Greg Mankiw Makes a Simple and Important Point About PPACA

by Reihan Salam

This is well worth a look:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

Healthcare reform, its advocates tell us, is fiscal reform.  The healthcare reform bill passed last year increased government spending to cover the uninsured, but it also reduced the budget deficit by increasing various taxes as well.  Because of this bill, the advocates say, the federal government is on a sounder fiscal footing.  Repealing it, they say, would make the budget deficit worse.

Douglas Holtz-Eakin, one of the most prominent critics of PPACA, has explicitly embraced the idea of making deep cuts to Medicare and Medicaid expenditures, as have most of the new health law’s critics on the right. And there are many policy thinkers on the right who favor reforming the tax treatment of medical insurance as well as well-designed subsidies for the purchase of medical insurance, with an eye towards protecting U.S. households against income shocks.

But what many of these same critics object to are steep tax increases, including increases in implicit marginal tax rates. I believe that we will most likely need to increase average tax rates — not marginal tax rates — as well as implement deep spending cuts to address long-run deficits. The trouble with PPACA is that it deployed virtually all of the “low-hanging tax fruit,” i.e., it attached many opaque tax increases that were just confusing or stealthy enough to dull political resistance to significant spending increases rather than employing them to the existing budget shortfall.

In my view, it is conceptually useful to think of the spending component and the revenue-raising component of PPACA separately. Why? Because there are much better ways to raise the same amount of revenue, e.g., by eliminating or paring back the mortgage interest deduction and the state and local tax deduction, among other thing. My sense is that thinking of revenue-raising mechanisms separately leads us to better public policy conclusions. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.