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.

Salon: Dudebros and millennials shouldn’t determine who gets healthcare!

I wrote this at Salon. I didn’t title it. So if you are going to complain about that, direct it elsewhere.


But instead of getting into the nuts and bolts of whether the young can be swayed to enroll, I think it behooves us to take a step back and consider how utterly surreal this spectacle is. The whims of a small set of 20-somethings and 30-somethings will determine whether our attempt at a universal healthcare regime stays afloat or self-implodes. Did you manage to see that shirtless bro with a crooked Miami Dolphins hat who became a mini-celebrity yesterday because he witnessed the Capitol shooting? The success of Obamacare depends on the neurons in his dudebro brain firing in a specific way that causes him and his dudebro friends to sign up for insurance on the exchange. We are all at his mercy.

Do you think the NHS in the U.K. had a phase like this? Do you imagine there was a moment in 1948 when all of Britain had their fingers crossed, hoping that the whims of the country’s youth would afford them the luxury of healthcare? Do you think Canada’s Medicare system was constructed in such a way that it could be unraveled by a small part of its population opting not to participate? No, of course not. These are competent countries and when they wanted universal healthcare, they made it happen. When we wanted it, however, we produced a Frankenstein joke so compromised by navigating between the relevant special interests that the whole thing may very well collapse in on itself in a spectacular display of our nation’s accelerating impotence.

Read the rest at Salon.

Socialize Big Pharma Research

I ran across this post at Jacobin called “Socialize Big Pharma.” The basic argument is simple. We need more antibiotic drugs, and pharmaceutical companies aren’t trying to produce them. Therefore we need to eliminate the private pharmaceutical sector altogether, putting a socialized system in its place.

I found the post odd for a number of reasons, but mainly because it seems to totally miss the drug patent system at the center of the dysfunction the author is so concerned about. Drug patents are state-granted monopolies over manufacturing specific drugs. This time-limited monopoly system allows drug companies to generate massive rents for as long as the patents last. The possibility of capturing those massive rents is what is supposed to motivate private companies to undertake drug research.

But, as Dean Baker has famously argued, the drug patent system is a ridiculous way for the state to go about making drug research happen. For $30 to $80 billion per year, the federal government could totally replace the research private drug companies undertake. If it combined this replacement spending with an abolition of the drug patent system, consumers would save $270 billion a year due to the elimination of patent-generated rents. Additionally, the publicly-funded drug research could be directed towards more socially valuable drugs, e.g. the antibiotics that the author of the Jacobin piece is so frantic about.

I was stunned by how badly the author missed the point. The piece is a great testament to the way in which incumbent institutions (in this case drug patents) get so ingrained into our understanding of reality that we barely take notice of them. So here, the author ends up totally overlooking drug patents on the way to reaching the unnecessary conclusion that the entire pharmaceutical industry needs to be socialized. In reality, the author’s complaint should lead him to indict the patent system as a failed way to generate good drug research. This then supports the idea that we should publicly fund drug research, a point many authors have already made. It does not, by itself, say anything about the need to socialize the firms that run the pill-making machines, this being the conclusion the author oddly comes to.