Sunday, March 21, 2010

Health care reform bill 101: Who will pay for reform?

Christian Science Monitor article "Health care reform bill 101: Who will pay for reform?" (March 21, 2010) does not offer the full story on who will pay for Health Care Reform. It notes that the wealthy will pay:

Higher Medicare taxes on rich people

If you are an individual making more than $200,000 a year, or a married couple making more than $250,000 a year, get ready to pay more for your Medicare if health care reform passes.

Labor supply of the wealthy is elastic. When they are taxed, they work less--their labor supply decreases. When their labor supply decreases, the cost of that labor as an input increases. As the costs of normal inputs increase (which labor is) supply decreases. That decrease reduces consumer surplus as well as producer surplus, depicted graphically below (click to enlarge). The left diagram displays an increase in marginal cost (of labor). The right diagram displays the resultant shift in supply. The light blue box in the right diagram displays the loss to consumers from the taxation of the rich.

The Christian Science Monitor offers discourse on "who pays for reform" without noting how surplus-destroying taxes spread loss of surplus to everyone.

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