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Rising US Healthcare Provision Has Tax Consequences

August 2011 - Tax & Private Client. Legal Developments by Hassans.

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While there has been criticism of Standard and Poor's (S&P) decision to downgrade United States debt, a paper from the Tax Foundation says that there are good reasons why it makes sense, particularly as the debt ceiling deal fails, either by cutting spending or increasing taxes, to take care of rapidly-rising healthcare spending.

William McBride, economist at the Tax Foundation, has shown that Medicare and Medicaid are the two largest components of healthcare spending, but "other healthcare" starts to kick in substantially in 2014, which is mainly attributable to Obama's health insurance subsidies and exchanges.

Healthcare entitlement spending is the one part of the budget that is exploding, McBride points out, and yet the debt deal specifically puts it off the table, outside of Medicare reimbursement rates which current law would reduce drastically anyway.

Further, he adds, Democrats are sending strong signals that they intend to protect entitlement spending at all costs. It all portends a long-term debt explosion and distinguishes us from AAA rated countries like the UK and France whose debt levels will peak in the next couple of years and decline afterwards, according to S&P.

McBride explains that many OECD countries spend more than the US on welfare programmes, but they also have a value added tax (VAT). Taxes on goods and services, particularly a VAT, provides the largest source of revenues for OECD countries, making their relatively generous welfare programmes more sustainable. He considers that it helps explain why Germany, France, Canada, and the UK in particular, continue to maintain their AAA ratings.

However, he also discloses that the VAT would not be without cost, as it would lead to a much higher level of taxation than Americans are accustomed to - roughly 10% more in taxes as a share of gross domestic product - and this would significantly lower the long-term growth trend.

McBride concludes that, in the US, our politicians have for years promised us European style welfare benefits and yet promised we won't have to pay for it. If we are to avoid a default... we have but two options: significantly reduce our future promises to healthcare entitlement recipients, or join the community of high-tax and low-growth social democracies via a VAT.

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