Catastrophic comparison, Part 2.2

In this series of posts I’m taking a look at three proposals for government-paid or government-provided catastrophic health care. I explained the proposals and compared them in the first post in this series. In my most recent post, I looked at whether the proposal by Martin Feldstein was paid for and concluded it was not. In this post, I’ll look at whether the proposal by Brad DeLong is paid for. You can read about his plan in detail in my first post but here’s a brief summary to go on with:

Brad DeLong proposes government take 20% of everyone’s income. Five percent goes to pay for government-provided catastrophic health insurance/care. The other 15% goes into a Health Savings Account. If you spend everything in your HSA in one calendar year, the catastrophic insurance kicks in. If you don’t spend everything in your HSA in one calendar year, you can roll what’s left into an IRA or just get the money back to spend as you please. He does not explicitly propose any type of government assistance for those with low incomes. Very, very simple.

So is DeLong’s plan paid for? Again, this is a different question from whether we can afford it, either nationally or as individual taxpayers. Here I’m just examining whether the income stream DeLong’s plan depends on is sufficient to cover the costs of the health care it must pay for. Let’s do a little math.

I’m looking at two sources for my calculations. First, Historical National Health Expenditure Data (hereinafter “NHE”). The Website is here; I’m using the pdf you can download via the “NHE Web tables (PDF, 1.1 MB)” link. The other source is the Congressional Budget Office Data on the Distribution of Federal Taxes and Household Income (hereinafter “CBO”). The Website is here; I’m using the pdf you can download via the “All of the Above Information” link under “Historical Effective Federal Tax Rates and Income, by Income Category (1979-2006)”. I’m looking at 2006 numbers since I believe that is the most recent CBO data available. Here we go.

According to NHE, in 2006 the United States spent $2.1127 Trillion on health care; our population was 265.4 Million. A little quick division and we discover we spent $7,960.44 per person for health care; I’ll use $8,000 to make life easier. What’s $39.56 among friends? Okay.

According to CBO (page 7), in 2006 there were 116,100,000 households in the United States. A little more quick division and we discover that each household contains 2.29 people. So each household is going to need $18,320 worth of health care in a year - on average, or course.

The CBO has graciously reported its average income numbers in quintiles with each quintile having approximately the same number of households. We can, therefore, pretend there are only five households in the country when we do our math. So.

The CBO (still page 7) tells us that average household pre-tax income looks like this:

Lowest quintile: $17,200; 20% of that is $3,440
Second quintile: $39,400; 20% of that is $7,880
Middle quintile: $60,700; 20% of that is $12,140
Fourth quintile: $89,500; 20% of that is $17,900
Highest quintile: $248,400; 20% of that is $49,680

So if we take 20% of the pre-tax income from each of our five households, we’ll have a total of $91,040. If we distribute that equally across our five households, that’s $18,208 per household. We need $18,320 to pay for their health care so we’re very, very close - short $112 per household. Or at least we were in 2006. We can easily make up the difference by having the richest household pay 20.25% rather than just 20%. I know we don’t want to soak the rich but an extra 0.25% is not really soaking them. So I say DeLong’s plan is paid for.

Now that’s using pre-tax income. DeLong doesn’t specify pre-tax or after-tax when he talks about 20% so let’s take a look at the numbers if we assess the DeLong fee on after-tax income.

The CBO (now page 8) tells us that average household after-tax income looks like this:

Lowest quintile: $16,500; 20% of that is $3,300
Second quintile: $35,400; 20% of that is $7,080
Middle quintile: $52,100; 20% of that is $10,420
Fourth quintile: $73,800; 20% of that is $14,760
Highest quintile: $184,400; 20% of that is $36,880

When we take 20% of the after-tax income from each of our five households, we have a total of $72,440. If we distribute that equally across our five households, that’s $14,488 per household. We need $18,320 to pay for their health care so we’re short $3,832 per household. If we want to make up the difference only from the wealthiest quintile, now they’re going to have to toss in 30.4% of their income rather than 20%. That doesn’t sound too workable especially given that whole “no tax raises for anyone making under $250,000 per year” thing.

When I thought about it, though, I realized that my numbers weren’t quite right. If we implement the DeLong plan, our after-tax income will go up: the amount that now gets taken out of each paycheck for Medicare should disappear. Not even the greediest Federal government could justify continuing to remove that amount once Medicare ceases to exist. So that boosts our after-tax income a little right there.

Beyond that, though, are other taxes that should disappear under the DeLong plan although I’m sure we’ll have to fight our governments tooth and nail to make them do so:

- Some part of our Federal income tax goes to fund Medicaid.
- Some part of our State taxes go to fund Medicaid.
- Some part of our Federal, State and possibly local taxes go to fund health care for those who have no form of insurance and are too poor to pay for care.

If we implement the DeLong plan we should insist out tax burden drop by whatever amount now goes to these health-care related expenses.

And there’s the other side of this, too: under the DeLong plan we hand over a chunk of our income but at the same time some of the expenses we incur now drop. Most obviously, we will no longer be paying health insurance premiums ourselves. Less obviously, we currently forego some wages because our employers contribute to our health insurance in the form of premiums and administrative overhead. Theoretically, we could write the DeLong legislation to require employers to “’cash out’ the money they currently pay for health benefits and distribute it as wages”; alternatively, we could just let the market do its work. It will take time - particularly so long as unemployment is up - but eventually companies will start using their extra breathing room to raise wages. Last, but not necessarily least, if some corporate income tax revenue goes to pay for health-care related expenses, we should insist that the corporate tax burden by cut by that amount. Since individuals end up paying these taxes in the form of higher prices, eliminating them will raise our disposable income.

At this point I began to wonder if the reduced taxes and increased disposable income I was thinking about might actually add up to the amount the DeLong plan would take from all of us. That was when I had one of those head-slapping, V-8 moments: of course it did. I wasn’t working with some theoretical cost of health care; I was working with the actual amount we spend on health care. This meant that - one way or another - we all do actually pay 20% of our before-tax income for health care. Maybe you don’t individually - although I think each of us might be surprised if we did the math - but on average we all do. We have to: that’s how much we spend.

Although there is, of course, one way around this: if we as a nation are borrowing to fund our health care. In which case, yes, we can argue we aren’t actually spending 20% of our before-tax income on health care and, yes, we can claim we can’t afford to pay that much for our health care. I’m just not sure the future generations that will have to pick up the tab are going to be much impressed by that argument and that claim.

The DeLong plan brings us face to face with the intractable truth at the heart of health care reform: if we’re horrified at how much the DeLong plan will cost us and argue we can’t afford it then we’re forced to admit we can’t afford what we as a nation are spending on health care now and we have to cut back. If we argue we can afford what we’re spending now then either we can afford the DeLong plan or we have to admit that we’re fine with getting health care we’re not paying for and leaving the bill to our children and grandchildren.

You pick ‘em.

*****

Reading:

William McGurn in the Wall Street Journal - What Singapore Can Teach the White House

Making someone else pay : This Milwaukee, Wisconsin, Journal Sentinel article is from October of 2009 which means it’s practically antediluvian in health care bill terms but it’s a nice, brief look at the idea that everyone wants Congress to ask - and thinks Congress is asking - someone else to pay for health care. It makes me think of that ditty attributed to Russell Long:

Don’t tax him. Don’t tax me. Tax that man behind the tree.

It’s also worth noting that - at least according to this article - under the Baucus plan (remember that?) the average family in Waukesha Country would be looking at premiums of 12% of income. That’s not far off DeLong’s 20% and under the Baucus plan taxpayers would still be footing the bill for Medicare, Medicaid, and whatever the government throws into paying for health care for the uninsured.