Brad is wrong, so is Brad

by on February 26, 2005 at 7:14 am in Economics, Medicine | Permalink

Brad DeLong quotes Brad Plummer:

[I]t really doesn’t make a difference whether you pay 40 percent of your income for private health care, or 40 percent of your income in taxes that then go to government-administered health care. I mean, yes, in one sense it makes a difference: If you think the free market is a better way of delivering health care, you’ll endorse option 1; otherwise, you’ll endorse option 2. But in the end, you’re still paying 40 percent of your income….it’s disingenuous to say, "Oh no! America’s doomed! We’re going to have
to raise taxes massively in the future in order to afford things we’d
be spending a good chunk of our income on anyway!"

Brad DeLong writes "Brad is absolutely right. (I like the way
that sentence sounds: I wish *I* heard it more often from others.)"

Sorry Brad (and Brad), I’d like to oblige but there is a big difference between spending 40 percent of your own income on health and having 40 percent of your income taken in taxes and spent on health even if we assume that the spending is on exactly the same thing.   The 40 percent of your income spent on health is a benefit of work, a reason to work harder, but the 40 percent taken in taxes is a cost of work that creates a dead weight loss.  Moreover, at 40 percent plus the dead weight loss is going to be big.

To make the problem with Brad P.’s thought experiment clear suppose that we documented exactly how everyone spent their yearly income.  Now we tax everyone 100 percent and provide them with exactly what they were buying before.  Nothing changes, right?  Wrong.  At 100 percent tax there is no longer any incentive to work – thus no one works and nothing is provided.  Everything changes.

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