Deficit Reduction Plan Must Include Tax Increases, Economist Says

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Congress will be compelled to slash Medicaid and Medicare unless a significant portion of the deficit reduction plan currently being developed comprises tax increases, states Henry J. Aaron, PhD, senior fellow of economic studies with the Brookings Institution, in an editorial published in the November 3 issue of The New England Journal of Medicine.

Aaron writes in the editorial that health programs constitute 23% of the federal budget and an even higher percentage of the projected spending growth. He deems Medicare and Medicaid are “too large” to be ignored when spending cuts are being considered, noting that whether or not tax increases are also incorporated into a deficit will play a major role in shaping the future of health policy.

“If the no-increase-in-revenues position prevails, both Medicare and Medicaid, as well as other healthcare spending and all other domestic social spending, will inevitably be subject to cuts so large that they will make it quite impossible to meet the commitment the U.S. made half a century ago to assure the aged, disabled and poor a standard of healthcare similar to that enjoyed by other Americans,” Aaron notes.

Current projections, Aaron observes, indicate that government debt owed to the public will comprise 90% of the GDP by 2021. However, he claims, the Congressional supercommittee’s objective of reducing the deficit by $1.2 trillion over the next decade will only delay the problem. A reduction of this scope, according to Aaron, will in two years, rapidly render debt projection “similarly grim”, causing the “deficit debate “ to begin once more and “debt fears and deficit angst” to become a “semi-permanent feature of the U.S. political landscape.

Aaron contends, however, that this pattern could be avoided or significantly delayed were the next decade to bring deficit cuts of $4 trillion to $5 trillion. By contrast, reducing the debt via spending cuts will make it impossible to maintain Medicare and Medicaid commitments. Moreover, he adds, the impact of executing President Obama’s ideas for modifying health programs to save around $300 billion, and/or such strategies as limiting reimbursement rates on state taxes paid to providers, “pales in comparison” to that of including tax increases in or excluding them from a deficit reduction plan.

“Should the various healthcare interest groups prevail on the specific issues that now occupy them without winning sizable revenue increases as part of a deficit-reduction program, it would be rather like securing a nicer cell for a prisoner facing certain execution,” Aaron concludes.

To read the editorial, click here: http://www.nejm.org/doi/full/10.1056/NEJMp1109940.