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Funding Medicare With Higher Taxes Likely to Cost Jobs

Armen Hareyan's picture

Medicare and Social Security

Medicare spending is growing more quickly than tax revenues and poses a far greater long-term financial problem than Social Security, according to a new paper from The Heritage Foundation.

If no action is taken to cut spending or benefits, the 2005 Medicare trustees' report estimates that Congress would need to raise some $2.7 trillion in new taxes to pay for promised Medicare benefits over just the next decade. To fully fund the benefits promised for the next 75 years, Congress would need to raise $29.9 trillion, or equivalently raise the Medicare payroll tax rate immediately and permanently to 13.4 percent, write Tracy Foertsch and Joseph Antos.

Foertsch, a senior policy analyst in Heritage's Center for Data Analysis and Antos, a scholar in health care policy at the American Enterprise Institute, also determined that payroll taxes of that magnitude would exact a heavy price: lost jobs. "Between 2006 and 2015, total job losses could average 816,000 annually and real (inflation-adjusted) gross domestic product could be, on average, nearly $87 billion lower per year," Foertsch and Antos write.

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And these estimates assume that Congress would use additional revenues solely to pay for Medicare spending or to buy down national debt. The economic costs would increase dramatically if Congress were to use new tax revenues to finance new spending.

With the government taking in more and borrowing less, the budget eventually would tip into surplus, and lawmakers might then decide to spend more on other projects. The negative economic effects of raising payroll tax rates would be more pronounced if the federal government used new tax revenues to finance higher spending, the analysts found.

Meanwhile, even though the government would end up with more money, both personal and corporate incomes would drop every year for the next decade. "By 2015 real GDP would be more than $283 billion lower than it would be without tax increases, and almost 2.8 million private-sector jobs would have been lost because of higher payroll taxes," Foertsch and Antos write.

The analysts note that today Medicare is less expensive than Social Security. However, they write, an aging population and other factors will make the program a primary concern of policymakers in the years to come, and any policies that reduce future job opportunities and future economic growth will only make the problems worse.