Financing Health Care Reform by Soaking the Rich: A Bad Idea All Around

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

July 21, 2009

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 argument that every hike in the top tax rate would kill the small business sector.)

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, which was originally suggested by my colleague Jason Furman, now deputy director of the National Economic Council, and then by John McCain during the campaign last year – 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 non-taxation 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.

If we want to seriously reform the health care system, we need our politicians to get serious with some sensible policies.