Let’s state the obvious: the Obama White House has painted itself into a corner on health reform. And though schadenfreude is a natural response, I worry about what might happen next.

The basic problem is that coverage expansion will be extremely expensive and it will have to be paid for through a new revenue stream, e.g., Senator John McCain’s sober and responsible call for taxing employee health benefits or, more ambitiously, a VAT. But of course the President Obama promised not to tax health benefits during his presidential campaign, and the labor unions are aggressively pushing back against any reversal on this front. And though I think conservatives should embrace the McCain approach, Ramesh notes at The Corner that Senate Republicans do not.

There may be one or two Senate Republicans who want the Democrats to include a cap on the tax exemption for employee health benefits, but that is not what “the Republicans” as a whole want. My impression from talking to congressional Republicans and their aides over the years, and especially over the last few weeks, is that they favor modifying the tax break for health insurance so that it applies to individually-purchased policies as well as employer-provided ones. But they are not in favor of simply raising taxes on employer-provided health insurance and using the funds to create a new, even more government-heavy health-care system.

This is a politically attractive strategy for Republicans, but it will also blow a huge whole in the federal budget. As someone who strongly believes that conservatives need to relearn fiscal responsibility, that gives me pause. The fact remains that coverage expansion will prove very costly. And because President Obama has, unlike Republican reformers like Coburn and Ryan, promised to preserve the dominance of employer-provided coverage, we’re left with a political dilemma: Americans will keep getting roughly the same employer-provided health insurance, yet they’ll have to pay for cheaper coverage for other people. This might be a good and noble thing to do, but it’s not very politically attractive. Granted, Obama’s concept promises to allow employees to enter the health insurance exchange to choose a plan they prefer, including a public plan, but the basic political dilemma remains.  

My fear is that Democrats believe that because Republicans didn’t pay for their tax cuts through unpopular spending cuts, they are under no obligation to pay for huge spending increases through unpopular tax hikes. In The American Prospect, Matt Yglesias has a bracingly honest essay on the dangers of this approach. In particular, he notes the fundamental flaw of Obama’s tax-the-rich and leave the bottom 95 alone approach.

Higher taxes on the rich are arguably more egalitarian, but they can only raise a limited amount of revenue. This is especially true when you consider that the extremely wealthy are a very small proportion of the population. An extra annual tax of $500 per capita could raise almost $150 billion. Obtaining a comparable amount from the top 1 percent of individuals would require $50,000 from each of them, an amount that the very wealthiest could easily pay but that is probably an unrealistic burden on those near the bottom of the top 1 percent. To get a lot of money you need to be willing to take at least a little from a broad group of people.

But if you’re going to “take at least a little from a broad group of people,” you have to promise them something in return — which leads us back to the coverage expansion dilemma. 

All this is to say that I think it’s very possible that Obama’s effort to remake how we finance health care could fail. So what happens then? One possibility is that the Democrats will embrace an aggressive incremental strategy by simplifying and expanding eligibility for Medicaid and S-CHIP. This would make political sense for the Democrats, as Republicans haven’t developed an effective means of countering this approach. Or they could rebrand the public plan effort by proposing that employees of small businesses and individuals could choose to pay into a “Medicare Plus” system, a half-way version of Jacob Hacker’s influential pay-or-play proposal. And those efforts to slow entitlement spending? Forget about them. It’s not obvious that this is a particularly happy outcome.

Then again, the failure of ObamaCare could lead Democrats to scale back their ambitions and take a second look at a more decentralized conservative approach. This could be wishful thinking on my part.