Means-testing for Medicare
I’ve several times advocated the means-testing as a way out of our current and forthcoming fiscal problems. Greg Mankiw (see also knzn) offers the classic criticism:
…from the standpoint of incentives, means-testing is equivalent to a tax
increase. As a result, economists worried about the adverse incentive
effects of taxes (like me) should be also worried about the adverse
incentive effects of means-testing.
The point, of course, is well-taken. But something must be taxed, and Medicare benefits for the well-off are a logical candidate. They represent the spending of relatively wealthy people, rather than savings. In behavioral terms, I suspect the negative incentive effects of means-testing are relatively weak. A person might say "If I get too rich, I’ll get less Medicare when I am old," and work less. Dollar-for-dollar I expect this effect is weaker than "They’ll take out another few percent this year from my paycheck, maybe I’ll work less."
I’ll stick with means-testing as the least bad way of raising (implicit) marginal tax rates. Means-testing also gets people away from the seductive but dangerous idea that government should take care of everyone, all the time.