The Public Policy

Pick Your Poison

Government-run health care can only mean huge new taxes. Here are some of them.

By 9.1.09

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As Milton Friedman used to say, "There's no such thing as a free lunch." This is especially true when you talk about "government" picking up the bill for "everyone's" health care. Any such overhaul is going to cost money… and a lot of it. Most analysts estimate the cost of the proposals being considered by Congress as ranging between $1.2 trillion and $1.6 trillion over ten years.

Currently there are four main revenue proposals being considered either alone or in various combinations: a surcharge on high-income earners; various "sin" taxes; individual and business coverage mandate penalties, and a value added tax (VAT). Each of these carries its own unique set of detrimental effects.

VAT: This is essentially a sales tax applied at each stage of production instead of only at the final point of purchase. This could possibly be the largest tax hike in history because a value-added tax would unlock a new mechanism allowing the federal government easily to take a massive amount of additional money from taxpayers' pockets at each stage of health care.

Surcharge on the "Rich": The proposal in HR 3200 will supposedly raise a staggering $544 billion over 10 years, according to the House Ways and Means Committee. When you add this 5.4 percent surtax to Obama's budgeted tax increases on the top two income brackets, the average top tax rate would be higher than in France and "higher than all but three countries in the OECD: Denmark (60 percent), Sweden (56 percent), and Belgium (54 percent)," according to the Heritage Foundation.

That would be a job killer because many small businesses pay income tax through the individual tax system. In addition to the obvious economic impacts, there is also a concern over the reliability of funding based on taxing only 1.2 percent of the population -- the "rich." States such as California, New Jersey, and New York rely heavily on hefty taxes on high income earners, and each of these states faced abnormally high deficits this year when compared to those relying on broader, flatter tax bases.

"Sin" Taxes: The call for new federal "sin" taxes on soft drinks, plastic surgery, video games, etc., means both higher taxes and more control of politicians over our personal decisions. It uses tax policy to discriminate against certain legal products such as soda, when the market is already rich with an abundance of "healthy" and "unhealthy" choices. The expansion of such taxes continues leading us down the slippery slope eroding individual liberties. Plus, sin taxes encourage consumers to evade them through smuggling and other means, which increases crime and other social disturbances.

Mandate Penalties: According to the CBO in a July 26 letter to Rep. Dave Camp (R-Mich.), "Increases in revenues would include the payments by employers to the exchanges for workers who received coverage there (amounting to $45 billion); payments of penalties by uninsured individuals ($29 billion); and payments of play-or-pay penalties by employers ($163 billion). Together, those provisions would increase federal revenues by a total of $238 billion over 10 years." All of that is money taken directly from individuals or that employers won't be able to use to pay higher wages.

OVERALL, THERE ARE THREE fundamental problems in funding the proposed government-controlled health care overhaul.

1. Obama has made a firm pledge that it must be deficit-neutral. But in its July 26 letter, the CBO said, "relative to current law, the proposal (HR 3200) would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window."

The final year of the CBO's 10 year deficit projections for the health care overhaul makes up $65 billion of the $239 billion deficit, 27 percent the total. This is particularly alarming because the sharp increase at the end of the ten year window indicates revenues will not keep up with the rising costs, thus increasing the deficit further and putting all taxpayers on the hook for potentially trillions more. This means taxes will have to be increased, health care services will be rationed or cut, spending must be cut from elsewhere, or a combination of the three.

2. Obama vowed not to raise taxes on those making under $250,000 per year. Yet a VAT, "sin" taxes, and the mandated health insurance penalties all would fall on those under the $250,000 threshold. After breaking his promise by raising tobacco taxes, another middle class tax hike would likely be a tough public relations battle.

3. The real elephant in the room is the unfunded liability already racked up by Medicare. It currently stands at $37.8 trillion, or $330,585 per household. Medicare is projected to go bankrupt by 2017 and is not addressed by any of the plans.

The CBO estimates the FY2009 federal budget deficit will be $1.825 trillion while the federal debt sits at $11.7 trillion, not including trillions of dollars in unfunded Medicare, Medicaid, and Social Security liabilities.

So if you want health care reform in its current form, just remember there is no such thing as a free lunch, especially when the government is involved.

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About the Author

John Nothdurft (jnothdurft@heartland.org) is the budget and tax legislative specialist for the Heartland Institute.