Obama, Healthcare Reform and the Cost of Good Health

In a move to close the budgetary gaps of the administration’s plan to overhaul healthcare, the House and Senate are considering increasing taxes in several areas. One alternative being debated is whether or not to increase the amount of taxes paid on sugary beverages. Several states already impose higher taxes on beverages such as soft drinks and have expanded these taxes to cover candy and other junk food.

Proponents suggest that a marginal increase of three cents on products high in sugar could help lower federal health care cost by decreasing the consumption of these products. However, opponents of the tax argue that the resulting decline in consumption and production of the products would result in a smaller tax base, decreasing the amount of income and payroll taxes collected. These results would be negated by the governments proposed increase in payroll taxes.

The Hospital Insurance Trust Fund is primarily financed by payroll taxes. These funds help pay for the inpatient care cost of those covered under Part A of Medicare. Two options are being considered under this plan.

The first option would be to raise the tax rate by 1 percent. This would increase the payroll tax paid by employers and employees from 1.45 percent to 1.95 percent. It would increase the payroll tax paid by the self-employed from 2.9 percent to 3.9 percent. Under this option the government would generate an extra $592.2 billion over the next 10 years.

Alternatively, the tax increase could only be applied to those making more than $150,000 and be adjusted annually for inflation. While this approach would avoid increasing the tax burden for lower and middle income earners, it would only provide about 13 percent of the revenues provided by the first option or $77.2 billion over the same period.

While the increase in payroll taxes will add to the HI Trust Fund substantially, some contend that the higher tax rates will reduce employee’s incentive to work. They say that this will also result in people looking for alternative nontaxable forms of income. On the contrary, a number of people argue that it may actually result in people working more as to maintain their standard of living because the increase in taxes would result in a lower after-tax income.

Although it has been agreed upon that healthcare reform is much needed, the question of who will foot the bill remains. It would appear that the proposed increases would have a higher affect on lower and middle income earners since the goods being considered are consumed in higher quantities by those classes. The increases in payroll taxes would also be a heavier burden on those earning the least in addition to negatively affecting the self employed.

It leaves one to ask, do the ends really justify the means.

Congressional Budget Office
Budget Options Volume 1, Healthcare