Tax-Related Proposals to Improve Health Care

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Health Subcommittee

Member Day Hearing on Tax-Related Proposals to Improve Health Care

Tuesday, May 17, 2016, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Tiberi and Ranking Member McDermott, thank you for the opportunity to submit these comments for the record to the House Ways and Means Committee.  As usual, we will preface our comments with our comprehensive four-part approach, which will provide context for our comments.

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25%.  
•  Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

Proposals along these lines have long been a part of our standard package of health care reforms.  We have long advocated a conversion to catastrophic insurance with a medical savings account to pay for appointments and drugs, although we have always suggested a third element – a Medical Line of Credit to bridge the gap between the current MSA balance at the catastrophic deductible.  The MLC would also pay for services, including acupuncture and reproductive health that may not be covered or coverable under catastrophic insurance.  

Under our standard tax reform proposal, catastrophic policies would be purchased by all employers (and certain self-employed) as an offset to the Net Business Receipts Tax/Subtraction VAT.  While this raises the tax rate, the lack of any tax subsidy would doom private insurance and deny most families medical care.  Likewise, the Health Savings Account would be provided by employers, but would be a deduction rather than a credit.  Medical Lines of Credit would be funded entirely by employees with no tax advantage – as under our plan most employees would not pay any income taxes.

Personal experience with cardiac care (luckily a succession of false alarms) showed that, while this approach makes economic sense, it does not jibe with how doctors operate.  There is no price schedule in the waiting or exam rooms to compare costs for proposed procedures or tests. Health care is not a normal good.  While it responds to market pressures, some care cannot be limited by them. 

I also came to the conclusion with the passage of health care reform – and the electoral rejection of the health care reform above which was not far from what Senator McCain proposed in his 2008 run (and which was not even mentioned as the Republican alternative in the Obamacare debate) – that Americans like their comprehensive insurance.  Most importantly, while the Medical Line of Credit is essential for complete health care, its inclusion essentially short circuits any decision to shop for care.

If the McCain approach cannot pass, will the Affordable Care Act survive the test of time (it has certainly survived all attempts to repeal it)?  Possibly.  The key concept, that people in marginal jobs deserve the same tax subsidies that corporate employees get is sound.  Those parts that fulfill that need, which originated in the Heritage Foundation (which even now clamors for repeal) are also worthy. 

What is less defensible are the higher non-wage income taxes used to fund it, although no bill which just repeals these will survive a Budget Act point of order in the Senate (regardless of House Rules) nor would the political optics look good.  Repeal would hurt too many Americans, so expansion of the tax (along with a rate cut) with some form of consumption or payroll tax– such as the one proposed by Senator Sanders in his single payer plan (or by Mrs. Clinton during her husband’s health care reform effort).  In our proposal, the consumption tax used would be the NBRT/Subtraction VAT.

The main danger to the Affordable Care Act is ease of entry and exit.  If it is too easy to get in, then people will wait until they are sick to sign up.  After they are well, any plan will stop coverage if you stop sending in your monthly premium check.  If enough people do that, rates go up and the cycle goes down.  This eventually leads to a collapse in the system that can be fixed in one of two ways – give everyone cheap and mandatory health care or place health insurers into bankruptcy, like General Motors and Chrysler, and reorganize them into a single-payer system (without any congressional action).  Had the leadership laid out this scenario, it might have stopped the Affordable Care Act – and insurance companies would have most assuredly stopped contributions to the GOP.

The low-cost system with catastrophic care would operate as above (and would hopefully include the Medical Lines of Credit).  Single-payer care would be funded by the NBRT/Subtraction VAT.  Such a tax is superior to the payroll tax proposed by Senator Sanders because it would hit profit.  The upper-income payroll taxes for non-wage income would repealed and incorporated into the NBRT.  

Under Single-Payer, we propose an additional option.  Firms that provide direct health care, such as automobile manufacturers, would not pay for third party coverage at all.  The cost of the coverage provided would be an offset to the NBRT.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.