A Health Care Surtax on the Rich: It Ain't So Easy

The Disease Management Care Blog has been taking a tour of the Senate Health Reform Bill currently up for debate. Blowing tanks and diving all the way to the end, it found this verbatim language in Section 9015 on how the rich will be subject to a surtax:

(2) ADDITIONAL TAX.—In addition to the tax imposed by paragraph (1)....there is hereby imposed on every taxpayer (other than a corporation, estate, or trust) a tax equal to 0.5 percent of wages which are received with respect to employment during any taxable year beginning after December 31, 2012, and which are in excess of (A) in the case of a joint return, $250,000, and (B) in any other case, $200,000.

Web opposition to a health care surtax seems to be either a) economic: the Heritage Foundation is typical, arguing it will stunt economic growth and contribute to unemployment, just look what it did to those silly beret-wearing bicycle-riding Europeans and b) prognostic: while the rich-surtax is not singled out by this Wall Street Journal editorial, dismay over the need for a plethora of revenue sources that reminds detractors of how the word 'trillion' has entered popular culture faster than our President can humbly bow to foreign heads of state.

The contrarian DMCB wonders, however, about the fairness. While we live in a country of progressive taxation thanks to a) the rich deriving greater benefit from living in the U.S., b) a tax on the upper bounds of income being less painful (i.e., there's 'less marginal utility') c) this is income that is less likely to be productive, d) oh heck, they had a free ride during the Bush years and e) it's disposable income (among other arguments). Yet, up until now we haven't really subjected insurance premiums to a progressive levy.

Generally, premiums have been tied to the size of the risk pool divvied up by the proportional degree of risk. Thinking of car insurance, this can simplistically be defined by the a) magnitude of the potential loss (a totaled Rolls Royce versus a totaled Hyundai) and b) the liklihood of the loss (a teenager with 3 prior accidents vs. the DMCB spouse).

Given the ways things are going, we're all going to be using the health insurance equivalent of a Hyundai and even if you're in good health, it looks like you'll pay more if your excess income can serve to avoid a Federal deficit. In thinking about insurance in general, this has important policy implications. For example, could this be the solution to hurricane insurance, where U.S. taxpayers are on the hook for Florida's coastal areas?

Poicy aside, while the current plan is to tax the rich, stubborn health cost inflation could tempt future Congresses toward a progressive tax involving lower thresholds of income. Last but not least, $200,000 to $250,000 may seem like a lot now, it may not be for more and more of us if inflation takes over.

Progressive premiums: Fair? Good policy? In your interest? You be the judge.