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Famed Liberal Economist Casts Doubt on Obama’s Health Care Financing

2 min readBy: William Ahern

Eminent economist and liberal icon Henry Aaron of the Brookings Institution has written in the New England Journal of Medicine that financing universal health care as Pres. Obama and the House have defined it is nigh impossible in this economy.

The current taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. proposals to partially fund the health care expansion are two, President Obama’s and Speaker Pelosi’s (HR 3200). They both rely on raising the top two income tax rates from 33 and 35 percent to 36 and 39.6 percent to get some revenue, but then they differ.

President Obama wants to cap the value of itemized deductions at 28 percent. People who pay taxes at the 33 or 35 percent rates (soon to be 36 and 39.6 percent) wouldn’t get the usual deductions on their federal income tax returns when they list their home mortgage interest, their state-local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. , their charitable gifts, etc.

The House bill leaves those deductions intact; in fact, the value of those deductions would increase for high-income people when their tax rates go up. Instead of curtailing deductions, the House would impose surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. es on top of the higher tax rates, ranging from 1 to 5.4 percent.

Even these ideas don’t fund the public health plans that Democratic lawmakers want, and Aaron dismisses the idea that Senate Democrats can easily push aside Republican ideas and adopt a “go it alone” strategy. He cites one especially daunting obstacle:

The most formidable is the “Byrd rule,” which authorizes any senator to raise a point of order against “extraneous” provisions, which include those that boost deficits during the period of the budget resolution – 5 years for most elements of the 2009 resolution – or in any year thereafter. Any provision that does not affect revenues or mandatory spending is also extraneous. To overcome such points of order requires 60 votes, the same number needed to end a filibuster.

Aaron wistfully mentions the virtue of a value-added tax but quickly acknowledges that it’s a political non-starter:

Even at modest rates, an earmarked VAT could easily pay for health care reform. But no president, including Barack Obama, has embraced this revenue source, and few members of Congress have shown interest in using it.

Finally, he advises Democrats to dial back their wish list because, “The full reform agenda may be beyond immediate political reach.”