“Priced Out” by Uwe Reinhardt

Nevertheless, Congress loves these nonproductive redistributions of tax burden among taxpayers. Tax preferences – properly called “tax expenditures” by economists – are the vehicles for these dubious favors. It is easy to see why Congress loves tax preferences:

Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion “weapons supply tax credit.” The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!

The virtue of the Milliman Index is that it includes out-of-pocket spending by families. The current debate on health reform typically focuses only on whether insurance premiums rise or fall, as if that were the proper metric for judging the affordability of health care. It is not. Total spending matters more.

Given the often clinically and morally compelling nature of health care as a commodity, one can think of a nation’s health system as just another tax system, operating side by side with the government’s tax system.

The care “tax” system takes a haircut of 18% of GDP. This actually understates the burden. Ideally, we should relate total national health spending not to GDP but to total personal national income, because all health spending is extracted from the personal national income of private households, not from GDP.

To arrive at personal income, one must deduct from GDP an estimate of the wear and tear (depreciation) of capital equipment (known in the national income accounts as “capital consumption allowance”). There are also a number of other items – for example, income retained by corporations – the must be deducted from GDP to arrive at personal income. On average, the latter is about 86% of GDP. Therefore, an 18% claim of health care on GDP in 2016 actually represents a 21% “tax” on personal income.

By comparison, total taxes of any type, at all levels of government in the United States, amounted to 26.4% of GDP in 2015, or 30% of personal income.

Employed Americans – especially high-income employees- who may have misgivings over the federal subsidies paid low-income Americans under Obamacare may be surprised to learn that the federal subsidies they are given through the tax preference granted employment-based health insurance are estimated to total $250 billion a year – closer to $300 billion if foregone state tax revenues are included. That subsidy is about 2.5-3 times the total public subsidies paid low-income Americans under Obamacare, which in 2016 cost the federal government only $110 billion and the states basically nothing.

To economists, there is something comical about Americans wringing their hands over the nation’s entitlement spending, all the while having their paws so squarely in the public trough.