A Premium Hike Is Not A Tax Hike

Volume III, Number 11 July 16, 1997

The Senate's proposal to raise Medicare Part B premiums for affluent beneficiaries has hit a snag. As written, the measure would require the means test to be administered by HHS. The White House insists that it would be simpler and more effective to have the IRS administer it. The White House is right. But the GOP leadership, worried an IRS-administered means test could be misconstrued as a tax hike, refuses to acquiesce.

This is a dispute without substance. A premium hike is not a tax hike, no matter what agency administers it. The White House should help allay GOP political concerns by stating publicly that it understands this fact. Congressional negotiators should make the sensible change the White House wants-- and Congress and the President should pass this important measure into law.

Imaginary Tax Hikes

The tax hike issue has bedeviled the means-testing debate from day one. To avoid the semblance of raising taxes, the Senate Finance Committee initially concocted an awkward and unworkable plan to means-test deductibles, which aren't payable to the government. After critics assailed the plan, the full Senate adopted the current and much fairer plan to means-test premiums. The obvious way to administer the plan is to have IRS collect the money. Instead, the Senate would have HHS collect it. As Majority Leader Trent Lott explains, involving IRS in the means test "turns it into a tax."

No it doesn't. Part B premiums are not taxes. They are fees that beneficiaries pay to participate voluntarily in a highly subsidized insurance program. Currently, these fees cover only one-quarter of full Part B costs. The balance is paid for with a direct general revenue subsidy-- the only genuine tax involved. That subsidy is projected to cost taxpayers $383 billion over the next five years, 50 to 100 times more than the means-tested premium hike Congress is agonizing over.

The problem with having HHS collect the new means-tested premiums is that it possesses neither the data nor the infrastructure to do so. A whole new bureaucracy would have to be set up to accomplish a task that the IRS could accomplish by adding a single line to the current 1040 form. Even when it's up and running, moreover, HHS would probably be much less effective than IRS. In fact, the CBO projects it would only collect half as much in premiums over the next five years.

Apparently, some conservatives are more spooked by imaginary tax hikes than the prospect of creating a needless and cumbersome new federal bureaucracy.

A Bigger Misunderstanding

All of this points to a bigger misunderstanding. If politicians are afraid the public will confuse a means test with a tax hike it's because many Americans believe what's being reduced is something they own and have somehow paid for. But they don't and they haven't. Again, the Part B premium does not come close to covering the Part B benefit. In any case, the benefit, and therefore the supposed "tax," is voluntary -- that is, you can avoid any contact with any federal agency by refusing it. As for Part A, the Supreme Court has repeatedly ruled that in programs like Medicare (and Social Security) the payroll taxes government levies give participants no contractual claim to future benefits.

Let's face it: Medicare is a pay-as-you-go transfer. If our Uncle Bob or Fred gives us a less generous gift than expected, he hasn't taxed us. If Uncle Sam gives us a less generous benefit, he hasn't taxed us either.

The Public's Good Sense

Polls show that means-testing enjoys far more public support than any other approach to entitlement reform. This is a testament to the public's good sense: Americans understand that entitlement costs need to be controlled, but want to preserve a floor of protection.

Let's hope politicians show as much sense. Means-testing Medicare premiums would help correct the huge imbalance between the benefits being promised to tomorrow's elderly and the taxes tomorrow's workers will be able to pay. It would be tragic if Congress lets the opportunity slip away because of a misapplied scruple.


The Concord Coalition web pages were designed by Marla Parker and Krista Reymann. These pages are now maintained by Craig Cheslog. . Last updated: 17 Jul 1997