Paying for Health Reform

Real health reform does not cost money. It saves money. Conservatively, I would guess we could reduce health spending by one-third and raise quality and increase access to care at the same time. That's $7,000 for every U.S. household. Since government spends almost half the money, we could all get an annual economic stimulus check for $3,000 – leaving $50 billion behind for government to mop up any remaining problems.

Alas, hardly anyone is in favor of real reform. For a lot of people, reform doesn't even count as reform without sacrifice and atonement. Think of California liberals and global warming. Nothing they do will have any perceptible impact on the climate. But they don't feel good about themselves unless they are enduring pain and discomfort.

Anyway, suppose we did need more money to add to our annual $2.1 trillion health care spending spree. Where could it come from?

In the Democratic primaries, here is the standard mantra: tax cuts for the rich are depriving government of revenue which we desperately need for health reform. All of this is exclaimed with almost religious fervor and a level of hysteria that is hard to top, unless you count this morsel from Paul Krugman in The New York Times: "for 30 years American politics has been dominated by…Robin Hood in reverse, giving unto those that hath, while taking from those who don't."

Now for an uncomfortable look at the facts. For the past 30 years, there has been no lasting tax cut for the rich. And far from being deprived of revenue, the federal government's share of national income today is exactly where it has been, on the average, for the past 60 years.

The penultimate sentence in the preceding paragraph deserves repetition and emphasis:

There has been no lasting tax cut for the rich.

What we have done, beginning in the Reagan administration 25 years ago, is cut tax rates for the rich. But every time we cut rates, total taxes paid by the rich went up, not down. As Art Laffer explained in The Wall Street Journal the other day, the top 1% of taxpayers are on the wrong side of the Laffer curve, and they have been there for almost the entire sorry history of the income tax.

Every Republican tax rate reduction for the wealthiest taxpayers as well as every Democratic one (both Kennedy and Clinton) has led to more revenue for the Treasury. In Clinton's case, approving a Republican capital gains rate reduction (from 28% to 20%) in 1996 is what produced surpluses at the end of his presidency – surpluses that Clinton's own Treasury Department never predicted!

Unlike ordinary mortals, the rich have enormous discretion over how they receive their income – as wages, as dividends, as realized capital gains or even as unrealized (untaxed) capital gains. So the way to get the most money out of them is not to push rates up to 70% or 90% (where they once were), but to lower them in order to coax the wealthy into realizing more taxable income.

Furthermore, almost every time tax rates for the wealthiest have been reduced, millions of low-income taxpayers have been removed from the tax rolls. So that today almost half the population pays no income tax. The upshot is that virtually every tax change in recent history – whether Democrat or Republican – has made the tax code more progressive. Since noneconomists often wonder whether they are being statistically hoodwinked in these discussions, let us be clear:

Over the past two decades the income tax system has become increasing more progressive, no matter how progressivity is measured.

So here are the takeaways: (1) government revenues today as a fraction of national income are equal to their historic average, (2) we are collecting more income taxes – both in total dollars and as a percent of the total – from the wealthy than ever, (3) the tax system today is more progressive by far than at any time in modern history and (4) repealing the Bush rate reductions for high-income taxpayers is unlikely to produce any extra revenue for health reform.

For Michael Stroup's demonstration that Republican tax cuts have made the income tax system more progressive than otherwise, go to

For Steven Moore's demonstration that capital gains rate cuts always produce more capital gains tax revenues go to

For Art Laffer's explanation of all of this, go to

Comments (6)

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  1. Derek Mock says:


  2. Bob says:


  3. Steven Bassett says:


    Agree! Real Health Care reform DOES save money! Currently the big payers are between 125% and 135% of RBRVS. If nothing changes as the boomers come on to Medicare perhaps we’ll move to somewhere between 160% and 200% of Medicare. Our single minded goal needs to be getting away from employer based coverage and phasing out Medicare. Average deductibles will move from employer based $600, to $2,500+ with individually based – enough to help the market start to function. We cannot miss this opportunity. Let me know what I can do to help.

  4. Klaus Illian, CLU says:

    Who should pay? All of us, not just the wealthy or the working. But there isn’t much point in looking at how to finance health care for everyone unless it also involves reforming the way health care is delivered and how providers are paid. John, I thought your article in the WSJ on 2/23 (Markets and Medicare) was fantastic. Of course Medicare is heading for bankruptcy; how can it survive? We have a system whereby private insurance covers the healthy, the young, the working and the wealthy while the public sector (Medicare, Medicaid, SCHIP, VA, etc.) pays for the elderly, the disabled, the indigent and the ill. I would love to be in an industry where I get all the profitable business and someone else carries the unprofitable. Isn’t that what the insurance indutry is doing: cherry-picking! And on top of their profitable insurance premium business, some companies handle claims processing for Medicare and profit there as well!

    Your article certainly showed some great examples of what could be done to create a better health care system; I’m just not sure that many people are listening yet! A case in point: I know a radiologist who was earning over $400,000 in net income and retired at age 50 because he didn’t need to work any longer. Is this man’s value triple that of my G.P.? And where is the equity in the system when my lipid tests cost me $15.94 (insurance discounted, paid out of my HSA), while my uninsured co-worker pays five times the fee (standard cash payer pricing). But the greatest impediment to reform is the entrenched parties: providers make more money by providing more services, not by giving better quality care. Your “Markets and Medicare” article explained this beautifully. Keep up the pressure!

  5. Brian Fennel says:

    Excellent segmentation discussion. Coverage versus access and people pay v. government pay. Do the supposedly 20 million people without insurance understand how health insurance works? Think of how many “no pays” show up in the ER; treating it like their primary care office, and leave getting better care than 80% of the people between the Rio Grande and the South Pole. When they show up with Hillary’s Plan next year they are going to be asked for a co-payment and then get a bill for $300 towards their deductible. When will someone on the campaign trail tell these people that Universal Healthcare coverage for everyone does not mean “free healthcare”?

    Health insurance as a comapny paid benefit needs to dry up. If each worker got a 20% raise and then was put in charge of funding his/her healthcare program I think you would see how much Americans value their health.

  6. […] no tax cuts for the rich.  Their tax rates are down, but their tax payments are way up.  [link] And there is every reason to think that reversing the process and raising rates will cause total […]