Healthcare Reform Without Raising Marginal Rates

Earlier today I was on a conference call Office of Management and Budget director Peter Orszag held with progressive bloggers, and from my vantage the most interesting facet of the new budget being presented by the Obama administration is how the government would pay for a shift to universal healthcare.

The headline chosen by the editors at The New York Times to describe the budget plan is "To Pay for Health Care, Obama Looks to Taxes on Affluent," which is correct. But the key here, and what I think has the potential of making this move more palatable, is that the Obama plan does not raise the marginal rate on the affluent -- or at least not beyond allowing rates to return to the level seen during the Clinton administration (just half of what they were at the outset of the Reagan administration, I might note).

Instead of raising the marginal rate on high wage earners -- say from the 39 percent seen during to the Clinton administration to 45 percent or even 50 percent (remember, this is not the rate on all income, only the rate on dollars earned above a particular mark, say $250,000 or $1 million in a year) -- the Obama plan would instead curtail itemized deductions to the benefit conferred following Ronald Reagan's tax reform of 1986. That is to say, instead of accruing a $3,900 benefit on $10,000 of itemized deductions (assuming a 39 percent marginal rate), an individual would only accrue $2,800 in benefits -- again, the same level of benefit derived under President Reagan's 1986 legislation.

So while the tax bill for the very wealthy would go up under the Obama plan, the marginal rate -- the clearest symbol to the aggregate of taxpayers of the overall tax burden -- would not go up.

The rub here, as mentioned by many and as I brought up to Orszag on the call, is that this move would also curtail the charitable exemption. Orszag countered that the budget also assumes a retention of the estate tax, a major incentive for charitable giving, and that, as mentioned above, the deduction would be the same as it was during the Reagan administration -- both good points. He also noted, correctly, that benevolence is at least as strong a driver (and probably more so) than tax deductions in driving charitable giving, and that charitable giving would be better served by a strong economy than a weak one.

That all said, even if the rest of the decrease in the deduction is able to make it through Congress, I'm skeptical that the benefit for charitable contributions will be limited. Regardless, it's good to see that universal healthcare can be achieved without raising the marginal rates on taxpayers -- a fact that greatly increases the chances of the passage of such legislation.

Tags: 111th Congress, Healthcare, healthcare reform, Obama Administration, Taxes (all tags)




Obama is also cutting $700 billion in taxes for the "middle class"--while I think a temporary tax break as stimulus is a good idea, I do not think a $700 billion permanent tax cut when so many things need to be funded is a particularly good one, even for the middle class, especially if the tax rate on the rich is simply going back to 1990s levels. Unless he's planning some secret $700 billion cuts down the line to make up for this enormous cut in revenues, it is a really bad idea.

by need some wood 2009-02-26 11:12AM | 0 recs
Peter Orsag

may just be the big progressive hero in the Cabinet.

by Lolis 2009-02-26 11:53AM | 0 recs
Re: Healthcare Reform

I pay alot for healthcare since I am self-employed, in fact, it is such a priority for me that it costs me more than my mortgage. But for $1600/month I have piece of mind. If I could get the same service I currently have for free I'd be thrilled.

My concern is that whenever you make something free, you increase demand. And once you increase demand, then you have two choices, increase expenditures or ration services.

by tpeichel 2009-02-26 12:14PM | 0 recs


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