Medicaid isn’t the only commitment the federal government has to fund into the future. At the federal level, the growth in health care expenditures is our most serious domestic policy problem, and Medicare is the most challenging component. For decades, annual Medicare spending has increased slightly more than 2 percentage points faster than gross domestic product. If we continue to consume products whose costs are growing faster than national income, that consumption will eventually crowd out every other thing we are consuming. For instance, the Congressional Budget Office found that if federal income tax rates were raised to allow the government to continue its current level of activity and balance its budget:
- The lowest marginal income tax rate — 10 percent — would have to rise to 26 percent.
- The 25 percent marginal tax rate — the tax bracket many two-income families — would have to rise to 66 percent.
- The highest marginal income tax rate — 35 percent — would have to rise to 92 percent.
If such marginal tax hikes were realized, the federal government’s ability to raise sufficient tax revenue for its spending commitments would diminish as the rates rose and people lost the incentive to work.