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Subsidizing the Rich?

22 Jul

I’m going to go ahead and apologize, because I just can’t seem to break free of the topic of health care costs. Take heart, though, because I’m working on lining up some guest contributors in the near future who should bring some nice variety to this forum. That said, I hope to accomplish two things with this post. First, I’d like to clarify some of the confusion around health care costs. Second, I’d like to tell you about the biggest government program you’ve probably never heard of.

First things first. Health care costs are in the spotlight now more than ever. We’re told about the unsustainable rate at which health care costs are rising. We’re told that health reform will save money. We’re also told that health reform will cost at least $1 Trillion over the next 10 years. What does all this mean? Ezra Klein had an excellent piece on his blog yesterday that clarified the difference between “national health expenditures” and “public health expenditures” as well as the difference between “paying” for health reform and “saving money” through health reform.

It helps to think of national health expenditures–everything the country spends on health care–as a pie. Public health expenditures, then, are the piece of the pie paid for with public funds (i.e., taxes). The remainder of the pie consists of private health expenditures. People who oppose increases in public health expenditures do so because they don’t like the idea of their money being handled by what they envision is a big and wastefully inefficient government–one that they see as redistributing their money to others without their consent. Understandably, this animosity typically grows in direct relation to the amount of money being taken by the government, which means that the wealthy (who pay more income taxes) are typically more opposed to redistributive public programs (which do not repay them in-kind).

Ultimately, however, the pie is the whole pie and nothing but the pie. That is to say, regardless of who’s paying for it, we need to be most concerned with the overall level of health care spending in this country. If the private sector can do a better job than the public sector, then the majority of the pie should be a nice fat private slice, and vice versa.

As for the seemingly contradictory notions of how we are going to “pay” for a reform that will “save money,” it is important to note that payment refers to the public budget. If the size of the public slice of the pie is going to be increased, that means that new costs are being brought onto the public books. Paying for that really means offsetting these new costs by either cutting costs elsewhere from other government programs, bringing in new revenues (i.e., taxes), or a combination of both.

Saving money, on the other hand, has to do with the size of the whole pie, which gets larger every year. And it isn’t really saving money, it’s slowing growth. That is, if the pie is currently $2 Trillion a year in size, an absolute savings would require that the pie be something less than $2 Trillion in size next year. That is never going to happen. Instead, the CBO looks at historical trends to project the future size of the pie in years to come if things stay as they are versus how big the pie will be if certain reforms are enacted. If reforms keep the pie from getting quite as large as initially projected, then that’s a “cost savings.”

Okay, but back to why the rich tend to complain: they pay more taxes. Well, the flip side of that is that the tax exclusions for employer-based health insurance are actually regressive in nature. Because wealthier individuals are in a higher tax bracket, and also tend to have better (read more expensive) coverage, the tax benefits they receive are actually larger than those that accrue to the less well off. And, of course, those whose employers don’t offer coverage see none of this benefit. Because these benefits are not taxed, this basically represents money the government never brings in, but the effect is the same as if the government brought it in and then turned it right back into the health care system. That’s right, we’re talking about a government subsidy of over $200 Billion a year that takes place “off the books” and accrues benefits disproportionately to the wealthy.

It’s understandable that wealthy Americans don’t want the government taking more taxes from them and redistributing them to those in need (I like my money too), but you sure don’t hear them complain about the government subsidizing their own health care coverage. I wonder why?

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1 Comment

Posted by on July 22, 2009 in Uncategorized

 

One response to “Subsidizing the Rich?

  1. Joel

    July 23, 2009 at 7:12 pm

    The following statement: "but the effect is the same as if the government brought it in and then turned it right back into the health care system" is not true. Regressive taxation is not the same thing as a subsidy. Excluding premiums for employer-sponsored insurance from taxable income reduces the tax revenue the government collects, but does not give them authority on how to spend the extra cash.This argument sounds like the old "rich people only donate to charity for the tax break". It's emotionally charged and convincing at first, but the numbers don't add up. Removing the insurance premium from a wealthy person's taxable income might give them a tiny break ($400 off a $1000 premium in the 25% bracket), but since they are in a higher tax bracket they are, as you mentioned, already paying far more tax than a poor person. This "benefit" is minuscule by comparison. Furthermore, this exclusion is unlikely to encourage a wealthy person to pay for more coverage than they need, so it isn't as though a wealthy person is going to carry more insurance just to get a bigger "break". Spending $5000 to save $2000 just doesn't make sense.This type of tax exclusion benefits everyone, except perhaps those already benefiting from the earned income tax credit.

     

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