Why Obama is Facing Friendly Fire on Health Care

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President Barack Obama is launching a counter-offensive on health care reform, as resistance movements have come pouring out of his own ranks. Let's review the two most recent news-grabbing gripes, from Democratic governors and Democratic representatives, and the economic soundness their arguments:

1. The Governors
At the National Governors Assocation meeting this weekend, a bipartisan group of govs told the administration they were concerned about "unfunded mandates" -- that is, new legal spending requirements from the White House without funds delivered to states to ease their burden. And many of the most vocal critics -- from Colorado, New Mexico, Tennessee and more -- are Democrats nervous that if health care reform expands the number of people required to be covered under Medicaid (which is partly paid for by the states), states won't have the money to fully cover them.

To make the current Medicaid burden perfectly clear, the graph below is how the GAO recently broke down state spending of the stimulus money: almost two-third is going to Medicaid. Distributed funds are already being used as a social service crutch, and governors are absolutely right to worry that a health care bill that hides the cost of federal spending by leaving more of it to the states (as many worry the Senate version does) will force states to radically change their tax/spending policies or demand more federal aid.

stimulusbreakdown.png

2. Democrats Representing the Rich
The Wall Street Journal reports that two freshman Democrats who voted against the health care bill in committee just happened to represent suburban Las Veagas and the posh ski-towns dotting the Denver burbs. Another Congressional Democrat leading the charge against the surtax -- which is triggered at one percent for couples making more than $350,000 and rises to 5.4 percent above $1 million -- was a Northern Virginia representative, whose district is the nation's richest. One can respond to these concerns politically or economically. Politically, I'm sympathetic to representatives of rich districts whose constituents will naturally want their taxes to remain low. Indeed, as the article points out, it was precisely the issue of tax-increases in the 1993 that many Dems remember as the nail in the coffin that was the 1994 Republican takeover.

Economically, however, it must be pointed out that the richest 1 percent -- which is the group targeted by the surtax -- is paying the lowest effective tax rate in the last 15 years, and it's impossible to be serious about closing the deficit without seriously considering raising taxes on the richest one percent of Americans. Furthermore, it would be wise to slice that richest percentage of Americans into multiple, graduated tax brackets, so that we're not taxing mulimillionaires' salaried income at the same rate as a family making $200,000. As David Leonhardt wrote on the topic:

The top marginal rate hovered around 90 percent in the 1940s, '50s and early '60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.

A more full explanation of this idea is here.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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