posted July 2, 2007
WHO PAYS? How to Finance Single Payer Universal Healthcare

WHO PAYS? How To Finance Single Payer Universal Health Care
by Jack Rasmus
copyright 2007

The ‘rules of the game’ that have governed for 60 years how healthcare benefits have been financed and delivered in the U.S. are being jettisoned. The dismantling of those rules is about to accelerate and enter its final stages.

Corporate America today is intent on abandoning providing health care benefits for its workers and their dependents. 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’. Consumer Driven Health Care essentially means fully privatized, personal health care plans purchased by workers directly from insurance companies and other financial middlemen. 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.

With the old rules now crumbling, Business maneuvering to exit from responsibility for benefits financing, and Bush & Co. attempting to turn the clock back more than a half century to when workers paid full cost for health care out of their own pockets—an alternative ‘third way’, Single Payer Universal Health Care, is once again on the agenda. But what exactly is Single Payer Universal Health Care? More importantly, how to finance it?

Total health care spending in the U.S. today is around $2.2 trillion a year, or about 16-17% 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, financial institutions, and other ‘middlemen’ today siphon off for themselves about $1 trillion of that $2.2 trillion total spending under the current system.

That $1 trillion is equivalent to the 90 million households in America today with less than $80,000 a year in annual income writing a check for $11,000 every year and giving it to a health insurance company. And that’s before they even begin to pay additional copays and deductibles ‘out of pocket’ to doctors, hospitals, for prescription drugs, and such.

To use another comparison: $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 his 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 of total U.S. healthcare spending to their corporate bottom line.

What is ‘Single Payer Universal Health Care’?

With Single Payer the U.S. government, through the Social Security Administration, would 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 would 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 taken in 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 today, with the exception of a contingency fund maintained to cover normal cyclical fluctuations in revenues and payments.

It is important to note that ‘Single Payer Universal Health Care’ thus defined is not ‘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 healthcare system. National Health ‘Insurance’ schemes integrated with a single payer-universal approach make the financing of a national health care system as economically untenable and unaffordable as the current employer-provided ‘insured’ benefits plan system today. There is no way to afford any longer to continue paying insurance companies $1 trillion a year—either under the current health benefits financing system or under some form of national health insurance system. The only way to make financing work is to the exclude the $1 trillion in annual payments to insurance companies and other middlemen.

Single payer universal health care systems exist in some form or another in most advanced industrial nations today. The U.S. is the only major holdout among nations still not providing it. The only thing approximating such an arrangement in the U.S. is the aforementioned Medicare system, which provides health benefits coverage for more than 45 million senior Americans at a minimal ‘cost’ of a barely 3 % payroll tax on wage-only incomes—i.e. a system which thus excludes all capital incomes from contributing anything to the health benefits of its senior citizens.

Financing Single Payer Universal Healthcare

Corporate, conservative, and liberal opponents of single payer universal healthcare 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 healthcare spending, it is likely health care in any ‘universal’ sense is not affordable. But with insurance companies and other middlemen out of the picture, financing single payer universal health care is not economically 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, how the proceeds of that wealth are invested, and how much of that investment is committed to the necessary ‘public good’ of universal health care.

The key question for financing and delivering single payer universal healthcare therefore becomes simply “Who Pays??

Estimating the cost of financing Single Payer Universal Health benefits in the U.S. begins with the current $2.2 trillion annual healthcare spending. As noted, that $2.2 trillion figure represents approximately 17% of annual U.S. GDP. Other advanced industrial economies in Europe, Canada, and elsewhere that have some form of single payer system spend only about 8%-10% of their total GDP on healthcare. Assuming a 9% average, that means the U.S. spends about 8% of its GDP on non-necessary administration and middlemen in the healthcare financing system today—i.e. largely the insurance companies and other unnecessary middle ‘brokers’ that would not exist in a single payer universal system. That 8% of U.S. GDP is equivalent to approximately $1 trillion a year. Therefore a transition to a single payer universal system in the U.S., with no role for insurance companies and other middlemen, could eliminate that $1 trillion annual cost. The remaining ‘cost’ of delivering a single payer system in the U.S. should therefore equal no more than 9% of GDP, or around $1.2 trillion a year. The task then becomes how to finance that $1.2 trillion on a continuing basis every year, with a provision for normal and reasonable medical cost increases each year that average the equivalent increase in the consumer price index annually, which has been around 2% to 4% on the high end over the past decade.

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 also undesirable. Ongoing, reliable and relatively stable funding sources are required.

Tweaking the current tax structure here and there is not sufficient to provide the necessary $1.2 trillion funding. The healthcare 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 in their own right, must be the basis of any solution to the major crisis that is healthcare system today. Minor adjustments can never resolve a major structural failure; major failures require fundamentally basic and innovative approaches.

There are seven fundamental proposals that would provide an annual flow of funds equivalent to at least $1.2 trillion a year to finance single payer universal health care. They are:

I. 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% 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., etc.)—pay no payroll tax whatsoever on even one penny of those capital incomes.

If the current 15.3% payroll tax for social security were cut roughly in half, to 7.6%, 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% raise. If nothing else, that would certainly get the attention and interest of tens of millions of workers today. It would represent more of a wage increase than 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 additionally at least part of the further $1.2 trillion funding needed for single payer health care?

The U.S. federal tax structure is composed of five basic types of taxes: the individual income tax, the corporate income tax, estate & 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% of GDP. After Reagan and Bush major tax cuts on capital incomes, that average declined to 7% by 2004. Similarly for the corporate income tax, which once ranged about 4% of GDP but has fallen to only 1.6% of GDP in 2004, and the estate tax which averaged 0.6% and now is only 0.25%. In comparison, the payroll tax which hits workers the hardest, averaged 2% prior to1980 but rose to 6.4%.

By simply 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% of GDP to 3.2%, 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, simply returning rates back to pre-1980 for capital incomes (individual, corporate and estate) would allow a 7.5% cut in payroll taxes—i.e. an immediate wage raise of 7.5% for the 90 million working and middle class households—and still leave $354 billion a year toward funding single payer health care.

Furthermore, by raising the corporate income tax by an additional 1% of GDP over each of the next three years—to 7% from the pre-1980 level of 4%–would permit the phasing out of the remaining 7.6% payroll tax altogether while still leaving the $354 billion available for single payer financing.

$1.2 trillion minus $354 billion leaves $846 billion yet to raise to finance single payer.

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

The payroll tax for social security was dramatically increased under Reagan, raising far more revenue than necessary every year to pay for retirement, disability and medical benefits for the approximately 45 million Americans (98% of all those over 65 eligible) receiving social security benefits. Every year since 1985 has resulted in a surplus in the Social Security Trust Fund. The cumulative surplus through 2006 has amounted to approximately $2 trillion. When the discounted future value of that $2 trillion is considered, the total in terms of principal and interest comes to nearly $4 trillion.

In what has been the greatest theft perhaps of any working class in any country, that full amount of $2 trillion in principal has been diverted in total from the Trust Fund for Social Security 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 in fact, 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 Congresses have 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’ payroll taxes and thus their deferred wages), but should ‘borrow’ and restore the additional $2 trillion in interest as well that would have been earned 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, or roughly $754 billion a year total thus far, with which to finance single payer health care. And $1.2 trillion minus the $754 billion leaves $456 billion more a year yet to raise to fully finance single payer care.

III. 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 the cumulative surplus noted above 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 defacto 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.

Congressional resolutions every year to maintain a ‘lockbox’ on the diversion of the surplus have failed miserably. Formal legislation—not just Congressional resolutions—must be enacted to make the diversion of the annual Social Security surplus a criminal act.

Retaining the annual surplus would raise another minimum $150 billion a year. The remaining $456 billion needed to finance single payer thus now reduces to $306 billion.

IV. Repatriate 25% of 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 now in thirty-four island locations around the world, not just the Caymans, all functioning as tax shelters for the large multinational corporations and discrete trust funds of the wealthy elite. The U.S. IRS designates these 34 shelters as “offshore secrecy jurisdictions?. They range from the Caribbean to the Isle of Man and Cyprus in Europe to the Seychelles in the Indian Ocean to Vanuatu and dozens more in the Pacific and elsewhere.

Hearings currently underway in the U.S. Senate on only the Cayman Islands tax shelter has 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 2007. 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 US corporations and 60% of all Fortune 500 companies are headquartered. In 2001 alone, more than six years ago and 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, however, 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. 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%, 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. 100% tariff penalties and/or 100% 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 $1.350 trillion, or now $150 billion more than the $1.2 trillion initially estimated.

V. Institute a 10% Surtax on Corporate Retained 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, quarter on quarter, for the past three and a half years. Profit levels are so high many U.S. based corporations today are having a difficult time finding productive investments in the U.S. They end up buying back their stock, investing increasingly abroad, or even engaging in the exploding global opportunities for speculative investing. Historically, retained profits ranged around $200 billion a year. Reported retained profits are now in the $500 billion range. A retained profits surtax of 10% would therefore raise another minimum $50 billion a year.

Such a surtax would be hardly prohibitive since, given single payer universal healthcare, corporations—the largest Fortune 5000 in particular—still with employer-provided health plans would no longer have to make contributions to those plans. $50 billion would probably not even offset their savings in many cases. In addition, a further positive consequence of such a surtax might well be an incentive for corporations to invest more productively in the U.S., thus generating more jobs, income for workers, and legitimate tax payments.

VI. Levy a 50% Tax Penalty on Unreported Offshore 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 is 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% rate at the time to only 5.25%. The idea was to entice the payment of at least some taxes. In question were 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. Taxing the diverted offshore profits at 5.25% was conditioned on the money being used by corporations to create jobs in the U.S.

In actual fact, however, most of the repatriated profits at the time were not targeted for job generating investment in the U.S., but were 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.

A severe penalty of 50% on profits diverted and/or earned and held offshore by U.S. multinationals would generate a reasonable level of profits repatriation and tax revenue, as well as likely raise additional revenue from penalties. Noncompliance would be supplemented with criminal tax evasion jail sentences for CEOs and senior CFOs. Meanwhile, corporations refusing to comply with profits repatriation could be assessed with quota limits on their products sold in the U.S. while court challenges by CEOs/CFOs to their criminal charges were pending.

Profits repatriation and related penalties revenue could produce a combined additional annual income source of at minimum $100 billion.

VII. 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 socialism’ 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 six 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.

To counter critics concerned that consumers of health care services under a single payer universal system would abuse and unnecessarily use health care services in excess, a token annual deductible could be introduced to the system that adds still further revenue flow to the above totals. Its limit would be set in law by Congressional action and limited in legislation to no more than 5% of total health care spending. That produces another 5%, or about $65 billion a year.

The seven measures above for financing single payer universal health care thus raise a total financing flow of at least $1.6 trillion a year—well beyond the necessary $1.2 trillion. 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. In fact, an annual surplus of $400 billion would just about enable the extension of prescription drugs to all citizens, not just retirees.

Single Payer and Income Redistribution

The above list of seven measures enabling the financing of single payer universal health care 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, might also be taxed. Taxing capital flows in general is further necessary to stem the tide of corporate disinvestment 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 disinvestments and offshore (capital transfer) shift.

In short, there is no lack of opportunities for funding single payer universal health care through fundamental reform of the federal tax structure in the U.S. Nor is it a question of whether wealth exists in sufficient levels in the U.S. to finance single payer. That wealth exists in numerous forms far in excess of what is required to fund single payer. Over the past three decades that wealth has been increasingly accumulated among the wealthiest 10% and even 1% households, and within the largest corporations, in the U.S. That income shift to the wealthiest households and corporations now amounts to well over $1 trillion a year and is rising.

What has been proposed is simply 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’ since the 1970s, and turned by the wealthy and corporations into a means for redistributing income in the U.S.

Financing single payer universal health care in the manner described above thus represents not an attempt to redistribute income, but rather to re-redistribute income. And in the process of so doing, provide a workable solution to the deepening health care crisis in America that doesn’t tag the worker and consumer as the problem but instead those who are truly responsible for the crisis: Corporate America and its numerous political allies.

Jack Rasmus, Ph.D.

Jack Rasmus is the author of THE WAR AT HOME: THE CORPORATE OFFENSIVE FROM RONALD REAGAN TO GEORGE W. BUSH, Kyklos Productions, 2006, available from AK Press and at Amazon online; and the forthcoming FROM US TO THEM: THE TRILLION DOLLAR INCOME SHIFT. Essays on the Origins of Income Inequality in America.

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