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)

Fiscal Federalism X: Federal Salaries and Wages

Following on my five previous blogs (Procurement, Grants to State and Local Governments, Other Direct PaymentsRetirement and Disability and All Federal Spending) . . . this blog shows federal “salaries and wages” spending as percent of personal income. What is this?

According to the Consolidated Federal Funds Report (pdf) from which this data is drawn from, “salaries and wages” constitute federal dollars that are used for:

  • Department of Defense personnel
  • U.S. Postal Service employees
  • U.S. Coast Guard personnel
  • Office of Personnel Management which manages all civilian employees except the Central Intelligence Agency, Defense Intelligence Agency, and the National Security Agency

The table below shows the wide range of federal “salaries and wages” dependency by state. The states that are most dependent are: Hawaii (8.5 percent), Alaska (8.0 percent), Virginia (4.7 percent), Maryland (4.4 percent) and Kentucky (3.5 percent).  Of note is the District of Columbia at 49.2 percent.

On the other hand, the states that are least dependent are: Connecticut (0.9 percent), New Jersey (1.1 percent), Wisconsin (1.1 percent), New York (1.2 percent) and Michigan (1.2 percent).

This is the last major federal spending category published in the CFFR.  Next we will turn our attention to looking at these categories over time–which has seen the largest percentage increase in federal spending?  Stay tuned.

Federal Spending on Salaries and Wages as a Percent of Personal Income by State for 2008

Fiscal Federalism VIII: Federal Spending Equals Higher State and Local Spending

A recent study by Professor Russell S. Sobel and George R. Crowley, as detailed in this previous blog, sheds light on a particularly disturbing aspect of federal spending–the inducement of higher state and local taxes.  Fortunately, since the study itself is rather lengthy, it is now possible to watch an overview by Dr. Sobel.

Fiscal Federalism IV: Federal Retirement and Disability

Following on my previous blog which showed overall federal spending as a percent of personal income . . . this blog shows federal “retirement and disability” spending as percent of personal income. What is this?

According to the Consolidated Federal Funds Report (pdf) from which this data is drawn from:

Retirement and disability programs include federal employee retirement and disability benefits, social security payments of all types, selected Veterans Administration programs, and selected other federal programs

The table below shows the wide range of federal “retirement and disability” dependency by state. The states that are most dependent are: West Virgina (12.8 percent), Alabama (10.4 percent), Arkansas (10.1 percent), Mississippi (10 percent) and Kentucky (9.8 percent).

On the other hand, the states that are least dependent are: Alaska (4.6 percent), Connecticut (4.7 percent), California (4.8 percent), Massachusetts (5.1 percent) and New Jersey (5.1 percent).

Federal Retirement and Disability Spending as a Percent of Personal Income by State for 2008

Fiscal Federalism II

As I pointed out in the first installment of this series, fiscal federalism today is dominated by money flowing from the federal government to state and local governments.  There are many side-effects of this inversion of fiscal federalism that I believe are detrimental to the American Republic.

A new study by Professor Russell S. Sobel and George R. Crowley sheds light on a particularly disturbing aspect of federal spending–the inducement of higher state and local taxes.  How?  Many grants to state and local governments are “temporary” in nature, yet when the federal funding dries up the recipient government feels political pressure to keep up the new spending.

For example, consider the U.S. Department of Justice’s Community Oriented Policing Services (COPS) hiring grants, whose purpose is to fund new officers to town police departments.  However, the catch is that towns that receive such grants must pick up the tab in the fourth year and beyond.  Here is an article summarizing the plight of a small town in Delaware facing such a challenge with the COPS grant.

In the end, the author’s conclusions are rather startling:

Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.