One of the supposed advantages of the Baucus health proposal is its lower "costs" compared to the rival House bills. But economist James Kwak at The Baseline Scenario calls this "voodoo savings" achieved by taxing low- and middle-income Americans.

First, Kwak points out the false comparison of describing the House bill as costing over $1 trillion while claiming deficit reduction for the Baucus bill. That’s comparing only the cost side of the House Bill without it’s surtax revenues with the net cost of the Baucus proposal with its tax revenues.

So if we take CBO’s 10-year projection of $239 billion net cost of the House bill (which includes the previously promised elimination of the automatic cuts in Medicare doctor payments) versus the projected $49 billion reduction in the Baucus bill, that means the Baucus bill reduces the deficit (relative to the House bill) by $239 + $49 = $288 billion over ten years, or about $29 billion per year, a deficit that should be fairly easy to make up. (Savings from a public option could be part of that, [but other revenues or savings would be needed].)

But Kwak reminds us that the cost reductions in the Baucus proposal really come from reducing the subsidies to low- and middle-income families who would be mandated to purchase insurance. That means Baucus’ savings translate directly to increased costs to those people.

Since a government mandate that people buy insurance is effectively a a tax on those people, that means Baucus has achieved his cost reductions relative to the House bill by increaing taxes on low- and middle-income Americans by $140 billion. (Baucus $860 billion versus House $1 trillion)

The House bill imposes a surtax on the wealthiest Americans. So Kwak then draws this comparison:

For illustration, let’s assume that the whole $140 billion difference is due to lower subsidies. Relative to the House bill, then, the Baucus bill costs the government $140 billion less; but it costs middle-income people exactly $140 billion more, since they have to buy health insurance.

The difference is that in the House bill, the money comes from taxes on the very rich; in the Baucus bill, it comes out of the pockets of the middle-class people who are getting smaller subsidies. Put another way, the Baucus bill is the House bill, plus a $140 billion tax on people making around $40-80,000 per year. That’ s not only stupid policy; it’s stupid politics.

. . . But this idea that reducing subsidies saves money is just an illusion created by selecting a particular frame of reference. If you start with a different frame of reference, reducing subsidies is just increasing taxes – on the wrong people.

So let’s consider how Baucus "seems to raise more revenue." There are some minor taxes on medical devices and other sources, which may or may not survive the protests of affected industries. Those will likely be passed through to the patients who purchase those devices.

But about $215 billion would come in the first ten years from a tax on high-end insurance plans, with the tax indexed to inflation while insurance plans escalate at the faster medical inflation rate (2-3 times faster). Who would be paying these health care and insurance taxes?

There are no doubt wealthy people who get so-called "cadillac" plans that cover everything with no co-pays, deductibles, limits, etc. But labor folks point out that an increasing share of these high-cost plans are held by folks who are not wealthy — they’re just pensioners and/or middle-income folks who live in states with higher health care costs and premiums.

As the insurance tax applies to more and more of these folks in coming years, the tax will increasingly impact moderate-income Americans, not just the wealthy.

To be sure, economists tell us that if you tax something, people will tend to use less of it. If we tax insurance benefits, people will use the insurance less and thus tend to use less (or less expensive) health care. The argument for this kind of tax thus assumes that a major factor driving up health care costs is that people are demanding too much care, that is, more than they "need." It’s an interesting empirical question.

A mandate functions as a tax on the uninsured for which, in a perfect world, they’d get valuable insurance with sufficient subsidies. The Baucus bill falls well short of that.

But just as important, no one should have any doubt that the Baucus plan achieves "deficit neutrality" mostly by taxing low- and moderate-income Americans, while the House bill substitues a half trillion in surtaxes on the wealthiest. Yet somehow, the Max Tax is supposed to be the moderate position, while the House surtax is considered out of bounds. By whom?

Maybe we should ask those who would be taxed.

More:
Commonwealth Fund Study — potential savings from public option