Heritage Foundation Leadership for America

We’re serious. Recently enacted income tax cuts will likely be the first casualty of Medicare “reform” if it pays for prescription drugs, Heritage Foundation tax expert Daniel Mitchell notes in a forthcoming study.

Here’s how your tax cuts die: Enacted in 2001 and 2003, the tax cuts are set to expire in 2010 and 2008, respectively. Shortly after that, the first wave of baby boomers will likely retire—adding millions to the Medicare program, which already serves 40 million.

No problem at first, but Mitchell finds a catch: Medicare currently operates at a deficit because it spends more than what it gets through taxes. When you add a prescription drug benefit, one government study says that deficit will balloon as Medicare needs more taxes to pay for the needs of more patients—projected to be 80 million by 2030.

In other words, not only will Congress have a hard time extending the tax cuts, but the costs associated with Medicare will put them under pressure to enact new tax increases.

What kind of increases? If Medicare pays 75 percent of prescription drugs, its overall deficit will consume about a third of income taxes in 2026. In 2042, it will be more than half.

Add government’s other expenses, such as defense and Social Security, and you can kiss current and future tax cuts goodbye. Mitchell says such burdens will make it “enormously” difficult for politicians to keep taxes low to, say, boost a sluggish economy. Or simply give you your money back.

Read more of Mitchell’s study and other Medicare research at heritage.org.

For more information or to receive an e-mail version of “Medicare Maladies,” contact medicaremaladies@heritage.org or call Heritage Media Services at (202) 675-1761.