I can see the community rating argument (same rate for all vs. lower rate for young people) both ways. The important thing to understand, I believe, is how much the premium would have to be in order to charge a uniform rate for the under 65 adult population. Data that I’ve seen suggest that the premium for adults would have to be about $4,000-$4,500 per year while children (under 18) would have to pay $1,000-$1,500 based on what Medicaid current spends on the children covered by its program. The current average premium for a family of four is about $12,000. As an aside, we think community rating is a fair way to price health insurance, but we don’t have any problem charging young people more for car insurance because they have more accidents than older drivers. Go figure.
I prefer payroll tax financing for two reasons. First, it’s a flat rate (not regressive) scaled to income, so low income people pay less and higher income people pay more, but I think there should be a cap on the wages to which the payroll tax applies so you don’t have very high income people paying 10 or 20 times what the insurance benefit is worth. The more important reason, however, is transparency. I think it is extremely important for people to fully understand just how much their health insurance costs whether the payroll tax is paid by the employee or by the employer. If we are ever going to get to the point politically where we can start to make some of the tough tradeoffs needed to better control medical cost growth, transparency of health insurance costs at the individual level and the taxes required to finance them will be extremely helpful, in my opinion.
The Social Security payroll tax is also a flat rate tax with a wage cap. Since the infrastructure is already in place to withhold FICA taxes from wages, it would be easy to use the same infrastructure to withhold a healthcare payroll tax. If we also had a flat rate income tax of 28% that applied to all income (including capital gains and dividends) above the federal poverty level but gave a dollar for dollar credit for all FICA and health insurance taxes paid by the employee but not the employer), we would have a more progressive income tax structure than we have now.
Example: Assume one person earns $100,000, all of it from wages. He or she pays about $7,500 in FICA taxes and a similar amount under my approach in health insurance taxes (assuming the same 50-50 employee / employer split that we have for FICA). The standard deduction is $10,000 and taxable income is $90,000. The gross income tax liability is $25,200 ($90,000 taxable income x 28%) less a credit for employee’s share of FICA and health insurance taxes paid of $15,000. Net income tax liability: $10,200. A second person earns the same $100,000, all from capital gains and dividends. That person pays nothing in either FICA or health insurance taxes but pays $25,200 in income tax.
So, two people earning the same income but from different sources pay bear the same federal tax burden. State and local taxes probably add another 10% or so to the tax burden for both people. For very high income
people ($500,000 and above), my approach would, in effect, subject virtually all of their income to the Alternative Minimum Tax which, under current rules, does not apply (for the most part) to capital gains and dividends. To the extent that employers’ health insurance costs go down from what they were previously paying, they could be required to raise salaries by a comparable amount per Senator Wyden’s cash out concept.
I have no problem with high tobacco taxes because they drive demand for cigarettes down, not because it raises a lot of money. I suspect we are already reaching the point of diminishing returns from that revenue source, at least in states like NY, NJ and CT with very high tobacco taxes already.
With respect to one set of national rules for Medicaid, I agree with paying the higher Medicare rates even though it will raise costs in the short run. It would simplify life for providers, make them more willing to see Medicaid patients, and it’s the right thing to do.
Much longer term, serious cost control is likely to require either global budgets (especially for hospitals), explicit rationing or both. If the public has clear transparency with respect to the actual cost of their health insurance and the associated taxes, it should advance the day when they will not only accept global budgets and/or rationing to better control medical cost growth, they might even demand it.
-Barry Carol
