Who Pays?

The rules of the game that have governed how health care benefits have been financed and delivered in the U.S. for 60 years are being jettisoned. The dismantling of those rules is about to accelerate and enter its final stages. Under emerging new rules of the game, employers are exiting from any responsibility or role in financing health benefits, effectively transferring all financial liability and costs to their workers. 

The Bush administration word-spin for the new rules is summed up in what it calls “consumer driven health care,” which essentially means fully privatized health care plans purchased by workers directly from insurance companies and other financial institutions. It means employers will no longer manage, maintain, or make contributions to traditional employer-provided health benefit plans. It means workers are given a token stipend, then told to go shop around and get their own. 

Total health care spending in the U.S. today is around $2.2 trillion a year, or about 16-17 percent of total U.S. Gross Domestic Product (GDP), which is the cumulative value of all goods and services produced in the U.S. in a year. Insurance companies and financial institutions today siphon off for themselves about $1 trillion of that $2.2 trillion under the current system. That $1 trillion diverted every year to the health insurance industry is equal to a typical non-supervisory worker, earning an average hourly wage of $17, working from January 1 through April 22 and turning over every penny of this net pay for that period to an insurance company like United Health, Cigna, or Aetna. 

What follows is a detailed description on how to finance true single payer universal health care through a fundamental restructuring of the current tax system—a fundamental restructuring that would raise $1.2 trillion a year while eliminating the insurance-finance industry’s current $1 trillion a year diversion. 

With single payer the U.S. government, through the Social Security Administration, could tax corporations and individuals based on their income and affordability (and not just payroll earnings) and raise funds to pay for health care services for all citizens. The Social Security system would expand and, in turn, make direct payments to doctors, hospitals, clinics, pharmacists, and other providers of health care out of the revenues collected—much like it now makes monthly retirement benefit payments to individuals and institutions under the Social Security retirement program introduced in the late 1930s. The government would retain no profits. It would set minimum prices for services, much like what is now done in the Medicare program that provides medical services payments for senior citizen over 65. All revenues would be paid out for services in a pre-funded pay as you go arrangement, just as in the case of Social Security retirement benefits, with the exception of a contingency fund to cover normal cyclical fluctuations. 

It is important to note that single payer universal health care thus defined is not the same as national health insurance. In fact, it is not an insurance system at all. There is no role for private insurance companies in a true single payer universal health care system. National health insurance schemes integrated with a single payer approach make the financing of a national health care system as economically untenable as the current employer-provided benefits plan system. 

Single payer universal health care systems exist in some form or another in most advanced industrial nations today. The only thing approximating such an arrangement in the U.S. is Medicare, which provides health benefits coverage for more than 45 million senior Americans at a minimal cost of a barely 3 percent payroll tax on wage-only incomes—i.e., a system that excludes all capital wealth from contributing to the health benefits of its senior citizens. 

Corporate, conservative, and liberal opponents of single payer universal health care argue it cannot work. It is too expensive. Which is half true. So long as insurance companies are in the picture and universal health care means the same as national health insurance, with insurance companies continuing to divert for themselves $1 trillion and more a year out of total health care spending, it is likely health care in any universal sense is not affordable. But with insurance companies and others out of the picture, financing single payer universal health care is not difficult. The problem in America is not whether there is sufficient wealth to fund universal health care. The problem is how that wealth is distributed. 

The key question for financing and delivering single payer universal health care becomes, “Who pays?” Estimating the cost of financing single payer universal health benefits in the U.S. begins with the current $2.2 trillion annual health care spending. As noted, that $2.2 trillion figure represents approximately 17 percent of annual U.S. Gross Domestic Product (GDP). Other advanced industrial economies in Europe, Canada, and elsewhere that have some form of single payer system spend only about 8-10 percent of their total GDP on health care. Assuming a 9 percent average, that means the U.S. spends about 8 percent of its GDP on unnecessary administration in the health care financing system today. A transition to a single payer universal system in the U.S could eliminate that cost. The remaining cost of a single payer system should therefore equal no more than 9 percent of GDP, or around $1.2 trillion a year. 

A regular, annual flow of funds from several diversified revenue sources is necessary to provide the $1.2 trillion annually. Diversification is important, so that a crisis and decline in any given source does not result in a major deficit in any given year. One-time sources of funding are undesirable. Ongoing, reliable, and relatively stable funding sources are required. 

The health care cost and funding crisis today represents a major structural problem at the heart of the U.S. economy and its social structure. Bold and innovative tax, as well as non-tax, proposals that represent major structure changes must be the basis of any solution. There are seven fundamental proposals that could provide an annual flow of funds equivalent to at least $1.2 trillion a year to finance single payer universal health care: 

1. Replace the Payroll Tax for Social Security with a Social Equity Tax on all Incomes 

The current tax structure for funding Social Security retirement, disability, and Medicare today rests upon the payroll tax. That tax is equal to 15.3 percent of wages and salary income up to a ceiling of around $90,000 a year as of 2005. Those earning more than $90,000 in salary or wages in a given year pay no additional payroll tax on their wage and salary earnings above $90,000. More importantly, those earning income from capital sources—i.e., capital gains, dividends, interest, rents, business income, and the various forms of executive compensation (stock options, deferred pay, no interest personal loans, tax gross ups, executive pensions, etc.)—pay no payroll tax on that income. 

If the current 15.3 percent payroll tax for Social Security were cut roughly in half, to 7.6 percent, the 108 million non-supervisory workers in today’s U.S. labor force—virtually all of whom earn less than the $90,000 limit—would all receive an immediate 7.7 percent raise. If nothing else, that would certainly get the attention of tens of millions of workers today as it would represent more of a wage increase that many workers received over the previous ten years combined. But then how to finance current Social Security retirement, disability, and Medicare payments and how to fund at least part of the further $1.2 trillion funding needed? 

The U.S. federal tax structure is composed of five basic types of taxes: the individual income tax, the corporate income tax, estate and gift tax, the payroll tax for Social Security, and excise taxes. The first three—the individual income tax, corporate income tax and estate tax—have all been dramatically reduced as a percent of GDP, in all three cases reflecting major tax cuts for corporations and the wealthy. Only the payroll tax, levied on working and middle class families, has increased significantly as a percent of GDP. Its percentage in fact has tripled. 

For example, prior to 1980 the individual income tax averaged about 10 percent of GDP. After the Reagan and Bush major tax cuts on capital incomes, that average declined to 7 percent by 2004. Similarly for the corporate income tax, which once ranged about 4 percent of GDP but has fallen to only 1.6 percent of GDP in 2004, and the estate tax, which averaged 0.6 percent, and now is only 0.25 percent. In comparison, the payroll tax, which hits workers the hardest, averaged 2 percent prior to 1980 but rose to 6.4 percent. 

By returning income tax rates to pre-1980 levels as a percent of GDP by focusing on raising top rates for the wealthy in the individual income tax, by returning the rates for the corporate income tax to pre-1980 levels, and by restoring the estate tax to pre-1980 levels, 2004 tax revenues could have been increased in net terms by $728 billion for that year. 

Cutting the payroll tax in half, from 6.4 percent of GDP to 3.2 percent, would reduce total revenue available for social security by half: from $749 billion to $374 billion, according to 2004 numbers. Replacing the $375 billion to the Social Security system from the $728 billion net tax revenue increase above would still leave $354 billion additional in 2004 that could be available for helping finance single payer universal health care. 

In short, returning rates to pre-1980 for capital incomes (individual, corporate, and estate) would allow a 7.5 percent cut in payroll taxes—i.e., an immediate wage raise of 7.5 percent for the 90 million working and middle class households—and still leave $354 billion a year toward funding single payer health care. Furthermore, raising the corporate income tax by an additional 1 percent of GDP over each of the next three years—to 7 percent from the pre-1980 level of 4 percent—could permit the phasing out of the remaining 7.6 percent payroll tax altogether while still leaving the $354 billion available for single payer financing. $1.2 trillion minus $354 billion leaves $846 billion still to raise to finance single payer. 

2. Restore the $4 Trillion in Principal and Interest Diverted from the Social Security Trust Fund since 1985 

In what has been the greatest theft of any working class in any country, the Social Security fund surplus of $2 trillion has been diverted in total to the U.S. general budget in order to offset annual U.S. budget deficits (ironically, created by tax cuts for the wealthy and corporations and chronic bloated defense budgets). If it weren’t for the Social Security surplus diverted every year to the general budget, the U.S. annual budget deficits would be ranging in the $500-$800 billion a year level instead of the recent $300-$500 billion a year. The U.S. budget deficit in 2006, for example, would have been more than $450 billion instead of the announced $298 billion.  

Although Congress passed a rule establishing a lockbox on social security’s trust fund in 1990, every year since Congress has suspended that lockbox and diverted the funds to the general budget. The argument justifying this practice has been that we owe that money to ourselves and that the current IOUs left in the Social Security trust fund can always be replaced with real funds. While in an accounting sense that may be true; in actual fact to replace the missing $2 trillion would require borrowing the same amount from banks and foreign sources, which politically is highly unlikely except in the event of a national crisis. 

Our second proposal therefore is just that. National health care is today a national crisis. Therefore Congress should borrow and restore not only the $2 trillion in principal stolen from the Social Security trust fund since 1985 (i.e. stolen from workers), but should “borrow” and restore the additional $2 trillion that would have been earned in interest as well on that $2 trillion principal. This borrowing would be done in equal amounts over a ten-year period, at the rate of $400 billion a year, with that $400 billion subsequently earmarked for deposit into the social security trust fund for financing single payer universal health care. 

That means we now have $400 billion a year added to the $354 billion a year. 

3. Stop the Transfer of the $150 billion Annual Social Security Surplus to the U.S. General Budget 

Social Security is a pay as you go system. Payroll tax revenues brought in every year by those who still work pay for the retirement benefits of those not working. Social Security has generated a cumulative surplus every year and has, in effect, subsidized the U.S. budget for more than two decades now. In the past six years the annual surpluses in the Social Security trust fund have been ranging from $153 to $171 billion a year. The diversion of those amounts from the Fund amounts to a de facto income surtax on workers’ incomes up to the $90,000. Repealing this de facto income surtax by prohibiting the transfer of the $150-$170 billion surplus every year results in that surplus retained in the trust fund as another source for funding single payer universal health care costs. Retaining the annual surplus would raise another minimum $150 billion a year.  

4. Repatriate Half the $8 Trillion in Hidden, Illegal Offshore Tax Shelters  

In 1983 it was estimated that approximately $250 billion was hidden away by corporations and the super-wealthy in offshore tax shelters, primarily the Cayman islands in the Caribbean, the Bahamas, and the British Virgin Islands. By 2004 this figure had risen to $7 trillion, according to that most reliable capitalist source, the Morgan-Stanley bank. That figure of $7 trillion is further corroborated by the European OECD. 

Today the $7 trillion is almost certainly around $8 trillion, dispersed in 34 island locations around the world. The IRS designates these 34 shelters as “offshore secrecy jurisdictions.” Hearings currently underway in the U.S. Senate on only the Cayman Islands tax shelter have identified at least 12,000 corporations operating as shell companies located in just one building on Grand Cayman Island, “whose sole purpose is to evade U.S. taxes,” according to Montana Senator Max Baucus this past May. The Caymans in particular has become the hedge fund administration capital of the world, through which passes the lions share of more than $400 trillion in derivatives trading by hedge funds. 

Many of the practices used to hide and shelter taxable income in the Caymans and islands elsewhere are also practiced in the onshore U.S. tax shelter called the state of Delaware where more than half of all U.S. corporations and 60 percent of all Fortune 500 companies are headquartered. In 2001 alone, before the explosion of offshore tax shelters, the IRS estimated it was losing annually as much as $354 billion due to tax evasion. The figure is no doubt in the $500 billion range today. 

The point is that closing just half the tax shelters and loopholes responsible for the $500 billion annual tax revenue loss would generate an additional annual flow of $250 billion with which to finance single payer health care. 

In addition, real measures could be taken to force the repatriation of some of the stock of the $8 trillion now squirreled away by corporations and the wealthy in the Caymans and other island tax shelters. Not all that $8 trillion is probably U.S. from multinationals or U.S.-based trusts. Given the global distribution of wealth, however, it is safe to assume at least $4-$5 trillion of it is U.S. based. The forced repatriation of, once again, just half that $4 trillion, i.e. $2 trillion, could be directed into special accounts in the Social Security trust fund which, if invested at 10 percent, would produce an additional flow of $200 billion a year to finance single payer universal health care. Mandatory jail sentences for wealthy trust fund administrators who failed or refused to comply would ensure cooperation and repatriation of the funds. Instituting 100 percent tariff penalties and/or 100 percent quota limits on multinational corporations similarly sheltering offshore with the intent to avoid U.S. taxes would no doubt also prove sufficiently convincing. 

Based on the above conservative assumptions, a flow of another $450 billion a year could thus be generated from major structural reform of tax shelters and associated loopholes. This revenue flow adds the total available for financing single payer health care to $1.35 trillion, or now $150 billion more than the $1.2 trillion initially estimated. 

5. Institute a 10 percent Surtax on Corporate Profits 

Corporate profits in the U.S. are at historic highs for the post-World War II period. Profits have risen double digit percentages every quarter for the past three and a half years. Reported retained profits are now in the $500 billion range. A retained profits surtax of 10 percent would therefore raise another minimum $50 billion a year. 

6. Levy a 50 percent Tax Penalty on Unreported Profits 

Reported retained profits is only part, and probably the lesser part, of the picture. Estimates by the Boston Consulting Group recently were that as much as $1.5 trillion in unreported profits are now held offshore. In late 2004 Congress passed an 800-page omnibus corporate tax cut bill. In it was a proposal to reduce the tax rate for corporate profits held offshore, from the normal 35 percent rate at the time to only 5.25 percent. The idea was to entice the payment of at least some taxes. The repatriated tax profits at 5.25 percent was conditioned on the money being used by corporations to create jobs in the U.S. In actual fact, however, most of it was used by companies in 2005-06 to buy back stock and acquire other companies. The amount held offshore in 2003 was estimated at around $700 billion. The Boston Consulting Group’s estimate indicates that level has now risen to twice as much. In question are both overseas profits made by U.S. corporations on investments already outside the country, as well as corporate shifting and transfer of earnings made in the U.S. and then diverted to offshore subsidiaries in order to avoid U.S. taxes. 

A severe penalty of 50 percent on profits diverted and/or earned and held offshore by U.S. multinationals would likely generate a reasonable level of repatriation, as well as penalties. Noncompliance would be supplemented with criminal tax evasion jail sentences for CEOs and senior managers, as well as penalties prohibiting the import of the violating corporations’ products to the U.S. 

Partial repatriation and penalties would produce a combined additional annual income source of $100 billion. 

7. End All Corporate Welfare and Direct Tax Subsidies 

Many U.S.-based corporations, in particular those in aircraft manufacturing, banking, technology, telecommunications, and pharmaceuticals pay no corporate income tax at all. In fact, they are the recipients of negative taxation—that is, direct subsidy payments from the U.S. government amounting in many cases to more than $1 billion each. In virtually all cases, moreover, these are corporations registering positive profits in the year of the subsidy. This corporate welfare amounts to around $40 billion a year, according to various sources. An end to the practice would generate another flow of that same amount which might be directed to the public investment alternative of single payer health care. 

From the foregoing it is clear the amount raised from the above seven measures produces a total annual flow of more than the required $1.2 trillion. In fact, the total thus raised is approximately $1.540 trillion. 

The seven measures for financing single payer universal health care could raise a total financing flow of at least $1.6 trillion a year. The excess of $400 billion a year provides a significant contingency surplus to cushion any cycles in the economy that may result in short-term declines in tax revenue flows. The annual excesses of $400 billion might be accumulated in a special fund, applied to improving social security retirement benefits, or used to improve and extend prescription drug benefits for all citizens—not just some of the retired as is now the case with the current prescription drug benefit. An annual surplus of $400 billion would just about enable the extension of prescription drugs to all citizens, not just retirees. 

The above list is certainly not exhaustive. Additional sources for financing single payer can also be identified. For example, taxes on capital and investment outflows from the U.S., which currently range around $400-$500 billion a year. Taxing capital flows in general is further necessary to stem the tide of disinvestments in America that has been growing in momentum over the past decade. We are witnessing today, for example, the virtual dismantling of what’s left of the manufacturing sector in the U.S. and its shipment offshore, mostly to Asia. Other areas of the economy, in professional services and technology R&D, are beginning to experience the same. 

What has been proposed is a reclaiming of that wealth in order to fund public investment in single payer health care. It is essentially a reversal of the more than $1 trillion annual shift in relative income that has been the consequence of corporate and government policies since 1980. It is simply a restoring of the tax structure that has been radically restructured from the right wing since the 1970s and turned by the wealthy and corporations into a means for redistributing income in the U.S. 

Z 

Jack Rasmus is the author of The War At Home: The Corporate Offensive From Ronald Reagan To George W. Bush, Kyklos Productions, 2006; and the forthcoming From Us To Them: The Trillion Dollar Income Shift.