A major concern with health care in the United States is that many of those who most need health care are unable to get health insurance- either because they would be charged higher premiums or not fully covered by employer plans, due to preexisting conditions. An important goal of health care reform was to make sure that all, regardless of the state of their health, could get affordable insurance coverage. Accomplishing this while maintaining some semblance of a private health insurance market is difficult.
In a free market, health insurance companies set premiums based on expected health care costs, and those costs will be much higher for people with poor health. While some employer plans continue to insure people whose health deteriorates, it is difficult for those with preexisting health problems to find a job or qualify for full health insurance coverage if they do.
If the government requires health insurance companies to cover everyone who applies without charging more for those with poor health, a problem known as adverse selection arises. Insurance companies will set a premium high enough to cover the average person who is likely to buy insurance from them. Given the choice, however, many people who are healthier than average will choose not to buy this insurance because they are unlikely to visit the doctor enough to justify the premiums they will have to pay. Almost everyone whose health is worse than average will perceive the premiums to be a bargain and will buy this insurance. The resulting below average health of those who choose to buy insurance will cause premiums to rise, making buying insurance worthwhile only for those in very poor health.
The problem described above can be overcome either by government providing health insurance for all at taxpayers’ expense or by mandating that everyone buy health insurance. The only way to sustain a private insurance market when companies are required to insure everyone without discriminating against those with preexisting health problems, is to mandate that everyone, especially those who are relatively healthy, must buy insurance.
Is it possible to have a system that does not discriminate by price based on preexisting conditions without some kind of individual mandate? The short answer is no. Hence the only way to guarantee affordable health insurance for everyone is to take away individual freedom. Although access to affordable health care may sound like a good reason for Americans to sacrifice some freedom, it is not. As I will discuss in future blogs, the argument that everyone should be able to purchase health insurance on the same terms is inherently flawed and does not hold up under careful scrutiny.
Because I am concerned about fiscal responsibility, I am hesitant to advocate keeping taxes low. Nevertheless, as my colleague Shawn Ritenour emphasized in his blog, restoring fiscal responsibility while also promoting a prosperous economy requires cutting government spending, not raising taxes.
Raising taxes from the current level would have harmful consequences in any case, but those consequences are exacerbated by the fact that we are in a severe recession (some say depression). The main problem with raising tax rates is not that it will lead to a reduction in consumption and demand. If anything it will lead to increased consumption, though by government agencies and recipients of government transfer payments instead of the people who earned the money through their labor.
The more serious problem for the economy is how taxes influence production. When a greater share of each dollar earned is taxed away, it reduces the incentive to earn, whether through working additional hours, hiring more workers, or investing in capital. This problem is more serious for those in higher tax brackets, who are more likely to own businesses and have discretionary time and money that they could invest producing more goods and services. It is not spending that leads to economic prosperity, but greater production of what people value, which depends on entrepreneurs having confidence about the future direction of the economy and an expectation of being rewarded for taking risks. This is the key to an economic recovery that will restore prosperity while preserving freedom.
It is doubtful that raising tax rates on individuals with incomes over $200,000 ($250,000 for married couples), as proposed by the president, would lead to a reduction in tax revenue, but it will not lead to a very big increase. Thus if the big spenders currently in control of Congress really care about fiscal responsibility they will let the lower tax rates on the middle class expire as well. This would lead to an increase in revenue that is at least two or three times as large as from increasing taxes only on the those earning more than $200,000, who make up less than 5 percent of households.
Raising taxes on the middle class may actually have a less harmful effect on economic growth and prosperity in the long run than raising taxes on the wealthy, since work and investment by the middle class is likely less responsive to tax rates than that of the wealthy. Nevertheless, uncertainty about which tax rates will be allowed to increase and which will not also hinders economic recovery. Even if the president and Congress say they do not intend to raise taxes on the middle class, their unwillingness to bring spending under control leaves many of us expecting that Congress might raise those taxes out of fiscal necessity. This uncertainty discourages entrepreneurs from investing in capital to expand production of goods and services demanded by the middle class.
A clear commitment on the part of Congress and the administration to extend the Bush tax cuts across the board would remove some of the uncertainty and lead to greater investment and job creation. While such a commitment is not sufficient to address the looming fiscal problems faced by our government, it would be a step in the right direction.