So Rudd will now deny those he sees as wealthy a subsidy on their private health insurance but will honour his income tax cut proposals for these same people. Both moves are foolish but he will get away with them both because of populist confusions.
The subsidy on private health insurance is a corrective that offsets the inadequate levels of demand for private health insurance that stem from the fact that we have a free public health system. Those seeking free public health treatment derive benefits from facing a less crowded market because some are induced to take private cover.
The subsidy was essentially an attempt to correct a pricing distortion that inevitably accompanies public provision of anything for free. For the same reason private education should be subsidised.
Rudd’s policy is to eliminate the distortion for those he classifies as high-income. They will pay more for private health cover while those on lower incomes will pay less. The move has redistributive intent but that necessarily creates inefficiency here because different prices are being set for the same services. Why pick on health in particular that you wish to price high for the wealthy? Why not luxury cars or dinners at Flower Drum?
If one wishes to attack the income of the rich then rescind the promised tax cuts not make one item in their menu of consumption choices more expensive. I think there are some arguments for doing just this given that the profligate extravagance of the Labor Party ignoramuses to deal with the GFC at the expense of the taxpayer have created such a need.
As I have argued before use income taxes to deal with distributional issues not excises and – in this case – corrective educational subsidies.