Thursday, August 6, 2009

No Laffering Matters - The Obama Pledge and the Health Care Wedge

Arthur Laffler is an economist who created the Laffer Curve. The Laffer Curve says at a certain point raising taxes generates less, not more, government revenues. Government revenues are currently plunging. No doubt much of this is due to the recession, but it may also be secondary to anticipation by “The Rich,” defined as those making over $250,000, that their taxes will rise under Obama.

The President has pledged to raise the marginal tax rates of the "rich" , to increase corporate taxes, to reduce deductions, and to slap a hefty health care surtax on those making $1 million or more.

To complicate matters politically,i.e. to jeopardize the Demcorat's domestic agenda, Obama and his advisors are now saying higher taxes on the middle class may be necessary, something Obama pledged not to do. His pledge smacks of the first President Bush's pledge, "Read my lips, no more taxes."

The Health Care Wedge

Enter the Laffer Health Care Wedge, as articulated in “How to Fix the Health Care Wedge: There is an Alternative to Obamacare,” August 5, WSJ.

Here is how Laffer describes the Health Care Wedge and how to remove it.

The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase. Mr. Obama’s health-care plan does nothing to address the gap between the price paid and the price received. Instead, it’s like a negative tax: Costs rise and people demand more than they need.

To pay for the subsidy that the administration and Congress propose, revenues have to come from somewhere. The Obama team has come to the conclusion that we should tax small businesses, large employers and the rich. That won’t work because the health-care recipients will lose their jobs as businesses can no longer afford their employees and the wealthy flee.

The bottom line is that when the government spends money on health care, the patient does not. The patient is then separated from the transaction in the sense that costs are no longer his concern. And when the patient doesn’t care about costs, only those who want higher costs—like doctors and drug companies—care.

Obama Policies Widen the Wedge

Thus, health-care reform should be based on policies that diminish the health-care wedge rather than increase it. Mr. Obama’s reform principles—a public health-insurance option, mandated minimum coverage, mandated coverage of pre-existing conditions, and required purchase of health insurance—only increase the size of the wedge and thus health-care costs.

Rather than expanding the role of government in the health-care market, Congress should implement a patient-centered approach to health-care reform. A patient-centered approach focuses on the patient-doctor relationship and empowers the patient and the doctor to make effective and economical choices.
Removing the Wedge

A patient-centered health-care reform begins with individual ownership of insurance policies and leverages Health Savings Accounts, a low-premium, high-deductible alternative to traditional insurance that includes a tax-advantaged savings account. It allows people to purchase insurance policies across state lines and reduces the number of mandated benefits insurers are required to cover. It reallocates the majority of Medicaid spending into a simple voucher for low-income individuals to purchase their own insurance. And it reduces the cost of medical procedures by reforming tort liability laws.
Empowering Patients and Doctors

By empowering patients and doctors to manage health-care decisions, a patient-centered health-care reform will control costs, improve health outcomes, and improve the overall efficiency of the health-care system.

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