Rangel Says Surtax Is Best Way to Raise Revenue for Health Care; Actually, It’s One of the Worst Options

July 12, 2009

As anybody who has followed the health care debate on Capitol Hill knows, Democrats are looking everywhere for money and they appear set to raise taxes on high-income taxpayers. Charlie Rangel recently told the New York Times that the best way to do so is via a surtax that will raise top marginal tax rates on high-income taxpayers. On the contrary, most mainstream public finance economists would argue that such a policy is one of the worst ways to raise revenue (controlling for differences in distributional viewpoint). Base broadening (e.g. limiting exclusion of employer-provided health insurance) is better than marginal tax rate hikes.

Now some argue that any tax hike is bad and thereby suggesting such revenue raisers is akin to supporting tax hikes. But that’s not the issue here. Even if a member of Congress is opposed to any tax hike as a rule of thumb, some tax hikes are worse than others. It’s not just the revenue amount that’s part of the total tax burden; economic efficiency costs (i.e. excess burden) and compliance costs are part of the tax burden as well.

If Congress is seeking another $500 billion in revenue, it’s better to raise that revenue in a way that has a smaller marginal excess burden, all else equal. Changing a bill that raises $500 billion in revenue in a terrible way into one that raises $500 billion in revenue in a less economically harmful way is the equivalent of inserting an amendment that lowers the revenue amount! The total tax burden in the bill has been reduced and after-tax incomes for households will be higher, all else equal.

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