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A few days ago I proposed a tongue-in-cheek “solution” to the health care cost problem: capping doctor pay. In a few weeks we will (hopefully) write a series of posts on the Big Questions: natural law, property rights, and the proper role of the state. Let’s just assume that someone else owns your property because you are not permitted to own it. Think of what happens when we cap doctor pay and when we raise top marginal tax rates.

When we do these things we create enormous inequities to those people who have just finished or are in the process of training to become medical doctors. For whatever its merits, it will cost people upward of $300,000 in tuition and training costs, and many years of long hours and low pay before they are able to make the large amounts of money that they seem to be making. They undertake these investments with the expectation that they will have the financial resources later in life (sometime well into their 30s or 40s) to pay it back, and also compensate them for their skills and inherent difficulties in many of their jobs. So, if we cap doctor pay, or if we raise top marginal tax rates substantially, without also altering the prices doctors face at the front end, not only would this be an unfair move for the current crop of doctors and it would obviously distort the incentives for new doctors to enter the field.

If we disincentivize new doctors from entering the field in this way, it can only contribute negatively to the health care cost problem, unless you have  a working model in your head that at some point more medicine does not lead to good outcomes (an entirely plausible thing to believe).

By the way, I just ran some hypothetical numbers to see how much of a hit a 4% point increase in top marginal rates would make over the earnings life of a representative doctor. It is not very large, at least on its face. If you use a 4% discount rate on future earnings, assume a $300,000 debt upon starting work, and having doctors make $70,000 per year during their internship and residency, and then start at age 30 earning $200,000 per year, with 3% annual salary increases and working until age 70 (all unrealistic assumptions I suppose), comparing a world with no taxes to one where all earnings over $200,000 are taxed at 4% (this is not exactly the correct calculation, but it is close), the Present Value of the doctor’s future earnings in the no tax world, including a 20 year repayment of his loans starting the day he gets his first big paying job, would be $4.786 million. If we throw in the taxes, that NPV would fall by $74,000. If we assume a lower discount rate of 2% that hit rises to $146,000 and if we assume money tomorrow is just as good as money today that difference rises again to $301,000.

But, let’s use the 4% number as the appropriate discount rate. Raising the top tax rate by a measly 4% is the equivalent of taking a full year of earnings away from the doctor in his job as an intern. It is equivalent to taxing from him almost twice the amount of income that the typical American worker makes. And it is equivalent to taking roughly 4 months of income away from him while he is working his well-paid job.

If the top rate were 10% higher instead of 4% (don’t say this won’t ever happen, a brief look at the history of the income tax from 1913 to today would shock you) then the discounted present value of earnings would be $186,000 using the same conservative assumptions. 20% higher tax rates? $372,000 lower.

In future posts we will show you what economists know about the disincentive effects of tax increases of these magnitudes. But even this “low” rate increase of 4% generates a $74,000 loss. Maybe you think these rich dudes can deal with it. You are probably right. But let’s think a little harder before we think that some people won’t respond to it, and even harder before you claim that you have a right to this produced income but that he does not.

3 Responses to “More on Capping Doctor Pay and Progressive Taxes”

  1. ckr says:

    Can you address the issue of ‘doctor scarcity’? I don’t know if doctor salaries are too high, but I believe their salaries are, in part, held artificially high because their numbers are held artificially low. Clearly far more people who would like to become doctors and are qualified to become doctors than actually have the opportunity to become doctors and this is directly related to the scarcity of accredited medical school slots. What if there were more medical school slots able to churn out more qualified doctors to meet the demand and help increase competition? I agree it is not useful to debate what the right salary is; why not let market forces prevail?

  2. Harry says:

    Good job, Wintercow.

    One thing is certain: the more the central planning crowd fools with doctor pay, there will be shortages in doctors. Our present system of third-party payers (private and public) has made a mess.

  3. Harry says:

    I think if a young person wants to be a doctor, and has sufficient brains and determination, he or she will not be prevented. Medical schools can always find a place at the margin.

    A friend of mine who is a doctor told me he spent four years in college learning how to learn what he would be taught in medical school. Not once has he ever talked about the AMA’s conspiracy to limit the number of doctors. Rather, he has told me much about how important it is to really want to be a doctor, since it is a long road of hard work.

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