Single Payer Payroll Taxes

Presently, three types of actors pump money into the US health care system: the government funds programs like Medicaid and Medicare; employers pay premiums to private insurers; and individuals pay premiums to private insurers and pay deductibles and copayments. Shifting to a single payer system requires capturing these various flows of money and redirecting them into a national health insurance program, which then pays money to providers.

Insofar as this money is already being spent on health care in the status quo, this does not necessarily require imposing any additional financial burdens on the three actors. The government spending will just shift from existing programs to the new one; a perfectly-crafted employer-side payroll tax would not require any extra outlays from them; and perfectly crafted individual taxes along with perfectly-crafted cost-sharing rules would not require any additional payments from individuals.

In practice, the perfectly-crafted taxes and perfect-crafted cost-sharing will not happen. Indeed, this is on purpose. One of the charms of moving to the single-payer system is that it allows us to replace the way we currently fund health care (mostly through flat payments akin to head taxes) with a more progressive way of funding it (generally flat payroll taxes). This shift would significantly alter the distribution of payments away from the bottom and middle and towards the top. This is why single-payer advocates can credibly claim that the majority of people would see their disposable incomes rise if we shifted to a single-payer system.

This all sounds good because it is good. But it also can make some people mad. However it doesn’t have to make them mad because we can fix what they are mad about.

In particular, employers complain that shifting from a flat premium payment to a flat payroll tax would be too disruptive to their labor costs. Employers overall dedicate 8.3 percent of their labor costs to health care payments, but there is considerable variation from employer to employer. Because premiums are done on a flat payment basis, lower-paying employers currently dedicate more of their labor costs to health care than higher-paying employers. Subjecting them all to a tax equivalent to 8.3 percent of their labor costs would thus shift the burden off of lower-paying employers and on to higher-paying employers. As Kliff notes:

“An 11.5 percent tax would look great if I’m a low-wage employer,” said Schoen. “But I’m a high-wage employer, 11.5 percent is going to be way higher than what I used to pay to buy insurance.”

This is actually very good, but you can see why employers of rich people get mad. In theory they could just pass the cost down to their highly-paid workers through lower pay, but a significant nominal cut in pay could cause the workers to become disgruntled. This means the employer has to either cut highly-paid workers wages in order to keep labor costs steady and deal with disgruntlement or keep the wages where they are and deal with a big labor cost bump. Neither is a very appetizing option to the employers.

But this problem should, in theory, be manageable. Instead of only imposing a flat employer-side payroll tax, a single-payer system could begin with two employer-side payroll taxes. One is a head tax equal to a certain dollar amount per full-time equivalent employee. The other is a flat employer-side payroll tax. By dialing in the two taxes at the right levels, you should be able to achieve whatever distributive result is necessary to make the employers minimally happy. And, over time, all you have to do is gradually dial down the head tax while dialing up the flat tax in order to achieve the distributive results single-payer advocates want while also avoiding a big one-time nominal wage cut to highly-paid workers.

If the prior discussion has caused your head to swim, consider the following explanation with hypothetical numbers.

Suppose we determine that employers currently contribute around $4,000 per full time equivalent employee to the health care system. Suppose we further determine that this is equal to 10 percent of employers’ payroll.

We could just impose a 10 percent employer-side payroll tax and indeed that’s what people typically propose. But if you are a high-wage employer, you may currently pay just 2 percent of your payroll to health benefits, meaning the tax would be quite a jump up from your current expenditures. And this makes you mad.

To please this mad person, what I’m saying we can do is impose two taxes: 1) a $3,000 per employee tax, and 2) a 2.5 percent payroll tax. Now instead of the high-wage employer’s health bill jumping to 10 percent of payroll, it only jumps to 4 percent, which is more manageable.

This would still be more progressive than the current system. And, over time, it would be possible to dial up the payroll tax to 5 percent and then 7.5 percent and then 10 percent, while dialing down the per-employee tax to $2,000 and then $1,000 and then $0. In this way, the switch from head taxes to flat taxes is phased in gradually, which solves the problem the employers gripe about, assuming that problem is what actually motivates them.

  • Lewis

    For the California state one, why not fund it partly out of property taxes? Less distortionary to pick up some of the land rents.

  • Andrew

    If you aren’t from California, you may not follow how incredibly fraught discussions of property tax have been for the past, oh, 40 years. We have this incredibly stupid consitutional amendment called Prop 13 https://en.wikipedia.org/wiki/California_Proposition_13_(1978) – needless to say it is very, very bad and makes wringing additional taxes out of property very difficult.

  • John Dix

    This is very interesting. Aren’t there very big/powerful low-wage employers like, I dunno, Wal-Mart or fast food chains? Would they save money by switching to a flat payroll tax? Why aren’t they championing single-payer?