Can’t Have Health Reform Without Revenue

Jonathan Cohn makes the important point that a bit lost in the week’s news that Harry Reid is cracking the whip on Max Baucus is the fact that this whip-cracking seems to have involved ruling out the idea of limiting the tax-exempt status of employer-provided health care as a revenue source for reform. Some important labor unions don’t like this idea and it doesn’t poll very well, but it’s too bad to see it ruled out because it’s a pretty good idea. And what’s more, even if you don’t like the idea you do need some idea of how to raise the $1 trillion to $1.3 trillion over ten years that something like the Senate HELP plan would cost.

This seems like a good moment to issue my dozenth call for congress to take another look at the Obama administration’s original revenue proposal—limiting tax deductions for high-income itemizers. This would target basically the same group of people (rich people) as House liberals’ plan for a surtax on high-income couples but raise the money in a substantially more efficient way.

When possible, it’s better to raise money by broadening the tax base—curbing loopholes, deductions, and exemptions—than by simply raising the rates. The reason is that higher rates on a narrow base do a lot to encourage people to shift income into loopholes, which both undermines your revenue-raising efforts and also distorts the economy. Both the employer tax exclusion proposals and the itemized deductions proposal fit that good model.