Health care plus entitlements plus higher taxes only on the rich" equals disaster.
By Jagadeesh Gokhale & Kent Smetters
Even a popular president like Barack Obama cannot win arguments against two forces: God and mathematics. While the president has openly shared his reverence for the former he has decided to take on the latter. Its a fight that he will lose.
Upon taking office President Obama decided to postpone his campaign promise to implement a true cost-saving reform of Social Security and Medicare. Instead hes trying to expand the nations entitlement offerings with massive new government spending on health care.
The
Congressional Budget Offices mid-July score" of the main House health-care bill puts the price tag at about $1 trillion over the next decade; the Blue Dog Democrats managed to shave off only about $100 billion.
But ten-year budgets as even the CBO has warned in the past are not reliable for assessing entitlement programs. Most of the spending in the House plan is phased in over several years making the ten-year cost look deceptively small. Extending the budget window by just three years doubles the programs cost to over $2 trillion.
And thats just a start.
The most comprehensive view of a programs projected shortfall comes from calculating the present value of all of its future outlays and subtracting any new revenue sources. The House plan has a present-value shortfall of $13.6 trillion. Thats the amount of additional money that must be set aside in todays dollars to put this program on a sustainable course.
This estimate optimistically assumes that health-care costs will eventually grow with the general inflation rate (theyre currently growing much faster).
This enormous shortfall is equal to about 1.6 percent of all future projected GDP or 3.5 percent of all future payrolls subject to Social Security taxes. From
those numbers this additional burden might actually seem manageable.
But President Obama promised that he would raise taxes only on those in rich" households.
Thats where the arithmetic gets especially interesting. Funding the new health-care plan on the backs of households making $200000 or more per year would require permanently increasing their annual total tax payments by about 50 percent.
So for example a household that currently pays $50000 in federal income taxes would need to pay another $25000.
Remember however that Social Security and Medicare already face enormous shortfalls. Shoring up these programs another Obama campaign promise would require collecting 328 percent more tax revenue from the rich. No we didnt forget a decimal point: That is three hundred and twenty-eight percent.
Most households making between $200000 and $500000 per year would not have enough money to pay their federal state and local tax bills much less eat. Rich households in California or New York would not be able to pay their tax bills regardless of their incomes. And a family of four living in a low-tax state (South Dakota) would need to gross almost $900000 per year to have enough income left over to reach the poverty line.
In fact there is no mathematical configuration of taxes on the current rich alone including additional levies on the super-rich" making more than $1 million per year that is compatible with putting the nations entitlement programs and the new health-care plan on a sustainable course.
U.S. federal income taxes are already very progressive. The top 10 percent of income earners pay the majority of federal income taxes. The top 1 percent of income earners pay a quarter of all taxes.
But cant we expect the rich to pay even more? Maybe for a few years but not without disastrous consequences to Americas future.
A major tax increase causes the tax capacity of the rich to shrink gradually as two factors kick in.
First many of the households falling into Obamas rich" definition are married couples in which both partners are working professionals. When tax rates rise the lower-earning spouses in these couples tend to work less. Often they quit work entirely.
Second many of the rich" are budding entrepreneurs and small-business owners. They finance their operations using their own after-tax income or with after-tax resources from family and friends. Small-business innovation is
the fuel for long-term economic growth. In fact many of the largest companies in the United States today were either small or nonexistent just 25 years ago. Killing small business kills the American economy.
We cannot allow federal health-care subsidies mainly Medicare and Medicaid to continue to grow faster than inflation indefinitely.
The challenge is to find ways to make the nations commitments to retirees and others sustainable without harming economic growth prospects. In this regard the Obama administration is charting a course in the wrong direction expanding entitlements on the backs of our nations job creators.
The math will work against the Obama administration and eventually against us all.
Jagadeesh Gokhale is a senior fellow at the Cato Institute. Kent Smetters is a professor at the Wharton School and a visiting scholar at the American Enterprise Institute.
