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Health Care Spending Growth and the Future of U.S. Tax Rates

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  • Katherine Baicker
  • Jonathan Skinner

Abstract

The fraction of GDP devoted to health care in the United States is the highest in the world and is rising rapidly. Recent economic studies have highlighted the growing value of health improvements, but less attention has been paid to the efficiency costs of tax-financed spending to pay for such improvements. This paper uses a life cycle model of labor supply, saving, and longevity improvement to measure the balanced-budget impact of continued growth in the Medicare and Medicaid programs. The model predicts that top marginal tax rates could rise to 70% by 2060, depending on the progressivity of future tax changes. The deadweight loss of the tax system is greater when the financing is more progressive. If the share of taxes paid by high-income taxpayers remains the same, the efficiency cost of raising the revenue needed to finance the additional health spending is $1.48 per dollar of revenue collected, and GDP declines (relative to trend) by 11%. A proportional payroll tax has a lower efficiency cost (41 cents per dollar of revenue averaged over all tax hikes, a 5% drop in GDP) but more than doubles the share of the tax burden borne by lower-income taxpayers. Empirical support for the model comes from analysis of OECD country data showing that countries facing higher tax burdens in 1979 experienced slower health care spending growth in subsequent decades. The rising burden imposed by the public financing of health care expenditures may therefore serve as a brake on health care spending growth.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/658380
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File URL: http://www.jstor.org/stable/full/10.1086/658380
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Bibliographic Info

Article provided by University of Chicago Press in its journal Tax Policy and the Economy.

Volume (Year): 25 (2011)
Issue (Month): 1 ()
Pages: 39 - 68

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Handle: RePEc:ucp:tpolec:doi:10.1086/658380

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  1. Mariacristina De Nardi & Eric French & John Bailey Jones, 2006. "Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles," NBER Working Papers 12554, National Bureau of Economic Research, Inc.
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Cited by:
  1. Amitabh Chandra & Anupam B. Jena & Jonathan S. Skinner, 2011. "The Pragmatist's Guide to Comparative Effectiveness Research," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 25(2), pages 27-46, Spring.
  2. Amitabh Chandra & Jonathan Skinner, 2012. "Technology Growth and Expenditure Growth in Health Care," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 50(3), pages 645-80, September.
  3. Mark Stabile & Sarah Thomson, 2014. "The Changing Role of Government in Financing Health Care: An International Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 52(2), pages 480-518, June.

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