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)

How to Defeat the Wealth Alchemists

Lawrence W. Reed, president of the Foundation for Economic Education, tells us that we are our own worst enemy when it comes to fixing the Federal deficit.  I think he hits the nail on the head because I too see a disconnect between folks who say they want “freedom” but act in way that is contrary to that very freedom.  Take Social Security/Medicare for instance.  You can explain until you are blue-in-the-face that those programs will either go bankrupt or enslave following generations to dramatically higher taxes.  Yet, among older folks, you’ll more often than not get the same response I’ve heard too many time . . . “I don’t care as long as I get mine.”  That attitude puts a smile on the face of Wealth Alchemists.

Restoring true freedom and defeating the Wealth Alchemists will take hard work.  It will require that we all follow Reed’s seven step plan:

  1. I pledge myself to a lifetime of self-improvement so I can be the model of integrity that friends, family, and acquaintances will want to emulate.
  2. I resolve to keep my hands in my own pockets, to leave others alone unless they threaten me harm, to take responsibility for my own actions and decisions, and to impose no burdens on others that stem from my own poor judgments.
  3. I resolve to show the utmost reverence and respect for the lives, property, and rights of my fellow citizens. I will remember that government money is really my neighbors’ money, so I will not vote to loot them. I will stand on my own two feet, behave like an adult in a free and civil society, and expect the same of my children.
  4. If I need help, I will ask my family, friends, faith network, neighbors, local charities, or even strangers first – and government last.
  5. If I have a “good idea,” I resolve to elicit support for it through peaceful persuasion, not the force of government. I will not ask politicians to foist it on others because I think it’s good for them.
  6. I resolve to help others who genuinely need it by involving myself directly or by supporting those who are providing assistance through charitable institutions. I will not complain about a problem and then insist that government tinker with it at twice the cost and half the effectiveness.
  7. Finally, I resolve that the highest authority in which I place my strongest faith will not be the United States Congress.

Fiscal Federalism V: Federal Other Direct Payments

Following on my two previous blogs (here and here) . . . this blog shows federal “other direct payments” spending as percent of personal income. What is this?

According to the Consolidated Federal Funds Report (pdf) from which this data is drawn from, “other direct payments” include:

  1. Medicare (more than half the total)
  2. Excess Earned Income Tax Credits (the portion that is refunded back to the individual)
  3. Unemployment Compensation
  4. Supplemental Nutrition Assistance Program
  5. Student Financial Assistance
  6. And a partridge in a pear tree . . .

The table below shows the wide range of federal “other direct payments” dependency by state. The states that are most dependent are: Kentucky (12 percent), North Dakota (9.9 percent), South Dakota (9.5 percent), Mississippi (7.6 percent) and West Virginia (7.3 percent)

On the other hand, the states that are least dependent are: Alaska (2.3 percent), Utah (3.3 percent), Colorado (3.5 percent), Nevada (3.5 percent) and New Hampshire (3.5 percent–Woo Hoo!)

Federal Other Direct Payments as a Percent of Personal Income in 2008

The State of America’s Private Sector IX

The flip side of looking at the private sector share of personal income is, of course, the public sector share of personal income.  The public sector consists of two components: Personal Current Transfer Receipts (PCTR) and Government Compensation.

Today, let’s look more close at PCTR which is made up of programs such as Social Security, Medicaid, Medicare, etc.  In the first chart below, the amount of money flowing through PCTR has been growing at an accelerating rate.  In the last ten years PCTR nearly doubled to $2.1 trillion in 2009 from $1.1 trillion in 2000.

Personal Current Transfer Receipts between 1990 and 2009

The culprit?  The next chart shows the growth in Medical Benefits which more than doubled over the last ten years to $892 billion in 2009 from $427 billion in 2000.  Digging deeper shows an even faster rate of growth in Medicare which grew 128 percent to $500 billion in 2009 from $219 billion in 2000.

Of course, some of the recent spike is due to a surge in unemployment insurance thanks to the “Great Recession.”  Yet, remove that surge, and the underlying trend-line is not encouraging.  Given the eminent retirement of the baby-boom generation, it is within the realm of possibility that PCTR could double again . . . not in ten years, but within the next five years.

The questions is . . . how do we pay for it?  Think personal income is going to be doubling in the next five years?  And it’s always instructive to see the difference between Maine and New Hampshire.

Medical Benefits between 1990 and 2009

The State of America’s Private Sector I

The ability of America’s private sector to generate income and create wealth has been unparalleled in the history of the world.  More amazingly, the private sector continues to do this despite its ever diminishing role in the overall economy.

The chart below shows the private sector share of personal income since 1929 (the first year of available data) to 2009 (the last year of available data).  The opposite of the private sector is the public sector which is defined as all government compensation paid to employees (military and civilian) plus all personal current transfer receipts (Social Security, Medicare, Medicaid, Welfare, etc.).

As the chart clearly shows, the private sector has been steadily crowded-out by the public sector.  Nationally, the private sector has plummeted 24 percent to 69 percent of personal income in 2009 from 93 percent in 1929.

Additionally, the decline in the private sector can vary dramatically by state.  The chart shows my two favorite states for making such comparisons–New Hampshire versus Maine.  These two states are alike in so many ways, yet differ in one major area which is the size of the public sector.  New Hampshire has the 2nd largest private sector in the country while Maine has the 39th largest private sector in the country.

Why is this important?  At the end of the day, a bigger private sector means a bigger economy.  New Hampshire’s economy (as measured by personal income) is $8.3 billion larger than Maine’s despite having identically sized populations.  As a result, New Hampshire has the 8th highest per capita personal income while Maine has the 28th highest.  In dollar terms that amounts to an additional $6,085 more for every man, woman and child in New Hampshire.

This is an extremely important measure to keep abreast of.  As a result, this will be a regular series here at Wealth Alchemy . . . stay tuned for more analysis and updates using the most recent data.

Private Sector Share of Personal from 1929 to 2009