It’s Taxes, Stupid!

Sensory overload is defined as a condition in which one or more of the senses is so overloaded that it becomes difficult to focus on the task at hand. Those interested health policy may be excused if they display this disturbing condition. Health policy faces far-reaching, even fundamental, change through a bewildering variety of channels. Health policy analysts are heavily engaged in all of them. Meanwhile, they are neglecting the single policy debate that will more profoundly influence health policy than all of those now absorbing their attention: whether tax increases form a major part of any program to curb future federal budget deficits.

The distractions, though unfortunate, are understandable.

For starters, the Supreme Court is likely by mid-2012 to decide the constitutionality of the Affordable Care Act’s requirement that almost everyone must carry insurance. Yet, regardless of this decision, major campaigns are under way to repeal the law, or at least block its implementation.

In the background, the House has passed a bill to convert Medicaid into a block grant and to replace Medicare with vouchers linked to indices that for decades have grown more slowly than health costs. After the 2012 elections, supporters of these proposals are likely to control the Senate, and potentially the White House, too.

And, perhaps most consequential: When Congress raised the debt ceiling, it created a super committee to cut federal budget deficits. Congress endowed the committee with unlimited authority to recommend changes to any federal law and all government spending, and, as a result, proposals that could remake Medicaid and Medicare could pass before year-end with simple majorities in each house. Whether or not the special committee deals with the currently-scheduled 30-percent cuts in fees Medicare pays physicians, Congress will have to decide whether to let them take effect in early 2012 or once again to suspend them.

President Barack Obama has presented proposals of his own to cut federal health care spending. The cuts are small — just 3 percent over the next decade. Nonetheless, many groups are behaving as if vital interests are at stake and have protested so vociferously that the cuts seem unlikely to win congressional approval.

The outcome of these debates is obviously not without importance. But none of them will count for much, if deficit reduction plans exclude sizeable tax increases. To see why, consider what will happen if deficit reduction occurs exclusively through spending cuts.

Eventual deficit reduction is not an option; it is a necessity. Not immediately — cutting government spending or raising taxes in the midst of a recession is an extremely bad idea. But once economic recovery is well under way, it is vital to prevent the ratio of debt to gross domestic product from continuing to rise. The United States is widely regarded as a safe place in which to invest. But if the cost of servicing the national debt continues to outpace income growth, savers — foreign and domestic — will eventually come to doubt the willingness of the U.S. to service that debt. At that point, savers would demand sharply higher interest rates, raising the debt service burden still further and discouraging both private investment and consumption. The result would be chaos.

There is no magic debt/GDP ratio at which a crisis will occur. But currently, the prospect of a debt/GDP ratio of 0.9 after 10 years is triggering a widespread sense that it is necessary to do something to cut future deficits soon. To stabilize the ratio of debt to GDP it would take deficit reduction steps totaling between $4 trillion and $5 trillion over the next decade.

But it is impossible to cut spending this much without slashing Medicare, Medicaid and Social Security so deeply that it would become impossible to sustain the commitments of these programs, including the assurance of standard health care to the elderly, disabled and poor. The reason is that cutting the rest of government spending by so much would amount to a permanent shut-down of most of what government now does — to promote education, aid veterans, build highways, assure safe air travel and so on.

The special committee is charged to cut deficits ‘only’ $1.2 trillion over the next decade. Such cuts would put off the deficit problem for only about two years.

By 2013, looking two years farther into the future, projections indicate that, even with spending cuts of $1.2 trillion, deficits over the succeeding decade would be as large then as they are now. If in 2013 spending were cut by another $1.2 trillion over the succeeding decade, projected deficits would once again, two years later, be as bad as they are now. In brief, dealing with deficit by the age-old approach of “salami slicing” will make deficit crises a semi-permanent feature of the U.S. political debate and will guarantee that, sooner or later, health programs must be slashed. The old service station advertisement read: “you pay me now, or you pay me later.” The modern paraphrase would be that without sizeable tax increases in any deficit reduction plan, “you gut Medicare and Medicaid now, or you gut it later.”

For everyone interested in health care policy, therefore, the most important issue on the current policy agenda is not whether to cut physician fees, change Medicaid matching percentages, cut drug payments for dual eligibles, and so on. How these debates turn out will matter little in the end if sizeable tax increases are not part of any deficit reduction plan. If taxes go up, there will be fiscal room to sustain the nation’s current commitments to the aged, disabled and poor. If they don’t, those commitments will end. For those who want those commitments sustained, job one is fighting to ensure that taxes are increased at least as much as spending is cut.