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Are the Obamacare Repeal Tax Cuts Just Giveaways to the Rich?

Jeffrey Miron

In the debate over the repeal of Obamacare, much opposition has
focused on the suggestion that the Republicans’ proposed cuts in
subsidies and coverage aim to fund big tax cuts for high-income
taxpayers.

The House and Senate health care bills adjust or repeal many
Obamacare taxes, but the main ones being castigated as
“handouts to the rich” are the elimination of the 3.8%
Affordable Care Act (ACA) hike in the tax rate on investment income
and the 0.9% increase in the Medicare tax on wage and salary income
for high-income earners (over $200,000 for an individual or
$250,000 for a family). The Tax Policy Center has estimated that, by 2026, people who earn
$5 million or more would, on average, see their taxes cut by almost
$250,000. 

This criticism of the Republican bills is understandable but
wrongheaded. 

The economically thoughtful way to evaluate government spending
and taxes involves two steps; first determining whether the
spending is justified and a good use of government resources,
setting aside how it’s paid for, and secondly, deciding on the best
way to raise revenue to pay for that spending. 

This criticism of the
Republican bills is understandable but wrongheaded.

The fact that taxes that distort the functioning of the economy
will be necessary to pay for government spending is a cost of that
expenditure. But otherwise, “sources and uses” are
separate issues.

How to pay

So, taking the amount of spending as given, whether under the
ACA, the American Health Care Act (AHCA) — or the Better Care
Reconciliation Act (BCRA), which taxes should be used to pay for
it? 

Standard economics says that high marginal tax rates reduce
economic activity by reducing the incentive to save and work. And
the ACA taxes on investment savings and high incomes are exactly
backwards from this perspective; they raise the tax burden on
savings and working for high income taxpayers, the ones most likely
to alter their behavior in response to such taxes, thereby slowing
economic growth which affects everyone.

There is considerable evidence that cutting taxes of this kind is a
plus — such cuts boost the economy in the short term,
and perhaps to a modest degree over the longer
haul.

Thus repeal of the ACA investment and income taxes makes sense,
whatever the fate of Obamacare more broadly. 

Eliminating these taxes does imply higher deficits, even though
the cuts will stimulate economic activity. The lost revenue is estimated by the Congressional
Budget Office at around $30-35 billion per year.

Cadillac tax

How should Congress make up for the lost revenue? By raising
taxes that improve rather than harm economic efficiency. The
obvious example is the so-called Cadillac tax on high-cost health
insurance policies.

This tax is an imperfect antidote to the current tax exemption
for employer-paid health insurance premiums. By waiving taxes on
the premiums, the current law subsidizes health insurance for those
who obtain coverage through their employer, so it encourages
purchase of overly generous provisions like low
deductibles. 

The public hates high deductible plans, but they do exactly what
insurance is supposed to do — protect the insured from large,
unpredictable expenses, not reimburse people for routine or
moderate health spending. This subsidy incentivizes care for which
the costs exceed the health benefits, and this increased demand
puts upward pressure on prices and therefore spurs health cost
inflation.

The best fix of this feature of the tax code would be repeal of
the tax exemption. According to the Office of Management and
Budget, that would generate more than $200 billion per year in
additional revenue, while making the tax and health care systems
more efficient.

Repeal of the full exemption, alas, faces stiff opposition. Not
surprisingly, therefore, the ACA did not schedule implementation of
the Cadillac tax, which goes only part of the way toward fixing
this problem, until 2018, four years after the ACA took effect.
Congress later pushed this to 2020. The House and Senate Republican
repeal bills postpone implementation until 2025 and 2026,
respectively. 

Other changes to the tax code, unrelated to health care, would
generate more revenue while improving economic efficiency —
elimination of the home mortgage interest deduction is a major
example.

Calm discussion of the House and Republican health bills,
therefore, suggests that individual features — such as repeal
of highly distorting taxes — make sense as good economics;
they are not merely giveaways to the rich.

Jeffrey
Miron
is director of economic studies at the Cato Institute and
director of undergraduate studies in Harvard’s Economics
Department.