Yes, I Do Have a Nerve

Well, I’m in the same boat. So, I’ll be happy to enter into a “compact” with Mr. Wright (and everybody else): if he’ll ask the government to return the share of my paycheck that it has taken for Medicare, which his parents use, then I’ll ask the government to return the share of Mr. Wright’s paycheck that it has taken for Medicare, which my parents use. That’s cutting out the middleman!

Mr. Wright acknowledges that single-payer (a.k.a. government monopoly) health care is his preference, but gracefully acknowledges that there are as many different “systems” as there are countries. His essay communicates a core value that the “system” be financed by progressive income tax. Well, more of it is financed by a progressive income tax than most of us appreciate.

In round numbers, national health care spending in the U.S. will run about $2.5 trillion in 2009, of which $503 billion will be Medicare and $386 billion will be Medicaid. Medicaid, accounting for 15 percent of national health spending, is financed by general state and federal government revenues, which is mostly from progressive income taxes. Almost every senior Medicare beneficiary believes (incorrectly) that he has paid for Medicare through payroll taxes deducted during his working years, and continues to do so via premiums deducted from his Social Security check. In fact, while payroll taxes and premium revenues accounted for 75 percent of Medicare’s income in 1970, they only accounted for 55 percent in 2007.

If a little more than half of Medicare’s spending and almost all of Medicaid’s spending is financed by progressive income tax already, then that means that more than one quarter of health spending is covered just the way Mr. Wright likes it.

And the trend is his friend: The share will likely grow as the Medicare Part A (Hospital Insurance) “trust fund” is exhausted by 2017. Last year, for the first time, Medicare spent more on Part A hospitalization benefits than it collected in payroll taxes, and the 2017 bankruptcy date, reported this year by the Medicare “Trustees,” is two years earlier than predicted in last year’s report. (The terms “trust fund” and “trustees” are ridiculous, because Medicare does not operate a trust fund: The surplus payroll-tax revenues for each year up to 2007 were immediately transferred to other operating departments of the U.S. government.) The government is going to have to look somewhere to fill this gaping hole and “taxing the rich” is more satisfactory than actually fixing the problem.

On the other hand, the taxation of privately purchased health insurance is grotesquely regressive and blatantly unfair. Because the government exempts employer-sponsored health benefits from taxable income, they are far more attractive to higher-income households. An employer-based health benefit of $10,000 is worth $12,500 of pre-tax monetary income to a household with a marginal income-tax rate of 25 percent, but is worth $15,000 of pre-tax monetary income for a household with a marginal income-tax rate of 50 percent. Unsurprisingly, higher earning workers prefer more of their compensation in health benefits, despite the fact that much of the health care we use is ineffective.

Furthermore, one of the primary causes of the lack of health insurance is unemployment. I have estimated that perhaps two million of the uninsured are simply undergoing a waiting period for coverage at their new jobs. Changing the tax code to give workers the same tax-benefit as their employers do, for the purchase of health insurance, would reduce the number of uninsured and improve the fairness of the tax-burden.

This blog was originally posted at KQED Healthy Ideas – Californians Weigh In On Health Care (San Francisco, CA), May 28, 2009

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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