Is Health Care Reform an Attack on Inequality?

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Obama health careA recent New York Times article by David Leonhardt suggested that the recently passed healthcare reform bill is the latest in a long line of Federal government programs which offer broad insurance against poverty and narrow the inequality between America's haves and have-nots. From this perspective, health care reform is a direct descendant of the Social Security and Medicare entitlements, which are funded by taxes on all wage earners.

To answer whether health care reform is truly an attack or income inequality or not, we need to establish some broad contexts, and ask some preliminary questions.

Is income inequality rising in America? As I wrote in Are the Rich Getting Richer? The Data Say Yes in February, it is simply fact that income gains for households in the top 20% far outpaced those of the low and middle income households over the past 30 years.

The nation's financial wealth is also highly concentrated, as the top 20% of households own 93% of total financial assets (that is, assets other than real estate, vehicles, etc.)

But before we conclude that the obvious "fix" to our high health care costs is to "tax the rich," we should note that the top 20% of households already pay the lion's share of Federal taxes. According to the Congressional Budget Office (CBO), the top 20% paid 86.3% of all Federal income taxes, 43.6% of Social Security, 87.8% of corporate taxes and 34.1% of Federal excise taxes.

After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.

The top 20% paid 68.7% of all Federal taxes: Income taxes, Social Security and Medicare, excise and corporate taxes.

The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.

The health care reform bill adds a special payroll tax to those households earning more than $250,000 annually-more or less the top 10% who already pay over 70% of all Federal income taxes.

Should the top 10% pay more tax? Since much of the additional costs of the health care reform bill are to be funded by this new tax, then the bill's answer is an unequivocal "yes."

But the key word here is "payroll:" this new health care tax is on earned income-wages, salaries and bonuses-while the income of the truly wealthy comes from "unearned" investment income: rents, interest from tax-free municipal bonds, dividends, etc.

As a result, the new tax hits high-income earners but appears to leave the super-rich untouched.

This raises the troubling possibility that perhaps the tax isn't really narrowing the nation's wealth inequality as much as its backers hope.

There are several other tax-related issues in the health care reform bill which sound good on the surface but which may not hold up to deeper scrutiny.

Another reform bill tax being levied is a 2.3% tax on medical devices and equipment. The intent is that the medical-technology industries which stand to benefit should help pay for the program, but excise taxes tend to be passed on to the consumer.

One of the key ways that the reform bill extends coverage to the uninsured is by expanding Medicaid coverage. Medicaid is the Federal program which offers health care to low-income households, especially those with children.

The Medicaid program is partially paid for by the states, and so states are facing big bills for this expanded Medicaid coverage. While the Federal government will pony up the full costs for the first two years of this expansion, after that, states will have to pay. California, for example, will have to come up with $2 to $3 billion more per year for Medicaid, even as the state faces a chronic $20 billion shortfall.

In other words, while Congressional backers of the legislation predict the bill will cut Federal deficits, these reductions may come at the states' expense.

Who will pay these billions in new state taxes? That will be up to each state, but it may not be only the very wealthy. So once again, the notion that the bill narrows income disparity is questionable.

Perhaps most importantly, the bill's total cost may be wildly underestimated. If so, then the "tax the rich" payroll surcharge may not cover much of the bill's real costs, and all taxpayers would end of footing the bill, either directly through higher taxes or indirectly, through higher Federal borrowing which would lead to higher interest payments on the Federal deficit.

One of the reform bill's key elements is a set of penalties on businesses and individuals who do not buy health insurance. The idea is to create incentives for businesses to provide healthcare via 35% tax credits and create disincentives by charging businesses $2,000 per employee if the firm does not provide coverage.

Non-partisan analysis of these measures suggest that many businesses would benefit from canceling their $10,000-per-employee coverage and paying the $2,000 penalty. The government would then subsidize the employee's own insurance by $8,000.

For businesses that are losing money or breaking even, the tax credit doesn't offer much incentive, as they owe no tax to be offset with a credit.

Individuals who do not buy insurance would be penalized about $600 per year (or 2.5% of income up to a certain level). But since the reform bill bans insurance providers from refusing coverage for pre-existing conditions, then healthy workers would do better financially by paying the modest penalty and saving the thousands of dollars insurance costs annually.

If they become ill or desire treatments, then they could join a plan without regard for pre-existing conditions, receive treatment and then cancel their coverage later.

The net results of these perverse incentives to "game the system" are unknown, but if small businesses and healthy individuals opt out of buying insurance, then that defeats the entire premise of spreading the risks over businesses and the healthy populace.

It doesn't take a math genius to see that saving $8,000 a year per employee is a powerful incentive, or to see that if the government picks up that $8,000 annual subsidy tab for millions of workers, the program's proposed savings will turn into cost over-runs. The payroll surcharge on the top 10% households would have to rise even higher to cover these additional costs, or be spread over all taxpayers.

Does this health care reform bill really attack inequality? One context which receives little attention but plenty of lip-service is that the U.S. spent 17.6% of its gross domestic product on health care in 2009, more than double the percentages spent by Japan, Britain, Spain, Italy or Australia, even as our overall health trails that of other developed nations.

At least some commentators have wondered if this huge gap between what the U.S. spends compared to its competitors may result from the "fee for service" model of U.S. health care.

In effect, the extra 8% of GDP we devote to health care acts as a "tax" on the entire economy, as we're paying this $1.2 trillion but ending up with poorer health than nations which spend half of what we do.

If the causes of our outsized costs are structural, then we as a nation would be better served by focusing on reducing our healthcare expenditures to align with the costs of the rest of the developed world, rather than seek to pay for our exorbitantly costly system with higher taxes and illusory savings.
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