Thursday, July 16, 2009

Is the House's Proposed Health Surcharge Progressive Enough?

Frank Pasquale

The usual suspects are alarmed by the House Health Reform Bill's proposed surcharge on high income earners. As the NYT explains with some examples, "Starting in 2011, a family making $500,000 would have to pay $1,500 in additional income tax to help subsidize coverage for the uninsured. A family making $1 million would have to pay $9,000." The surcharge rises with income, and over time, to hit 5.4% (by 2013) for households earning over $1 million annually. Households making between $280,000 and $500,000 per year would only face a 2% surcharge by 2013.

Beneath all the sturm und drang about soaking the rich, the press should focus on three underlying realities. First, income and wealth vastly increased at the top of the distribution over the past thirty years -- in part because of corporate cost savings that included denial of health coverage to millions of workers. Second, inequality itself exacerbates the health care crisis, by fueling the allocation of medical care according to profit potential, not need. Third, inequality causes health problems, because societies grow "more dysfunctional, violent, sick and sad if the gap between social classes grows too wide." The surcharge on the rich is not some random resentment inflicted by Frenchified Madame DeFarges on America's John Galts. The surcharge will itself help address some of the problems health reform is designed to solve. I'll unpack these thoughts in a series of posts this week.

Nevertheless, the surcharge is not progressive enough, and this should be the main message of liberals commenting on the House bill.

As David Leonhardt has observed in another context,
Today . . . the very well off and the superwealthy are lumped together [in the tax code]. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change [from the past] is especially striking, because there is so much more income at the top of the distribution now than there was in the past.

The House's top bracket for the surcharge is one million dollars, a slight improvement. But it is very hard for me to see why those who make that amount should be treated the same as those in the "Fortunate 400"--the 400 highest earning households which made, on average, more than $263 million apiece in 2006. As a Wall Street Journal article reports, "the group's average income tax rate -- calculated as income taxes paid as a percentage of adjusted gross income -- fell to 17.2%. in 2006 from 18.2% the prior year. That's down from a high of 29.9% in 1995." The health care surcharge makes up less than half of that decline in taxes from 1995 to 2006.

In short, the next time a pundit screams "socialism" at a surcharge like the one proposed by the House, I'd recommend calmly agreeing, and pointing out that those at the very top of the income scale do indeed appear to be shirking their fair share of the fiscal burden. I'd also ask the pundit to take a look at these figures from Charles Morris's The Trillion Dollar Meltdown:
Between 1980 and 2005, the top tenth of the population’s share of all taxable income went from 34 percent to 46 percent, an increase of about a third. The changing distribution within the top 10 percent, however, is what’s truly remarkable. The unlucky folks in the 90th to the 95th percentiles actually lost a little ground, while those in the 95th to 99th gained a little.

Overall, however, income shares in the 90th to 99th percentile population were basically flat (24 percent in 1980 and 26 percent in 2005). Almost all the top one-tenth’s share gains, in other words, went to the top 1 percent, or the top “centile,” who doubled their share of national cash income from 9 percent to 19 percent.

Even within the top centile, however, the distribution of gains was radically skewed. Nearly 60 percent of it went to the top tenth of 1 percent of the population, and more than a fourth of it to the top one-hundredth of 1 percent of the population. Overall, the top tenth of 1 percent more than tripled their share of cash income to about 9 percent, while the top one-hundredth of 1 percent, or fewer than 15,000 taxpayers, quadrupled their share to 3.6 percent of all taxable income. Among those 15,000, the average tax return reported $26 million of income in 2005, while the take for the entire group was $384 billion.

A truly progressive health surcharge would take that fractal inequality into account. But we may as well support the small step towards fairness that the House Bill represents.

PS: Conor Clarke has a good series on the surcharge here.

X-Posted: Health Reform Watch.