Funding Health Care Reform: surtax on wealthy?

Health care reform, no matter how it works, won't be cheap, since we will be adding millions of uninsured to the rolls.  (Hopefully, we will also be changing to a single-payer public option (at the least) and passing some uniform rules that do not permit insurance companies to make money by primarily fooling their customers about the amount of coverage or delaying and denying benefits that should be covered or kicking the sick off the rolls (for the public to pay for) while profiteering on the limited coverage and less risk of healthy insureds.)  Some have surmised that higher taxes will need to raise half a trillion, while cuts in costs will need to result in another half a trillion of savings.

 Bloomberg.com reports today that the House Ways and Means is considering a surtax on the highest-income Americans as a way to help pay for overhauling the health care system.  Charles Rangel proposed a surtax in 2007--4% on incomes exceeding $200,000, and an additional 0.6% on incomes above half a million.  This surtax proposal will likely apply only to incomes exceeding $250,000 and would substitute for the proposal to tax employer-provided health benefits to the extent they exceed the coverage for federal workers.  See Donmoyer, U.S. House May include Surtax on Wealthy in Health-Care Package, Bloomberg.com, July 7, 2009.

As usual, the Republicans have brought out their --"can't raise taxes on wealthy people because it would hurt small business" mantra.  Yes, folks, many small businesses are run as sole proprietorships or S corporations and therefore the income of those businesses is taxed directly to the owner.  Most of those small businesses don't produce income for their owners of that magnitude.  But if the income passed through to the owner exceeds $250,000, we don't need to worry about it hurting the small business if it is taxed.  Remember, that's PROFITS from the business that are passed through to owners.  If they are passed through to owners rather than being plowed back into capital or ordinary expenses of the business, that means that the business has already extracted what it needs and this is the "leftovers" that the owner is appropriating for his/her own use.  That profit should be as readily taxed as any other person's income who earns a quarter of a million a year or more.  It simply ain't gonna hurt small business. 

From my perspective, I think a surtax on the highest incomes--in fact, a progressive surtax of 3% up to half a million, 4% above that to 2 million,  5% between 2 and 5 million, and 6% on 5 million and up, and 7% on $10 million and up, 8% on $20 million and up, with a maximum surcharge of 10% on incomes of $50 million or more--makes a heck of a lot of sense.  Now if Congress would just eliminate the capital gains preference, we'd have a tax code that treated ordinary Americans who work for a living more fairly, while eliminating the inordinate deference currently provided to capital income.

Comments

[John]

Professor:
I like the concept, but I'd go higher on the high end, say 30% on $20 million and up?

[LindaMBeale]

I'd support even higher rates than I recommended, but I thought it would not be politically feasible. We haven't even been able yet to enact a law that would tax hedge fund managers on their compensation at ordinary income rates rather than letting them rake it in at preferential capital gains rates!

The good thing is that an overwhelming majority of the American people want Congress to make the changes necessary to create a decent health care system. Even if Congress does what it should and enacts a strong public option, reforms will be costly. The surcharge, in some form, is a reasonable way to pay for it, and a way that doesn't further sacrifice the consumption power of those who already consume all or almost all of their wage income. So it seems realistically possible that Congress will enact a surcharge.
So all I am asking is that those shaping the legislation consider a set of progressive rates so that those with tens of millions of annual income are taxed in accordance with both the benefits they receive from the system and their ability to pay. The top surcharge rate could well go beyond 10%.

[Peter]

Linda,

Have you EVER opposed a tax - any tax - on the wealthy?

Just curious.

[LindaMBeale]

Not nearly as often as I've opposed additional regressive taxes on the poor! Look, the fact is that the wealthy in this country enjoy extraordinarily low taxation at this point in time, and increasing those tax rates will be necessary to bring about economic stability (not to mention, in the long run, social stability). We have cut rates on the wealthy for decades, with the result that inequality has increased as well as the federal debt and deficits. We have to reverse that trend. The best way to do it would be by removing the capital gains preference, which a saner Congress back in the 1986 reforms recognized as the right tax policy step to take. We can also extend the current payroll taxes to all income, which is an obviously fair step to take. And we can increase the rates on the super-wealthy by at least some modest amount.

Turn the question around, Peter. Have you EVER supported an increase of taxes on the wealthy, who are most able to pay and who have benefited most from the government system that permitted them to acquire that wealth and those high incomes?

[peter]

Linda,

I would support tax increases on the wealthy if I were confident the money would be spent wisely and efficiently.

I don't think it's radical to demand accountibility from government as to how it has spent monies we have previously given it before we give it more money.

I don't oppose the concept of tax increases, I just oppose giving more money to bureacrats who have a long history of using it recklessly.

It's much easier for the government to raise taxes than it is for it to eliminate or reduce waste.

As long as we keep giving government officials more money via tax increases, they will have little incentive to clean up the waste.

We taxpayers become our government's enablers.

[zack]

So if we spend all this additional money on health care, whose pocket will this money ultimately end up in? Do we think this money will magically cause more doctors, nurses, and hospitals to spring into existance? If so, I would like to understand the mechanism better. If not, how do we expect the money to result in actual additional health care?

The fundamental problems are that as a nation we spend much too high a percentage of GDP on health care. Throwing a large amount of money against a relatively inelastic supply of health care services will likely be extremely counterproductive and make the problem worse. The second major problem is that probably close to half the health care expenses are due to bad lifestyle choices including obesity, drug use, and tobacco. Does it make sense to tax people living a more healthy lifestyle to subsidize this? Ultimately this will seriously erode political support for such huge expenditures.

[LindaMBeale]

Zack, I think your comment includes a fundamental misconception about the costs of health care and the way reform should work. On the one hand, reform should cost more because (1) we should be covering all the currently uninsured (about 45 million) and (2) we should be covering real health care costs that the privatized system currently is able to dump--by insuring only the lowest risk population and leaving the high risk population without care except when they use emergency rooms; by delaying and denying payment for coverage that appears to be included in the policy and leaving catastrophically ill insureds to go bankrupt paying for their own health care, etc. Second, it is probably a severe exageration to assume that half of health care expenses are bad lifestyle choices. Certainly some are, but then, we ALL--every one of us--make one of more of those poor choices. And we don't even know for sure which ones are poor choices, so the blame game you suggest just doesn't make sense. (For just one example of the latter, teetotalers have claimed that any alcohol at all is both a sin and unhealthy, but now it turns out that a little bit of wine each day is probably very healthy indeed.)

And while there will be increased costs from real health reform, since we will be providing real health care to millions who have had nothing and to additional milions who have had inadequate coverage, there should be some cost cuts if we do it right--ie, with a genuine public option. Private insurers have been raising costs by seeking "rent" profits while denying benefits, and paying their managers the kinds of salaries that make Main Street boggle. If they want to remain in the business, we need to set up a system that makes it impossible for them to compete without cutting those salaries down to size.

Finally, I'd contest your a priori conclusion that we spend too high a percentage of GDP on health care. Right now, the allocation of that care, I'd argue, is problematic, since there are some who get exorbitant care (including expensive and freauent cosmetic surgeries, botox, etc.) while there are others that get none. But it's not clear that the amount is not a reasonable amount, it if were better allocated. After all, if spending on health care gives all Americans a healthy life, think what that means for the quality of life. If it results in decent end of life situations for all, that would be a wonderful boon for us. Health is terribly important--a body, like a mind, is a terrible thing to waste. I could easily make the argument that it is reasonable to spend considerably more on education and health than we currently do, allocated better so that those at the bottom get much more than they currently get of both.

Health care services are primarily inelastic, by the way, because of the AMA's control, which is designed to limit the population of doctors and thereby increase the profits of doctors. Among many other factors, that is one of the reasons that many young doctors have withdrawn from the AMA as not setting appropriate priorities.

[LindaMBeale]

Peter
Your caveat--that you'd support higher taxes on the wealthy if only the government were better and would spend it wisely (meaning you don't think taxes are spent wisely now)--is problematic. Because the very people and organizations that have pushed for Americans to resent taxes have also been the ones pushing the agenda of "blame the government" "starve the beast" and the infamous Reagan quote that says it all when, as President of this nation, he said that "the government isn't the solution to the problem, the government is the problem" (paraphrased).

Sure, we need to cut spending on foolish things and stupid things. We need to cut back military spending stupendously. We need to cut out luxury spending. We need to increase environmental spending, parks spending, education spending, NEH and NSF spending and public transportation spending. But the way we do that is by electing the right people to serve us in the House and Senate and Presidency. Once we plan to spend, we need to raise the money to support the expenditures. I think this notion of condemning government and therefore condemning taxation is foolhardy. Our government is just us--people are not perfect, and government isn't either. But we can inspire our elected officials to be better, to reach for the best instead of the worst.

I also agree on accountability, but don't think that has much to do with whether we pay for needed health care reforms by raising taxes on the rich or by raising them on the poor (really, the only two alternatives). Yes, let's work for better accountability. There are lots of people doing that now, and more are needed. More citizens should become citizen activists and more of us should support real journalism (instead of the fake-entertainment-news that supplies most of America with their information about what's going on).

But the argument that cutting taxes will lead government to clean up waste is, I think, very wrongheaded. Fact is, without broad-based taxation that requires the wealthiest (who are the most powerful) to pay more, the wealthy will own the government and the waste will continue in their benefit. That has been the way it has gone for 40 years of the Reagan-inspired reign of tax cuts and military expenditures. We've had 40 years of corporate welfare and welfare for the wealthy, while we've cut many of the most important programs to the bones--science funding, culture funding, parks funding, environmental funding, education funding, energy conservation funding, unemployment compensation, etc. Fact is, putting the cart before the horse (cutting taxes because you want to "shrink" government because you think it is "wasteful") leads to shrinking of the parts that most benefit the public interest and expansion of the parts that best serve the wealthy. Not a good plan, in my book.

[zack]

LMB: "Zack, I think your comment includes a fundamental misconception about the costs of health care and the way reform should work."

I am not sure that is true because my questions were NOT rhetorical and I have reached no conclusion on how I think reform should work. I find the whole issue difficult and puzzling.

LMB: "Finally, I'd contest your a priori conclusion that we spend too high a percentage of GDP on health care."

Fair enough. See http://krugman.blogs.nytimes.com/2008/03/28/runaway-health-care-costs-were-1/ for some support of my assertion. Surprising since I rarely agree with Paul on anything.

But your response, and the government's proposals, seem to be dancing around an obvious fact. In order to provide health care services to those not currently receiving it you must either:

A: Take some health care services away from those currently receiving them.

or B: Increase the overall supply of health care services.

Government health insurance is not a particularly cost effective way to do B. It can be effective at doing A, but only if it mandatory for everyone and includes serious rationing provisions.

I am not necessarily opposed to a single payer system and it might well be the best of the alternatives. However I am very bothered by the hypocrisy. The proponents don't want to tell the people the truth about what the plan really means out of fear it may cause a loss of political support. And I greatly fear that the vast sums of money are primarily targeted at paying off the key constituencies needed for political passage of the plan rather than improving health care for the public.

[Jack]

Linda,
I'm a bit confused by the references to "raising taxes in order to pay for health care reform." My confusion is in thinking that the country runs on a unified budget. There are only several discrete expense programs, Social Security and Medicare the two big examples, that have specific funding streams. That being the case how can it be said that any tax increase is to pay for an added program rather than to contribute to the general budget and avoid additional deficits to that budget?

I'd suggest that any additional taxes applied to extraordinary levels of income be described as being attributed to the military budget, or to discrete aspects of that portion of the budget. Possibly there could be a surtax on incomes over $500,000 that would be exclusively designated to pay the costs of military adventurism; the Iraq Expeditionary Tax, the Afghanistan Democratization Tax, the Eric Prince Personal Fortune Tax. In this manner the more unproductive aspects of the budget expenses would be covered by the very wealthy leaving general tax collections to cover the costs of government programs designed to benefit all citizens, like health care reform.