Of Head Taxes, Income Taxes, and Distributive Justice in American Health Care
Zelenak, Lawrence, Law and Contemporary Problems
This response to Clark Havighurst's and Barak Richman's powerful indictment of the distributional effects of the American health care financing system (1) addresses two respects in which they have somewhat overstated their claims. First, they argue that the current system imposes an implicit head tax on all persons with employer-provided health insurance, the proceeds of which are used largely to provide health care for the uninsured, and that the result of this implicit tax-and-transfer system is a regressive redistribution of income. However, this response explains that once one considers the distribution of the benefits financed by the tax, as well as the distribution of the tax burden, the overall system is not necessarily regressive. Indeed, it may well serve to decrease income inequality. Second, they criticize the income-tax exclusion for employer-provided health insurance as "aid[ing] the moral-hazard enemy." (2) This response, however, argues that the core of the current income-tax treatment of health insurance--the exclusion from the tax base of the value of basic employer-provided health insurance--makes good sense from a tax-internal policy perspective and is not a health-policy culprit. Other aspects of the current income-tax treatment of health care expenditures--in particular, the exclusion of the value of non-basic employer-provided health insurance, the tax bias against non-employer-provided health insurance, and the tax bias against health-insurance cost sharing--are both bad tax policy and bad health policy, and should be reformed. The core of the exclusion, however, should be retained.
Both of these comments are in the nature of friendly amendments. Even with the view advanced here that the implicit head tax is not necessarily regressive in its overall effect, the unmasking of the head tax suggests the transfers it makes possible should be financed by a tax keyed to ability to pay. Similarly, even with the view that the core of the income tax exclusion is justified, much of the income-tax treatment of health care costs is in dire need of reform.
THE DISTRIBUTIONAL EFFECTS OF THE HEALTH-INSURANCE HEAD TAX
According to Havighurst and Richman, hospitals take advantage of their insurance-enhanced market power by charging insurers substantially more than the cost of caring for insured patients, and the insurers pass on the extra costs to their insureds as "a 'head tax,' which falls on individuals [with employer-provided health insurance] without appreciable correlation to wealth, income, or ability to pay." (3) The hospitals use these excess payments to finance a range of unprofitable activities, most notably, research and development, and providing uncompensated care to the uninsured. (4) Because low- and high-income insureds pay (more or less) the same amount of this quasi-tax, rather than paying in proportion to income or wealth, Havighurst and Richman conclude that this system of financing health care for the uninsured is regressive. (5)
Much of this analysis is correct. The identification of the disguised head tax is persuasive, and it is almost certainly true that lawmakers designing an explicit tax to finance health care for the uninsured would not have chosen a head tax. (6) However, the implicit tax-and-transfer system they describe is not necessarily regressive. It is, of course, common usage to describe an income tax as regressive if taxpayers with higher incomes pay a lower percentage of their income in tax than do taxpayers with lower incomes. It is also common to describe a head tax as regressive with respect to an income base, because a head tax expressed as a percentage of income obviously declines as income increases. It is a doubtful practice, however, to apply a distributional label to a tax system without regard to the distribution of the benefits financed by the tax. A tax that would be labeled regressive under the usual tax-viewed-in-isolation approach may look very different when considered together with the use of the tax's proceeds. …