NCPA - National Center for Policy Analysis

Tax Increases Required to Fund New Drug Benefits

August 5, 2003

The Medicare prescription-drug benefit Congress is creating for seniors would add roughly a third to the long-term shortfall in Medicare funding and require tax increases, concludes a new Heritage Foundation study. Like Congress, the study assumes the drug benefit will cost $400 billion over the next 10 years; but researchers say that costs will explode thereafter. In the following 10 years, for example, from 2014 through 2023, they project the drug benefit will cost $772 billion.

They estimate that the drug benefit would add $2 trillion to the projected $5 trillion shortfall Medicare will face in 2030, after adjusting for inflation. Taxes will have to be hiked to pay for those benefits:

  • It will cost, on average, 40-year-old heads of households an extra $16,127 in taxes between now and the time they retire to fund the drug benefit.
  • Babies born this year will end up paying $1,125 in extra taxes at the age of 27, in 2030.
  • These taxes will be in addition to the 15.3 percent payroll tax they will pay to fund Medicare and Social Security, plus $2,855 in additional taxes needed to cover the projected Medicare shortfall.

Medicare spending is on pace to double in the next 10 years, and that growth rate will accelerate when the baby boomers start retiring, the researchers contend.

Source: Amy Fagan, "Study says high cost of drug entitlement would force tax rise," Washington Times, August 5, 2003; based on Brian Riedl and William Beach, "New Medicare Drug Entitlement's Huge New Tax on Working Americans," Backgrounder No. 1673, July 30, 2003, Center for Data Analysis, Heritage Foundation.


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