Taxing the Rich To Pay for Health Care, Part Two

by Conor Clarke

Democrats in the House of Representatives unveiled their version of a health care bill yesterday afternoon, and the Congressional Budget Office released its preliminary analysis of the costs and benefits. If you sympathize with the case for universal health care, it's an occasion to be happy: the CBO says bill will leave 97% of the legal population insured by 2019. (I haven't read all of the summaries, much less the bill, so I'll happily outsource further thoughts to my former colleagues Jonathan Cohn and Ezra Klein. If you are a masochist, the full bill is here.) But the million dollar question -- excuse me, the trillion dollar question -- is who's writing the checks. The CBO says the bill will increase the deficit by $1,042,000,000,000 over the next ten years.

The House's answer is a surtax on the wealthiest Americans. The tax will affect families earning more than $350,000 a year, with rates ranging from 1% to 5.4%. On Monday, I posted some data about the decline of effective federal tax rates for the top 1% of families over the past fifteen years, and I think that is still helpful context for this discussion. The House's surtax will affect only the top 1.2% of families.

Nonetheless, the tax will be controversial, and I want to discuss some criticisms. For starters, here's a Washington Post editorial slamming the surtax:

The traditional argument against sharp increases in the marginal tax rates of a very narrow band of Americans is that it could distort their economic behavior -- most likely by encouraging them to put more of their money into tax shelters as opposed to productive investments. This effect could be greatest in certain states, such as New York, where a higher federal rate would add to already substantial state income taxes. 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.

I'm not convinced. I agree the distorting effects of income taxation are more worrying on the state level than the federal level, largely because it's easier to move to the other side of the Hudson River than the other side of the Atlantic Ocean. But that's really not a good case against a federal tax! I guess it's possible, though not altogether likely, to imagine a federal increase coupled with a high state tax nudging a few Manhattanites over to the New Jersey. But that will affect revenues in New York, not federal revenues.

As far as I can tell, the Post's second point ("the deeper issue") is pretty solidly incoherent. Yes, we will need to get serious about the deficit. But if the Post thinks we shouldn't tap the rich to pay for health care because we will need to tap the rich to pay for the deficit, that's an objection to the health care spending, not the tax. The old lesson here is that money is fungible: A dollar of revenue spent on federal deficit reduction is exactly the same as a dollar spent on national health care. If you prefer deficit reduction, then don't increase the level of federal spending on health care.

I'll be writing more about healthcare funding questions later today, so please drop me a line with thoughts, attacks, other junk, etc: conorjclarke [at] gmail [dot] com