Soaking the Rich to Pay for Health Care

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On Wednesday, House Democrats released a draft of the America's Affordable Health Choices Act and the Congressional Budget Office released its Preliminary Analysis on provisions of the bill related to coverage expansion.
 
Over at www.usbudgetwatch.org, we have added up various estimates of the ten-year costs and offests as follows:
 
 
COSTS (in billions):

 
OFFSETS

 
The largest single offset, by far, is a $544 billion surtax on wealthy Americans. This could be a big mistake.
 
Essentially, the proposal would institute a 1 percent to 3 percent tax on income over $350,000 a year, and a 5.4 percent tax for income above $1 million.
 
Combined with President Barack Obama's other tax proposals, this would increase the top marginal tax rate from 35 percent to 45 percent on earned income and 15 percent to 25 percent on capital gains and dividends.
 
And these numbers go up when we include the payroll tax and state taxes.
 
These higher rates, in turn, are sure to have some adverse economic effects -- particularly on labor supply and investment supply and composition. At the same time, they would encourage considerable amounts of legal (and illegal) tax evasion whereby workers restructure the form of their compensation to keep their taxes down, such as choosing better health insurance or more stock options.
 
But even assuming this tax has only a small impact on economic growth and lost revenue, do we really want the top 1 percent of Americans to pay for health care reform for the rest of us?
 
Yes, the system should be more progressive, but what happened to shared responsibility?
 
Do we want to send the message that our government can provide us whatever we want for free becase someone else will always pay the bill?
 
And if we make the rich pay for this, how much money will be left for the rest of our priorities? Will we have another surtax to patch the Alternative Minimum Tax (AMT). (This might actually be logical -- the AMT is designed to hit high earners)? And to help pay for Social Security reform? And what about the deficit? At some time they, too, run out of money.
 
You can soak the rich a few times, but eventually they get saturated.
 
Since health care reform has broad benefits, its costs should be spread throughout the economy. Here are some options to pay for it. My preference would be to go after the employer-sponsored insurance (ESI) exclusion which essentially exempts compensation in the form of health insurance from taxation.
 
As I argued recently, the exclusion is expensive, regressive, and distortionary. Through the exclusion, the government is subsidizing health insurance in a way that drives up costs, but gives a disproprotionate benefit to wealthier individuals.
 
Limiting or eliminating this exclusion would be quite progressive -- a goal clearly in mind when the surtax was designed. But it gives many of us at least some amount of skin in the game. AND limiting the exclusion could actually slow the growth of health care spending -- one of the key goals of this entire reform agenda.
 
Economically and philosophically, it's the right thing to do. Politically, it may be difficult.
 
But it's time for President Obama to start making the hard choices, and start demanding the shared responsibility he is so fond of discussing.