Tax Policy as Health Policy

Tax cuts have limited our nation’s ability to provide insurance to the indigent, cover medications for the elderly and keep foundering health systems afloat.

By Ian Morrison

Policy wonks love to talk about alternative ways to cover the uninsured, exciting new quality and patient safety initiatives, meaningful pay for performance systems and so forth. All of this is completely irrelevant. The single biggest issue that affects health care in the short term and the long term is tax policy. When the rich among us received a big tax cut, it virtually dictated massive state budget crises and a rise in the uninsured. The massive federal deficit the tax cuts created constrains meaningful expansion of health care to the uninsured and will require Medicare beneficiaries to dig deep into their own pockets to pay the premiums for the old Medicare Part B and for the new drug benefit. If we make the tax cuts permanent, we are sealing the fate of many of the vulnerable elderly and the uninsured.

Why is tax policy so important, and how do we differ from other countries and health systems? Here are some thoughts:

American health care financing is increasingly regressive. Health care premiums are a regressive form of taxation for a social good: Everyone pays the same regardless of income. Indeed, when you factor in the corporate tax deductibility of health insurance premiums, well-compensated executives getting health insurance from their company are receiving a nice tax-free benefit; the higher paid they are, the more the benefit is worth in net terms.

Admittedly, while Social Security tax maxes out at $87,000 of income (2003 ceiling), the Medicare tax of 2.9 percent (half paid by employee, half by employer, all by the self-employed) is a flat tax with no ceiling. It’s still not a progressive tax. Million-dollar earners are paying $29,000 toward Medicare–a big number to be sure. But consider this: According to distinguished Canadian health economist Robert Evans, the top decile of income earners in Canada are spending on average 10 percent of their total income to support the health system in Canada through progressive general taxation. There are actually a few million-dollar earners in Canada such as Wayne Gretzky, Jim Carrey, William Shatner and Michael J. Fox (most of whom actually pay taxes in the United States–but play along with me for purposes of exposition). Those same million-dollar Canadian earners would pay about $100,000 toward the Canadian Medicare system. Admittedly, they don’t have to pay any health premiums, just taxes. So for the sake of fairness, you have to add to the American executive’s bill about $10,000 in premiums for a family (nice coverage too). Bearing in mind it’s a tax-free benefit, and while it really is part of total compensation, many folks think health care provided by their employer is free. Suppose also that there is some portion of general taxation earmarked for health care purposes like Medicaid–let’s say 2 percent of earnings (or $20,000). We’re still only at $59,000.

Remember that Canadians spend 10 percent of the GDP on health care, a number that has been flat throughout Chretien’s terms as prime minister (ironically because rich Canadians wanted a tax cut, which meant constraining the total health budget). We in the United States spend close to 15 percent of the GDP. So it is logical to assume that Canadian-style progressive tax financing (even using American top rates of tax, which are not that much different) would create a tax burden for the hypothetical rich American in a single payer system of about $150,000 as opposed to the $59,000 they currently pay. This is crude analysis; I’d love to see a real policy wonk do it properly. It’s hard to figure out. But do you know who has figured it out? Rich people. That’s why the rich are more likely to vote Republican, and more likely to be against single-payer policies (unless they are rich people from Boston, New York, Seattle or San Francisco–the civilized world as we now know it).

The values are shifting away from social solidarity. Health care systems can survive only if there is a massive transfer of income from rich people to poor people and from well people to sick people. Even the American system does this, because allocating health care solely on the ability to pay is barbaric. But as the medical concierge and VIP medicine crowd are finding out, there is a very good reason for providers to want a cross-subsidy to the poor sick from the rich well. Why? There aren’t enough rich people to go around. A lot of doctors think consumers should pay for all care out of their pockets. These doctors believe their waiting rooms are full of malingering riffraff with minor boring conditions, and that if ability to pay was factored in, their waiting rooms would be full of rich people with interesting diseases. Wrong. Cross-subsidy matters, not just for social solidarity purposes, but because it is good for providers.

My colleagues at Harris Interactive have asked the public about their values and beliefs. A classic question sums it up: Do you agree or disagree with the following statement? “The higher someone’s income is, the more that he or she should expect to pay in taxes to cover the cost of people who are less well off and are heavy users of medical services.” In 1991, on the eve of a Clinton presidency, 66 percent of Americans agreed with the statement. By 2003, in the midst of the Bush administration, only 51 percent agreed with the statement. It says a lot about the erosion of social solidarity that has occurred in 12 years.

Tax credits for the rich and poor. A centerpiece of Bush administration policy has been tax credits and tax advantaged medical savings accounts for rich and poor alike. But if you have mastered first-grade arithmetic, you will know that a tax credit or a tax advantaged plan is worth more to rich people who pay high taxes than to poor people who pay little or no taxes.

The undeserving rich. America rightfully honors its million-dollar earners; you come here with nothing and you make a lot. America has been very, very good to Arnold, and Ariana, and Wayne Gretzky, and me. But what made America the greatest country in the world is not that it had the lowest taxes, but that it was a country that offered freedom and opportunity in a place that was safe, fair and compassionate. Giving massive tax breaks to Paris Hilton so she can buy more Prada handbags doesn’t strike me as consistent with American values. Better she has fewer handbags and we have less uninsured.

Ian Morrison is an author, consultant and futurist based in Menlo Park, California.