The onerous burden on the poor of Obama’s health care plan

“Barack Obama is, in many ways, the left’s answer to Ronald Reagan.

Both came to office as charismatic and self-confident leaders, elected in times of economic crisis and determined to move the economy in a new direction. What is less obvious, however, is that the signature domestic issue in President Obama’s first year in office — health care reform — is shaping up to be the antithesis of President Reagan’s supply-side economics.

The starting point for Ronald Reagan was the idea that people respond to incentives. The incentives that he most worried about were those provided by the tax system. …
…
The key economic concept here is the marginal tax rate, which measures the percentage of a family’s incremental income to which the government lays claim. During Mr. Reagan’s time in office, the top marginal tax rate on earned income fell to 28 percent from 50 percent.

The verdict on supply-side economics is mixed. The most striking claim associated with the theory — that cuts in marginal rates could generate so much extra work effort that tax revenue would rise — is unlikely to apply except in extreme cases. But substantial evidence supports the more modest proposition that high marginal tax rates discourage people from working to their full potential. …

President Obama has said he wants to raise marginal tax rates on high-income taxpayers. Yet under his policies, the largest increases in marginal tax rates may well apply not to the rich but to millions of middle-class families. These increases would not show up explicitly in the tax code but, rather, implicitly as part of health care reform.

The bill that recently came out of the Senate Finance Committee illustrates the problem. Under the proposed legislation, Americans would have the opportunity to buy health insurance through government-run exchanges. Depending on a family’s income, premiums and cost-sharing expenses, like co-payments and deductibles, would be subsidized to make health care more affordable.

A family of four with an income, say, of $54,000 would pay $9,900 for health care. That covers only about half the actual cost. Uncle Sam would pick up the rest.

Now suppose that the same family earns an additional $12,000 by, for example, having the primary earner work overtime or sending a secondary worker into the labor force. In that case, the federal subsidy shrinks, so the family’s cost of health care rises to $12,700.

In other words, $2,800 of the $12,000 of extra income, or 23 percent, would be effectively taxed away by the government’s new health care system.

That implicit marginal tax rate of 23 percent is a significant disincentive. And it comes on top of the explicit marginal tax rate the family already faces from income and payroll taxes. Altogether, many families would face marginal rates at or above the 50 percent level that animated the Reagan supply-side revolution.”

N. Gregory Mankiw, “Supply-Side Ideas, Turned Upside Down”, The New York Times (31 October 2009).

http://www.nytimes.com/2009/11/01/business/economy/01view.html?_r=1&ref=business


N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.

The CBO numbers on which Professor Mankiw’s assessment is based can be found at http://www.cbo.gov/ftpdocs/106xx/doc10642/SFC_Subsidies_Penalties_10-09.pdf.


This Tdj is further on that of 9 October, which pointed out that if one includes Social Security contributions, state and local income taxes and the hidden taxes on consumption expenditure the total tax take of the government could easily exceed two-thirds of any raise in pay that low and moderate income families receive. In fact, in the case of families making between $42,000 and $54,000 the implicit marginal tax rate of the Senate Finance Committee bill is 34 per cent of any additional income they might earn, bringing the total tax take of the government to over 75 per cent of any additional income that family might earn.

It is not just that the health care reform proposals are confiscatory on the incomes of the poor. Large increases in marginal tax rates also tend to depress labor effort across all income groups, and in doing so they depress the level of GDP compared to what it would be without the added taxes. As the negative effect on the GDP of the hike in marginal tax rates from the health reform takes lowers GDP, it will also lower tax revenue, making the budget deficit larger than the CBO assumed. This is only one reason why the budget deficits associated with the health reform packages in Congress will inevitably be much larger than the CBO estimates.

When politicians tout their policy proposals they always hype the benefits that are supposed to come if their ideas are implemented and never talk about the costs associated with what they propose to do. It is particularly contemptible for them to advertize that they are going to help the poor when in fact any help they propose to give comes at the expense of the very people they say they want to help.

We should provide better access to health care to those at the bottom of the economic ladder. To this end, there are many ways to channel additional resources to the poor that do not come at the expense of low-income families. Substantial increases in marginal tax rates on the incomes of the working poor, however, is not one of them. Indeed, when economists say that means-tested entitlements financed by heavy marginal taxes on the incomes of the poor are especially oppressive, the health care reform bill provides a perfect example of what they are talking about.

Professor Mankiw is right to stress the work incentives of these bills now in Congress. I would go further. The health care reform measures now in the Congress should be rejected as creating a poverty trap for the poor. Then better alternatives can be debated and a real program of benefit to those who need help can be considered and passed by the Congress.