PAYROLL TAX ALONE: Not a Fair Way to Fund a Health Care System

By Marjorie Power

March 14, 2011

Because of the recommendations in the Hsiao Report, funding proposals of the single payer health care system have focused exclusively on an employment tax to be paid by both the employer and employee. While it may be advantageous for some of the revenues to be levied in this way, to depend on a payroll tax as the only tax funding the system is not equitable.

Dependence solely on the payroll tax, is a blunt instrument that does not fairly distribute the costs of a universal health care system over the beneficiaries of that system. A flat tax rate is unfair to lower paid employees and potentially to families with more than one employed member. Working Medicare recipients may have to pay twice for both their Medicare premiums and the  payroll tax. The proposal does not deal with the cases of Vermonters who may be subject to double payments or those who will pay little or nothing.

Although a payroll tax is an improvement on the current regressive premium financing which is totally unrelated to ability to pay, a flat percentage payroll tax does not recognize the higher impact of these taxes on people with low incomes. In addition, most proposals put a cap on the total amount that an individual is required to pay. In effect, the tax is actually regressive since the average tax rate will be lower for the highest income earners—the higher the income over the cap, the lower the effective rate.

The strongest indictment of the payroll tax proposal is that it will create free-riders–trust-funders, coupon-clippers, wealthy retirees, etc–people who will benefit from the system and who can afford to contribute to its cost.

Although, there is no “official” financing proposal on the table yet, we have to make sure that when it comes, the funding system for our health care system is much more sophisticated and equitable than a straight payroll tax or it is never going to fly.

9 Responses to “PAYROLL TAX ALONE: Not a Fair Way to Fund a Health Care System”

  1. Jonathan Starr says:

    Progressive income taxes, individual and corporate, scaled by ability to pay, would be a far more fair and equitable way to fund single-payer health insurance than FICA-style payroll taxes. That is why countries with single-payer systems now, like Canada, have chosen to fund them with progressive income taxes.

    As an example of the problems with using payroll taxes, the present Social Security payroll tax is very regressive, since it applies only to earned income (i.e. wages and salaries), and only up to a certain cap level. Unearned income (e.g. capital gains, dividends, interest), which accrues overwhelmingly to wealthy people, is entirely exempt from both Social Security and Medicare taxes.

    And the employer portion of FICA payroll taxes is very inequitably distributed as well, and in a way that discourages hiring and employment, and even threatens business viability. In accordance with the principle of taxing by ability to pay, business taxes should be based on level of profits. But instead, employer FICA taxes are applied by number of employees, regardless of the level of profitability of the business. So, for example, a barely surviving company that employs many people will pay much higher FICA payroll taxes than a highly profitable business with few employees. Essentially, these are substantial taxes on hiring, strongly encouraging businesses to make do with as few employees as possible, and making it much harder for labor-intensive businesses to survive at all.

    In contrast, progressive income taxes can be applied to all types of individual and corporate income. They can be scaled by ability to pay, such as by total income-level for individuals and by level of profitability for companies.

    In FDR’s famous “Four Freedoms” speech, he said, “The principle of tax payments in accordance with ability to pay should be constantly before our eyes to guide our legislation.” Progressive income taxes, scaled by ability to pay, comply with FDR’s principle, while regressive and inequitable FICA-style payroll taxes do not. As such, equitably applied progressive income taxes are the better way to fund single-payer health insurance.

  2. Jean Embree says:

    Yes, Jonathan! I could not have said it better myself! Jean Embree

  3. Bob Haiducek says:

    FYI, a “modest tax on unearned income” has been added to the national proposal for a “Medicare for All Program”, the new title for the plan proposed nationally within H.R. 676.
    You can link to that area of H.R. 676 from this list of differences:

    Bob Haiducek, Bob the Health and Health Care Advocate

  4. Bob Haiducek says:

    The last paragraph of the article references that there is no “official” financing proposal on the table. That is the same situation for H.R. 676, so the status is nothing new to me.

    However, there is also a reference that “we have to make sure that when it comes …” which leaves me wondering how Vermonters are going to be able to “make sure” of anything when there isn’t even a documented starting point for how financing will occur.

    Please comment on this either via a post of comments here or send me an e-mail.

    Thanks, Bob the Health and Health Care Advocate

  5. Pkm says:

    So Now I pay 3% of my income for a great policy that provides excellent care anywhere I travel. But if we go your wayi will pay 14% and only have coverage here ein Vermont. So 3 grand versus 14.5 grand. Oh yeah that plus 8% income tax, a property tax that triples every ten years. What’s not to love about Vermont?

  6. Ray Schrab says:

    Consider a tax everyone must pay, whether working or not. How about a sales tax? It is regressive to an extent, true, but those with more money will spend more and thus pay more. It would also be well defined and visible, which will generate public interest in keeping health care costs down. It will relieve employers from having to provide health care funding in any way, which may attract employers to Vermont. Even those on public aid spend money on something, and so would be contributing to their health care costs. In this way there are no free riders.

  7. Jean Hopkins says:

    I also agree with Jonathan Starr.
    We not only need a much more progressive income tax to pay for our health care system, we need it to strengthen our middle class and lessen the divide between rich and poor in this country.
    Those who benefit the most from our capitalist system, would be admired not for having a lot of money, but for contributing more to our country by helping to pay for its infrastructure.
    Maybe citizens could once again be happy about paying taxes if they could also decide on their tax forms where their tax money would go. Right now a lot of us feel like we have taxation without representation.

  8. sharon says:

    I want to also share my story- my husband and I work very hard to “survive” in this state,as do many others,we have a home which was very difficult to obtain,to keep it really depends on how healthy we are able to remain, now into our late 40s’ and 50,no children,no life insurance,no savings, we are on a budget,are careful how far and how often we drive,hoping we don’t get sick so as to get behind on a paycheck-between education taxes and health insurance-which this is our “FIRST” time ever with “health” insurance (which by the way makes us sick every time I look at my pay check,as it takes 1 and half of my hard earned dollars a month and my employer matches it, my God we live to keep insurance companies wealthy -while we build additions to our hospitals-what does that say about our country? we have no retirement-LOL!!! ,all I know is if you have everything you need nothing-if you have nothing you get everything- and if you are hard working and wish only to live comfortably and contribute fairly you get screwed-only to have the last penny in your pocket drained by some greedy mind that has found another way to reduce the working person to below poverty level but just above the line to recieve no help, there in becomes homeless and struck with disease from the stress of holding up the entire country on their backs by increasing the wealth of corporations and enriching the lives of those who do nothing and are sucking the life out of the system-

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