NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Health Care Spending Growth and the Future of U.S. Tax Rates

Katherine Baicker, Jonathan S. Skinner

NBER Working Paper No. 16772
Issued in February 2011
NBER Program(s):   HC   HE   PE

The fraction of GDP devoted to health care in the United States is the highest in the world and rising rapidly. Recent economic studies have highlighted the growing value of health improvements, but less attention has been paid to the efficiency costs of tax-financed spending to pay for such improvements. This paper uses a life cycle model of labor supply, saving, and longevity improvement to measure the balanced-budget impact of continued growth in the Medicare and Medicaid programs. The model predicts that top marginal tax rates could rise to 70 percent by 2060, depending on the progressivity of future tax changes. The deadweight loss of the tax system is greater when the financing is more progressive. If the share of taxes paid by high-income taxpayers remains the same, the efficiency cost of raising the revenue needed to finance the additional health spending is $1.48 per dollar of revenue collected, and GDP declines (relative to trend) by 11 percent. A proportional payroll tax has a lower efficiency cost (41 cents per dollar of revenue averaged over all tax hikes, a 5 percent drop in GDP) but more than doubles the share of the tax burden borne by lower income taxpayers. Empirical support for the model comes from analysis of OECD country data showing that countries facing higher tax burdens in 1979 experienced slower health care spending growth in subsequent decades. The rising burden imposed by the public financing of health care expenditures may therefore serve as a brake on health care spending growth.

download in pdf format
   (368 K)

email paper

A non-technical summary of this paper is available in the 2011 number 1 issue of the NBER Bulletin on Aging and Health. You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (368 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published:

Users who downloaded this paper also downloaded these:
Chandra and Skinner w16953 Technology Growth and Expenditure Growth in Health Care
Fogel w14361 Forecasting the Cost of U.S. Health Care in 2040
Milligan and Wise w16719 Social Security and Retirement around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms - Introduction and Summary
Finkelstein, Taubman, Wright, Bernstein, Gruber, Newhouse, Allen, Baicker, and Study Group w17190 The Oregon Health Insurance Experiment: Evidence from the First Year
Garber and Skinner w14257 Is American Health Care Uniquely Inefficient?
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us