To help pay for health reform, President Obama’s wants to limit deductions for high income taxpayers. He’s on to something, but I’ve got some questions about what he’s doing.
This tax increase, sure to be politically contentious, would kick in starting in 2011 and raise about $318 billion over 10 years. That sounds like a lot, but in fact it would only fund about 20 percent of the total cost of the health plan Obama outlined in his presidential campaign. TPC estimated the price of that plan at $1.6 trillion over 10 years.
As tax policy, his idea has some merit. Deductions benefit high earners more than ordinary working people. Think of it this way: If you're in the 35 percent bracket, a $100 deduction is worth $35. If you are in the 10 percent bracket, it is only worth $10. The Obama plan would take a step toward turning these deductions into quasi-credits by limiting their value to no more than 28 percent, no matter how much you earn.
But there are some big downsides to his idea as well. Here are four:
What sacrifice? Obama talks often about shared sacrifice, but he’s loading much of the cost of health reform on the backs of about three million upper-bracket taxpayers. If we are going to fix the health system, everyone should be contributing.
The elephant in the room. Obama would pay for health reform by capping tax benefits for everything from charitable giving to mortgage interest. But he leaves untouched the most obvious one: employer-sponsored medical insurance, which is excluded from income but is not a deduction. In the campaign, Obama promised to protect this subsidy, but it was a bad choice.
Clumsy reform. If Obama wants to restructure tax expenditures, he’s picked an awkward method. It would be much easier if he just converted most deductions to credits or, as some have proposed, capped all deductions at 15 percent—for everyone.
What reserve fund? Finally, while Obama says revenues raised by limiting deductions would be reserved for health reform, money is fungible and there will not be any way to know how it is used. Besides, as long as Washington is running deficits, there is no money to reserve.
Obama’s plan would limit the value of deductions to 28 percent, even for those in higher brackets. At first, this would seem to bite especially hard because he’s also promised to restore the pre-Bush 36 percent and 39.6 percent tax brackets.
But it isn't that simple, especially since Obama's plan is hopelessly tangled up in the Alternative Minimum Tax. Many of roughly 3 million taxpayers who might be targeted by Obama’s new tax hike have already seen the value of their deductions limited to 28 percent by the AMT. They have already, as it were, given at the office.
One other quick note. Obama’s overall health plan sounds a lot bolder than it really is. As blogger Bob Laszewski notes, besides slashing subsidies to Medicare managed care plans, Obama would reduce medical costs by only $140 billion over the next decade—only about 1 percent of total expected federal health spending. Health reform, like the tax hikes to pay for them, leaves many questions unanswered.
