A proposal in the House of Representatives to expand health care coverage envisions surtaxes on
taxpayers with relatively high adjusted gross incomes. Reliance on tax revenue from high-income
earners poses a dilemma for proponents of the House health care scheme: The spending and tax
provisions in the health-care scheme are unsustainable, leading to ever growing Federal government
deficits; or, the scheme proves to be sustainable, but only if income inequality continues to grow.

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When The Tax Base Grows Slower than Spending, the System is Unsustainable: According to the
Congressional Budget Office (CBO), the House proposal generates the paths shown below between
2010 and 2019 for new net spending by the Federal government on health care benefits (net of
proposed savings in the Medicare system) and for tax increases, primarily from tax hikes on
high-income earners.

Beyond 2019, it is important to understand how both new spending and tax revenues in the House
proposal can be expected to grow. According to the CBO, net spending “…would be growing at
a rate of more than 8 percent per year in nominal [dollars unadjusted for inflation] terms between
2017 and 2019; we would anticipate a similar trend in the subsequent decade.” Also, from CBO,
“Revenue from the surcharge on high-income individuals would be growing at about 5 percent
per year in nominal terms between 2017 and 2019; that component would continue to grow at
a slower rate than the cost of the coverage expansion in the following decade.”

Using CBO’s expectation of over 8 percent annual growth in spending and 5 percent growth in
revenues, the figure directly above projects the paths of spending and revenues, and the
resulting deficits (which are the vertical gaps between the red spending line and the green
tax increases line), over the period 2019-2029.

Under the growth rates anticipated by CBO, the addition to the Nation’s deficit will be $186
billion in the year 2029 alone. This is a large amount, but it pales in comparison to what
happens if we extend further out in time to consider the longer-range effect on the Nation’s
budget from the House health reform scheme.

When viewing the House health care scheme over a 75-year window if new spending
were to continue to grow beyond 2029 at an 8 percent rate, while revenues continue growing
at a 5 percent rate, deficits run to over $1 trillion by 2048 and to $20.5 trillion at the end of
the window in 2084, as the accompanying figure shows.

The trillions of dollars of future yearly deficits cumulate to enormous amounts of unfunded
liabilities. Given the growth rate assumptions used above, the cumulative deficit for the
period 2010-2084 arising from the House proposal to grow government health care
spending and finance it with surtaxes on high incomes amounts to a staggering $261
trillion.

Adjusting for consumer price inflation of 3 percent, the cumulative deficit amounts to
$43.6 trillion in 2010 dollars. Adjusting also for expected growth in the general
economy, on a net present value basis the 75-year cumulative deficit inherent in the
House health care scheme is $9.2 trillion in 2010 dollars. That means that the
House scheme, under the growth assumptions used above, would add $9.2 trillion
of unfunded liabilities next year to the $51.3 trillion existing combined unfunded
liability of the Medicare and Social Security programs over the next 75 years.

There are good reasons to expect that the surtax-financed expansion of health care
embedded in the House of Representatives proposal will follow a path toward
ever growing deficits, as in the example above. Historically, health care spending
has grown faster than growth in the economy—the so-called “excess cost growth”
in spending on health care. Aside from loose promises of a better future, given
the inability of the Administration to come up with effective methods to reduce
excess cost growth and “bend” the health care cost curve downward, spending
growth in the House health plan could easily outpace income growth in the
high-income brackets. Unless growth in incomes in the high-income brackets
outpaces growth in the overall economy plus excess health-care cost growth, the
House health care scheme is a recipe for growing deficits and an unsustainable
system.