On The Surtax

Enough said.

Enough said.

I understand that newspapers come under a lot of pressure to publish a variety of views on certain subjects, and thus, we get mendacious commentary like this from Martin Feldstein, who served on Ronald Reagan’s Council of Economic Advisers.

Although the president claims he can finance the enormous increase in costs by raising taxes only on high-income individuals, tax experts know that this won’t work. Experience shows that raising the top income-tax rate from 35 percent today to more than 45 percent — the effect of adding the proposed health surcharge to the increase resulting from letting the Bush tax cuts expire for high-income taxpayers — would change the behavior of high-income individuals in ways that would shrink their taxable incomes and therefore produce less revenue. The result would be larger deficits and higher taxes on the middle class. Because of the unprecedented deficits forecast for the next decade, this is definitely not a time to start a major new spending program.

Whether or not Feldstein’s assertion is empirically true — that increasing taxes on the wealthy would sour their desire for making money and result in such a precipitous decrease in pre-tax income that the measure would actually lower revenue — the claim that tax revenues would shoot to 45 percent is just factually incorrect. According to the Urban Institute-Brookings Institution Tax Policy Center:

If Congress enacted both the surcharge and the President’s tax proposalsand also allowed the tax rate on dividends to return to 39.6 percent when the 2001 tax law expires (which almost certainly will not happen, given that the President has proposed to set the top tax rate on dividends at 20 percent) — the top 1 percent of households would face an effective federal tax rate of 34.4 percent.

So much for that. Anyway, instead of pulling my hair out about Feldstein’s specious op-ed, I’d rather take this moment to say that he has a point, sort of. There is a good reason to avoid the surtax as a revenue measure, it’s just not because of the reason Feldstein cites. That is, though the surtax in the House bill to which Feldstein alludes would help raise revenue, it wouldn’t do anything to discourage runaway health care spending. In particular, “Cadillac” style health benefits — which exist mostly because the tax code makes it effecient for employers to offer them — fuel health care inflation by stoking demand for expensive treatments and specialist visits when lower-priced care can solve the problem for less. After all, if you’re knee is bothering you and your insurance doesn’t differentiate between a more expensive orthopedist and the MRI they are going to order, you have little reason to seek primary care first. However, if we were pushed to first seek lower-cost options, we’d help contain spending by making sure all the treatments we get are actually needed. As it happens, this one of the only things the CBO says will definitely “bend the curve.”

Thanks to Marty’s distortions, you all know that now.


3 Responses to “On The Surtax”

  1. Repartay Says:

    […] On The Surtax […]

  2. Answering Matt Taibbi « Repartay Says:

    […] health insurance for this middle-income family.” The report is an illustrative example of why we should tax employer health benefits. I’m not sure what Taibbi is referring to when he says he’s seen that taxing employer […]

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