion of Medicaid, which will induce people to drop their private coverage in favor of insurance provided at taxpayer expense. [link]

What we have seen so far is not encouraging — either for the economy or the health care system.

Comments (14)

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  1. Bart Ingles says:

    If they uncap the Social Security tax, Gates’s tax subsidy will be considerably higher than 50 percent. I’m assuming you consider some portion of the SS tax a true tax (i.e. that not all of it will be recovered in the form of higher retirement benefits).

  2. Joe S. says:

    Bart, I think the payroll tax is viewed by workers as a true tax. But even if it’s not I think you will find (when you get to the fine print) that when they remove the cap on Social Security taxes they will keep the cap on benefits. So for Gates, the additional tax will definitely be a true tax.

  3. Stephen C. says:

    Have you ever noticed that liberals hardly ever talk about taxes and the negative effects of collecting them? It’s as if the cost of seizing peoples’ incomes for the benefit of others is completely off their radar screen.

  4. John Goodman says:

    I am attaching this without comment:

    March 6 (Bloomberg) — President Barack Obama now has the distinction of presiding over his own bear market.

    The Dow Jones Industrial Average has fallen 20 percent since Inauguration Day, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg. The gauge has lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday.

  5. Bruce says:

    Have you noticed that every time Obama announces a new plan, the market goes down? And every time it looks like he may not succeed, the market starts rising again?

    Do you think the market is trying to tell us something?

  6. Bart Ingles says:

    He doesn’t have to announce a plan, he just has to appear on television.

    …when they remove the cap on Social Security taxes they will keep the cap on benefits

    Good point. Add the fact that the benefits themselves are taxable, reducing the effective return in a progressive manner. And the only real proposals I’ve seen to limit COLAs have been to make them means-tested.

  7. Joe S. says:

    There is a good editorial on this in Friday’s Wall Street Journal by Michael Boskin.

  8. Mark Kellen says:

    As a physician, it is painfully obvious that only patients who pay their own bills have any concern for cost. Obama’s plans do not address this primary problem of our system. The first problem with our system is employer provided health insurance as virtually dictated by the tax laws. If we get sick, the first thing which occurs is we can no longer work. Would it not make more sense to get insurance privately or through groups such as your bowling league, your church, your local civic group? In this way not only will you not lose your insurance when you lose your job, but you will not see your insurance changing constantly. The second big problem is people need to pay their day to day bills and insure against the big bills like heart attacks, car accidents or cancer. Lastly, the regulatory burden is immense. Why should you need a doctors prescription to get a blood test or an MRI? With these three changes we could greatly improve quality, create stability, and decrease costs. Mark Kellen, President AAPS

  9. Vic Wood says:

    It doesn’t take an economist to understand that when you tax the contributors(givers) to a community, then the non-contributors(takers) have less. Contributors are people who work, pay taxes, and even provide jobs. Non-contributors do not. This current road we are heading down has to end at a “dead end”. It seems the non-contributors have the Presidents ear.

  10. James Sewell says:

    Co. profits are the origin of taxes,appears the Pres. has overlooked this fact.

  11. Uwe E. Reinhardt says:

    That’s an old one, John. Have you run out of ideas? I can give you some.

  12. David Boyle says:

    It seems to me that President Osama and his toadies in congress have never heard of the Law of Diminishing Return. The more revenues removed of an economy the less there is available to be invested into new products and accordingly fewer new jobs. The final results is a deepening recession, higher interest rates and super inflation

  13. Tamzin Rosenwasser says:

    Let’s let Uwe Reinhardt point out the roaring successes of any Socialist system. What do you think made this new nation the powerhouse of the world in such a short time? Why isn’t Germany the innovator it once was?

    Didn’t everyone in the USSR have guaranteed medical care? Yes. And when Yeltsin needed heart surgery, he had an American cardiologist holding his doctor’s hand.
    Immediate Past President, Association of American Physicians and Surgeons

  14. Kevin Hilbiber says:

    Listen to all the keywords and talking points here. Do you REALLY think that the US will become a Socialist Country? Sounds like Beliefs to me, not Facts. That Obama has created a “Bear” Market by suggesting that the liars loans dealing bankers and low lifes who took them ought be held accountable? HAH! The stock market lives for profits, wether from production or deception. If you live by the market, go ahead and die by it. As if it is any true measure of anything but Socialized Greed [I will loan you money, now make me rich]……..