Taxing the Wrong Thing
The Pigovian insight on taxes is that placing a tax on an activity with negative externalities will reduce that activity and, importantly, the negative externality with it. More generally it becomes obvious taxes affect incentives – want less of an activity, tax it. I know the economists in the Obama administration realize this. So, I’m disappointed that the President’s healthcare plan shifts more of the tax burden to the wealthy’s unearned income instead of taxing “Cadillac health plans.” As Greg Mankiw points out,
The tax on so-called Cadillac health plans made sense as a way to reduce the existing tax incentive toward excessively generous health insurance, which in turn encourages excessive use of healthcare. That reform is, apparently, now gone. Instead, the current administration proposal is to increase the tax on capital income, reducing the incentive for saving and investment.
In other words, the new proposal would do less to bend the curve of rising healthcare costs and more to impede long-run economic growth.
I’m glad the Obama administration recognizes that if we want something (e.g. more coverage) it needs to be paid for. They just need to realize that the way we pay for something is just as important as the something we get. I still support the overall direction of the healthcare proposal but my disappointments are piling up.