Taxes Matter VIII: Will Higher Taxes Put Brake on Health Care Spending?

An intriguing and distressing paper by Jonathan S. Skinner (Dartmouth) and Katherine Baicker (Harvard) titled “Health Care Spending Growth and the Future of U.S. Tax Rates” (NBER Working Paper 16772) finds that growing federal health care costs will drive up future income tax rates to as high as 70 percent.  However, before that nose-bleed level is reached there will be action to stem the growth in health care because the economic damage ($1.48 per dollar of revenue raised) of the higher tax rates will simply be too great to bear.  From the abstract:

Higher Income Tax Rates Due to Higher Health Spending

The fraction of GDP devoted to health care in the United States is the highest in the world and rising rapidly.  Recent economic studies have highlighted the growing value of health improvements, but less attention has been paid to the efficiency costs of tax-financed spending to pay for such improvements.  This paper uses a life cycle model of labor supply, saving, and longevity improvement to measure the balanced-budget impact of continued growth in the Medicare and Medicaid programs.  The model predicts that top marginal tax rates could rise to 70 percent by 2060, depending on the progressivity of future tax changes.  The deadweight loss of the tax system is greater when the financing is more progressive.  If the share of taxes paid by high-income taxpayers remains the same, the efficiency cost of raising the revenue needed to finance the additional health spending is $1.48 per dollar of revenue collected, and GDP declines (relative to trend) by 11 percent.  A proportional payroll tax has a lower efficiency cost (41 cents per dollar of revenue averaged over all tax hikes, a 5 percent drop in GDP) but more than doubles the share of the tax burden borne by lower income taxpayers.  Empirical support for the model comes from analysis of OECD country data showing that countries facing higher tax burdens in 1979 experienced slower health care spending growth in subsequent decades.  The rising burden imposed by the public financing of health care expenditures may therefore serve as a brake on health care spending growth.

Is it me or are they basically saying the world has to blow up before we fix Medicare and Medicaid?  Not exactly the proactive solution . . .

The paper in its most recent form is gated behind NBER’s paywall.  However, I was able to find an earlier version of their paper on NBER’s website dated October 2010: Jonathan S. Skinner (Dartmouth) and Katherine Baicker titled “Health Care Spending Growth and the Future of U.S. Tax Rates” (pdf)

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