Employer contributions to health insurance

This essay takes a deep dive into who really pays for the employer paid portion of health insurance. No, I did not just answer my own question. 

This is not an examination of how this contribution is subsidized by taxpayers through the health insurance exclusion for corporations, the deductibility of health care when provided to non-corporate providers or through the Affordable Care Act. 

Nor is it an analysis of how abortion is funded differently in private insurance, Medicaid and under the ACA - as just mentioning that issue provides the answer to the question. 

Finally, it is not the usual menu of options for reform. I have been covering these for  quarter of a century in many places, including how compromise is possible if people actually wanted it.

The context for this analysis is the proposed wealth tax, which has been suggested as a way to fund Medicare for All and the Green New Deal. I am not for this tax because of its collection and liquidity problems, which combine the worst features of the capital gains tax and the land value tax. 

There are better ways to tax the wealthy, which I have also covered ad nauseum in my tax reform plan in comments to Congress and on my Center for Fiscal Equity blog, fiscalequity.blogspot.com.

This analysis is also applicable to debates on who really pays corporate income taxes and the employer contribution to Social Security. It also applies to the President’s soon to be released proposals to raise revenue by only taxing wealthier households - an approach which doomed Obamacare to frequent repeal votes (which may have been the goal of doing so).

There are five ways to look at the question.

The first is to acknowledge that, regardless of how we slice the pie, the customer pays the tax, either directly or indirectly. This is the argument to end the corporate income tax entirely and simply tax households.

The second is the Public Enemy #1 option. Wealth taxes are sought for the same reason John Dillinger robbed banks. It is because that is where the money is kept. Of course, white collar criminals have found better ways than a gun and a ski mask to get such money.

The third is to look at who benefits from taxation or overhead. Because workers benefit from having health insurance, it is assumed that, lacking Social Security taxes or employer-paid insurance, they would be paid more in wages, which ads credibility to the libertarian argument that we should simply end all subsidies and give workers the money so that they can shop on their own.

The fourth approach is to look at product-level costs rather than annualized cost. The elements of product cost are known to any cost accountant (although, surprisingly, not every public finance economist). These are direct labor (wages), indirect labor, labor overhead, material, indirect material (and material overhead), land, general and administrative, taxes and profit. 

Georgists like to say that all profit is a function of land and that taxing anything else is a deadweight loss - which is a misunderstanding of the term (dead weight loss is a feature of monopsony). 

A product cost approach is useful in justifying an employer paid-subtraction value added tax, which would give employers the choice between fully funding services to employees or paying taxes so the government can do so. A product cost approach also shows that when person A buys an item, they are paying a hidden value added tax - that being the payroll and income taxes of the workers and owners who provide the service.

Our current system is a hybrid between both of these options, although because sales and tax revenue is fungible, there is no link between where you get the money and how it is spent. This is only true if you hold to the principle. From abortion fuhding to highway funding, revenue and budgetary streams are directly allocated whenever we want the to be.

The assumption behind the product cost approach is that customers really do pay the freight on every dime of revenue collected. One can argue that this approach merely restates the first and third points of view and justifies the second.

The retort to saying that customers pay all costs and taxes is that, if you take away the customers, the rich still have equipment, plant and land to be sold and cash reserves to buy goods and services. That is only partially true.

Without customers, even the wealthy have nothing - although if their enterprises shut down, they are able to live off of accumulated wealth - which is the point of doing a wealth tax. On a macro scale, however, if all economic activity ceased, all wealth is useless - so the idea of taxing wealth only goes so far.

As importantly, much of what we collect from the holders of capital are gambling winnings. Secondary markets for assets are gambling using real employees and equipment as poker chips. Actual investment comes from expected sales, not in primary investors cashing out their equity into the secondary market. This is why tax cuts impact the savings sector, not the productive sector.

Then there is option five. To state the obvious, unless option five is “all of the above, “ the real point of the story is the last option considered. Everything else is setting up strawmen to burn. This analysis is no exception.

This is the Marxian option - not to be confused with the justification for wealth taxes. The key question is this: who owns the labor or the products of labor?

Capitalists. Capital also owns the plant and equipment and manages all benefits and overhead. After they are paid, workers own nothing of their product. They may cooperatively pay into a benefit program arranged or by the entrepreneurial capitalists, but they do not own the benefits. Labor contracts exercise common employee power over their own labor and benefits, but these are concessions from the employer. 

The workers do not own the insurance contracts. They do not own the profits from their labor. If they purchase insurance, it is not a transaction with the insurance company, it is a transaction with the employer. In other words, it is a kick back. They work at will and voluntarily (or so the theory goes) subject themselves to unilateral discipline by the employer. 

Workers know this in their bones. Employers know this is. They also count employees as a resource, not an equal party in a bilateral contract.

The only power they have is group action, backed by the threat (if the government does its job, a right) to seek collective bargaining agreements (for which they pay dues). This provides some measure of due process to employees, but ultimately the employers make concessions for that right of ownership. 

Only by buying out the owners do they own the company and the contracts the company makes - and even that is a stretch. The real ownership of all of these things lies with the ESOP Trust. 

The Trustees control the assets for the benefit of the workers - and they do so in their interests. They bear a fiduciary responsibility for the financial, not the actual, interests of the employees. While they may be informed by the workers in making decisions, the trust has control. Employees implicitly pay dues to the Trust in the form of retirement savings and benefits. The Trust pays the taxes, not the employees.

The only group that argues the point are financial economists, who are largely funded by the ownership class. The political class and the receipt of these funds is an implicit bargain is the maintenance of the current ownership situation. Everyone knows all of these things, but the system demands that we not mention any of it. It is both the elephant in the room and a matter of sacred ritual.

Let me stress that the ownership of employee labor ceases when it is paid for. Their interest in contributions to the employee health plan ceases when they stop paying for it. It is not a form of pay in and of itself. Neither is the obligation for paying taxes on them. If the taxes are not paid, they bear no obligation for such payment. They are truly alienated, as Marx asserted, from their labor product. 

This is true for everyone below the Board of Directors level - except that in most cases the Board is a captive audience to the Chief Executive of the Enterprise. While shareholders technically hire the Board of Directors, it is more a matter of ascent to the will of the Executive. While their intermediaries have a fiduciary duty to the shareholders, it does not translate into actual control in most cases. Brokers are required to get the best deal. While there is such a thing as socially conscious investment, it is a rarity.

Even socially conscious owners are simply gamblers who have some influence on the operations of the house. Make no mistake, however. The house always wins. There is a term for this system. Authoritarianism.

Even the public debt is a system of gambling, with one third of the debt owned by richest 0.001% of workers (as estimated using the observations of Pareto - although what was once 20% of top owners of 80% of assets is now the top 10%.).

Government can mitigate this system through semi-democratic means. Unless elections are publicly financed, capitalists own the politicians. Social Democracy, including limited influence in shop floor management, does not change the ownership situation. Any wealth tax or corporate income tax legitimates the status quo. It is a half-way measure; a better cage. 

The only way to get out of this situation is for the ownership class to surrender its control. Government can only seize so much of it or the financial system collapses. The best we can do is to systematically pay down the debt and give capital the option of selling its shares to employees. Even then, employees must then exercise their power in other than an authoritarian manner. The current extent of employee democracy is a pro-forma vote of the board, a monthly lecture on ownership culture and reheated Lasagna.

The bottom line is, if calculating who pays what in the sense of public revenue, the entire responsibility for paying both insurance and taxes is on the richest among us, as is the national debt. More importantly is the issue of control. Control in society is more important than even ownership of the assets. 

This applies to overseas assets and arrangements as well. Transnational enterprise is personal or family rule. The Walton’s are absentee owners. We know their names. Do you know who their CEO is?

Some would call this argument cynical. It is not. It is simply the moral and legal truth of our modern life. That it is never acknowledged is a symptom of the status quo.