Taxes for the Rich, Health Care for the Rest

The health care bill that emerged from the House this week probably represents the liberal end against which Congress will try to wrangle, amend and compromise its way to a passable health care plan in the next few months. The bill -- which provides coverage for about 97 percent of Americans at the cost of more than $1 trillion -- will be judged in Washington primarily on the basis of how we will pay for it. Our health care crisis, after all, is not just a health crisis, but a fiscal crisis, as health spending is projected to devour increasing government and personal spending. When DC bigwigs call for the plan to be "deficit-neutral" in ten years, it means they're looking for a way to set health care spending on a fiscally sustainable course and pay for the upfront changes within the next decade without further burdening the deficit.

How does this bill do that? It promises Medicare/Medicaid savings and forces almost all employers to cover their workers. But most importantly, it taxes the rich.

Wherever you fall on the ideological spectrum, this additional federal tax on the top one percent -- known as a surtax -- should not be terribly surprising, even if it is troubling. There are other options for paying for health care reform, but they all come with their particular political challenges. The argument for rationing has few friends in Congress facing 2010 reelections. We could repeal the tax break for employer-paid health insurance, but labor unions will scream bloody murder. We could reduce the charitable deduction rate, but that idea has already caused a stink. We could legislate all sorts of sin taxes on soda, and cigarettes, and calories, but those are the most regressive taxes in the bunch, and will likely face strong public opposition. We could also promise that a host of smart cost-saving innovations -- like electronic records and a national database of best practices to keep individual districts from falling back on expensive, unnecessary treatments -- but it's very hard to say exactly how much these programs would actually save, and we should probably do them anyway. So tactically, it's no surprise that the House bill comes with a hint of Robin Hood.

But of course, how much Robinhoodism is good for America is an issue that the Senate -- and the country -- will certainly debate. The current surtax affects households earning more than $350K a year with a progressive rate that moves from 1 to 5.4 percent, and expects to bring in more than $500 billion over the next ten years. The debate over How High is Too High is underway, and I want to give a sampling of it before pulling away to read more about this legislation.

The Washington Post writes an editorial today calling the House's surtax excessive. The authors acknowledge that the rich bear an historically low burden: "the average rate paid by the top 1 percent of households shrank from 33 percent in 1986 to about 23 percent in 2006." But such a sudden jump in taxes for the rich could hurt productivity or encourage them to stash their money in tax shelters. They go on:

The deeper issue, though, is whether it is wise to pay for a far-reaching new federal social program by tapping a revenue source that would surely need to be tapped if and when Congress and the Obama administration get serious about the long-term federal deficit.

To echo Conor: That makes no sense. Raising taxes on the rich goes precisely to the deeper issue of the deficit. Fred Hiatt, the editor of the very page on which the Post article ran, just said so himself! So what the Post must object to, I suppose, is the size of the tax increase, and not the principle.

Instead of a surtax, the editorial suggests that Congress end the tax break for employer-provided health benefits. I agree. So do lots of people. But ending that $250 billion transfer entirely will be politically impossible. A more realistic cap -- like Steven Pearlstein recommends -- might only net something in the tens rather than hundreds of billions over the next decade. But of course, as long as we're talking about realistic, it's important to note that the surtax proposed in House bill could be just as politically impossible to swallow, at least in the Senate. After all, Robin Hood and the law never did get along.