The health care plan President Obama recently released is mostly a combination of the different plans passed by the House of Representatives and the Senate. But in one major way it breaks with long-standing precedent, proposing a fundamental wrong-headed change to both entitlement policy and tax policy. He proposes for the first time to tax capital income to support entitlement programs.
Payroll taxes have always applied just to wages and salaries and the revenue those taxes raise has gone solely to pay for entitlements like Social Security and Medicare. The deal has always been that we pay payroll taxes during our working years and receive the benefits they fund after we retire. President Obama’s health care plan would shatter this compact forever.
The Hospital Insurance (HI) portion of the payroll tax is 2.9 percent on all wages and salary that is paid half (1.45 percent) by workers and half (the remaining 1.45 percent) by employers. It is supposed to pay only for the hospital insurance portion of Medicare benefits that retirees receive. President Obama’s plan adopts this break with long-held policy and doubles down by further severing the link between HI and Medicare benefits. Obama’s plan not only increases the HI tax on wages and salaries for high-income earners similar to the Senate bill, it also applies the HI tax to investment income for the first time. Obama’s unprecedented plan would levy the current 2.9 percent HI tax on what the administration obnoxiously refers to as “unearned” income, which includes capital gains, interest, dividends, annuities, royalties and rents for families earning more than $250,000 a year ($200,000 for single filers).
Applying the HI tax to investment income would also continue to transform entitlements and how they are paid for. Using the revenue raised by levying the HI tax on investment income would open the floodgates for future rate increases to pay for other new spending programs. Adding a new revenue stream for Congress to tap when it needs more money is always dangerous and should be resisted at all costs, otherwise expanding government will be too easy for Congress.
Yet this is likely the reason President Obama wants to levy the HI tax on investment. Applying the HI tax separately to investment income will forever give Congress yet another tax to hike whenever it wants to fund a new program. If Congress can raise payroll taxes easily to pay for any spending it desires, payroll taxes will no longer be used to pay for entitlements, but as an ATM for Congress to go back each time it needs more cash.
Nancy-Ann DeParle, the Director of the White House Office of Health Reform, posted a note – ironically titled “Reality Check” – on the White House blog this morning claiming that a new report from the federal government’s health actuaries supports the administration’s position on health care reform.
But all that report says is that U.S. health care spending continues to increase – even though the rate of increase actually hit a historic low in 2008 (the latest year for which figures are now available). DeParle’s argument is basically this: We spend too much on health care, therefore the reform proposals currently in Congress will fix everything.
However, DeParle seems to have missed the actuaries’ earlier report on what those reform proposals will actually do – which is, to make health care spending grow faster, not slower. In particular, actuaries estimate that if the Senate health reform bill becomes law, total U.S. health care spending would increase by 0.7%, or $234 billion through 2019. And that’s after taking into account what little savings would be achieved by cutting Medicare benefits and encouraging employer to cut health benefits by taxing private insurance plans that are “too generous.”
In other words, the primary source of “savings” in the Senate bill comes not from making the health care system more efficient, but from (1) denying health care services to seniors under Medicare, and (2) from encouraging private insurance companies and employer to deny health care services to everybody else. Even after taking account of that so-called “savings,” total health care spending would still increase faster than it would without reform!
The inescapable conclusion is that reform proposals currently in Congress will take an inefficient health care system and make it even more inefficient than it is now. One does not have to be one of what DeParle dismissively calls “defenders of the status quo” to oppose a reform plan that will produce a result clearly even worse than the status quo.
DeParle claims that if “opponents of reform get their way,” health care spending will continue to increase. The fact is, if the administration gets its way, health care spending will increase faster than it does already and we’ll get less health care for our money. If opponents get their way, we might instead have real reform that gives patients more choices, gives providers incentives to give the best treatment instead of the most expensive treatment, and ultimately better health care at a lower cost. Unfortunately, that’s the opposite of the outcome the bills in Congress would give us.