Matt Zeitlin: Impetuous Young Whippersnapper

The great hope for liberals on health care was that we could expand coverage, implement cost-cutting measures, establish a public plan and a health insurance exchange and fund some of this by either reducing or eliminating the employer tax benefit.

Not only would getting rid of the tax benefit help pay for the plan, which is a good thing on its own, it would also help correct one of the original sins of the American health care system — the expectation that it’s the responsibility of employers to provide health care. Not only does this encourage overconsumption of heath care, it also has negative effects on entrepreneurship and happiness-increasing mobility, as people are tied to their jobs with health benefits and are discouraged from starting new things or moving to new places.

During the campaign, Obama smacked McCain around for pledging to get rid of the employee tax benefit and not replacing it with a system better than the individual insurance market for those that would lose their health care. But us wonky liberals were buoyed with hope that when the administration sent signals showing that they would accept an elimination, reduction or progressivation of the tax benefit if Congress suggested it.

But that dream appears to have been dashed. Instead, Harry Reid has said that the tax benefit is off limits, and because other revenue enhancers have been ruled out, like capping charitable deductions for the wealthy, we now have a very bad idea — an income surtax:

Beginning in 2011, the plan would target all income over $350,000 a year for families and $280,000 a year for individuals, Democratic sources said.

The surtax would start at 1 percent, rise to around 1.5 percent for families earning more than $500,000, then step up again, to around 3 percent, for families earning more than $1 million, Democrats said. That would raise about $550 billion over the next decade, Democrats said — about half the cost of reforms that are expected to cost about $1 trillion.

Now, if this is really the only way we can get health care passed and paid for, I’d be willing to go along, but it should be noted that of all the ways to pay for health care, this might be one of the worst.

For one, the income tax is distortionary and it shouldn’t be raised unless we have to. Also, the targeting of people who are quite wealthy, but aren’t on the precipice of America’s income distribution, but are still politically powerful due to their relatively high numbers and influence, makes this tax less sustainable than other possible revenue sources.The more strucutural reasons for this is a bad idea is that, even if, eventually, Obama’s reforms lead to a cheaper health care system, they will still require large increases in government outlays for a long time. Depending on income tax surcharges for those outlays is a bad idea for two reasons.

One, as Megan McArdle points out, an expanded government-funded health care system will almost surely be counter-cyclical, meaning that it will start spending more when the economy is doing worse, and thus people’s incomes are going down. As those in California know, trying to fund a large government, and specifically a government with lots of public services and welfare spending, on the backs of the wealthy is disastrous in perilous economic times.

Second, a large scale entitlement or increase in social spending should involve some sort of tax increase for everyone to pay for it. That’s so we don’t get in the situation where the people paying for the benefit and the people receiving the benefit aren’t totally seperate. When that happens, the people receiving the benefit will always push for greater spending on them, which will then lead to political backlash from people actually paying the taxes that provide for the program and benefits.

This is not to say that our tax system shouldn’t be progressive, and that the wealthy should contribute (much) more than they will get out from social spending, but at a very basic level, it’s just politically and economically unwise to exclusively burden a relatively small number of people with paying for our social spending. Notice how in countries that have the levels of social spending liberals want, they have relatively broad based tax systems. There’s a reason for that.