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Health Care: Premiums and Taxes

Photograph Source: Backbone Campaign – CC BY 2.0

There’s an old joke about a lawyer who is questioning a doctor on an autopsy they had done on someone who was allegedly a murder victim.

The lawyer asked the doctor, “did you check whether the patient was breathing?”

The doctor answers “no.”

The lawyer then asks “did you check whether the patient had a pulse?”

The doctor again answers “no.”

The lawyer then asks, “so how did you know that the patient was dead,” to which the doctor responds, “because his brains were sitting in a jar on my desk.”

The lawyer then triumphantly asks, “so he could have still been alive?” To which the doctor responds, “I suppose he could have been practicing law somewhere.”

Our doctor may want to amend their answer to allow for the possibility that the patient could be a political pundit for a leading news outlet.

Our pundit class have to decided to make a crusade out of forcing Senators Warren and Sanders into saying that their proposals for universal Medicare will require a tax increase. Both have repeatedly responded by saying that total costs for the vast majority of people will fall, since Medicare for All will lead to a large reduction in costs by all accounts, because it reduces waste in the health care system.

Our pundit class have insisted that this is some sort of dodge. While there may be no hope in addressing arguments to people who have their brains in a jar on a doctor’s desk, there is a simple point that everyone else should understand.

When employers pay for the health care insurance of their employees, this is effectively a tax on workers’ wages. Employers don’t pay for insurance because they are nice, they provide insurance as a way to attract and retain workers, just as offering higher wages is a way to attract and retain workers.

If employers didn’t have to pay for insurance, then the savings would mostly end up in workers’ wages. This will not be true everywhere and always, but the fact that employers are indifferent between paying another dollar for health care and paying another dollar for wages is pretty much universally accepted by economists.

In fact, the Wall Street Journal just made this exact point in a slightly different context in a piece last week on Social Security taxes. In reference to a proposal by House Democrats that would increase Social Security benefits and pay for it in part with an increase in payroll taxes on both the employee and employer, the article commented:

“The tax would continue rising until 2043, when it would hit $3,700. Employers would face the same tax increase. Economists generally think workers bear the cost of both sides of the tax.”

Just as economists generally think that workers bear the cost of a payroll tax imposed on their employer, they also think that workers bear the cost of health care insurance paid by their employer. So Senators Warren and Sanders are not being evasive, the pundits are being confused.

There is one additional point to be made here. As noted above, it would not be the case everywhere and immediately that the elimination of employer payments for health care premiums will end up in workers’ paychecks, even if this might be in general the outcome over time.

One way around this problem is to impose taxes to pay for Medicare for All on the employer side, effectively an employer side payroll tax. The idea is that the tax would be roughly equal to the premium for employers that are providing insurance, so that there is no question of whether the savings will be passed on to workers.

In any case, this is a finer design point that can be addressed down the road, but the key issue here is that workers with employer-provided health care insurance are effectively already being taxed for their health care insurance. People should understand this even if the pundits don’t.

This column first appeared on Dean Baker’s Beat the Press blog.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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