Tuesday, June 26, 2007

I'm not swooning over the Dem's health care plan

I am not a huge fan of our current way of paying for health insurance. By tying insurance to employment, it creates market distortions. Imagine you are a 45 year old woman with a great idea for a new business. You have had breast cancer - now in remission. Leaving your job to pursue that great idea becomes extremely difficult because you may find yourself essentially unable to purchase private insurance.

The new health care plan offered in Wisconsin by the senate Democrats continues to distort the labor market. It will be funded by a payroll tax - 10.5% of social security earnings to be "paid by the employer" and 4% to be paid by the employee. Putting aside the dubious notion of "savings" that will make those numbers work, the plan continues the current system's promotion of market inefficiency, albeit in a different and potentially more insidious way.

Supporters of the plan note that many businesses and their employees already pay this much and making it a "tax" just changes the identity of the payee. No real problem.

Here's the problem: Employers do not provide health insurance for their employees because they are big -hearted or "good corporate citizens." They do it because the market demands it. It is necessary to obtain the employees they desire.

When they do not provide health insurance, it is not because they are big green meanies or exploiting the workingman. It is because the market does not demand it. Simply put, it is because the employee does not add sufficient value to the enterprise or insurance is simply not necessary to attract the type of employees that the employer desires. The latter circumstance would be most likely if there was, for example, a buyer's market for low-skill labor.

If you raise the cost of employing these folks by 10% (while reducing their take-home pay by 4%), three things will happen. Guranteed. Some lucky ducks will keep their jobs and now have health coverage. They will probably, however, see a reduction in their wages. Others will lose their jobs because it will no longer make sense to hire them.

Second, you will - at least up to the social security maximum - reduce the return to labor. This works in a couple of ways. First, obtaining a raise (perhaps in return for increased responsibilities) or overtime becomes less rewarding. For a person in the 25% tax bracket, the marginal tax rate will go from roughly 39% to 43.5%. Second, the marginal rate for new entrants to the labor market will go up. Imagine a woman whose husband is employed but who has been out of the market raising small children. The kids are older. Should she work? The calculus has just been modified.

The problem is not really offset by the notion that presumably such an employee
will no longer have to pay the employee's share of group coverage. Insurance premiums do not go up if you earn more or work more.

Maybe 4% will not deter all that much work. That is not, however, self-evident and, in any event, who knows if these numbers will prove out?

All of this is exacerbated by the fact that Wisconsin is not an island. Its businesses compete with firms in other states who almost certainly not have these costs imposed upon them. For those for whom the plan is a wash or saves money, there will be no problem. For others, the impact will be less salutary.

Perhaps these market distorting impacts are the best way to extend coverage to the 1 in 10 Wisconsin residents who lack it. I doubt that, but I know that it would be foolish to pretend that they won't happen.


Dad29 said...

The tax effect in Wisconsin is particularly worrisome with the workings of the Alternative Minimum Tax.

Which another reason why, if Gummint healthcare happens, it will happen nationally.

Jay Bullock said...

I'm not unsympathetic to these arguments, and considered them in my own post about the plan. But I think you overestimate the effect on jobs where, as you put it, "insurance is simply not necessary to attract the type of employees that the employer desires."

One interesting parallel is the rise in the minimum wage, which primarily affects exactly the same labor pool. Wisconsin's minimum wage is going up by considerably more than 10%, and there is not a flood of job losses to accompany it--so far. This despite the same concerns you voice here that Wisconsin doesn't operate in a vacuum, and it must compete with other states for business.

This is because, as I've had economists explain to me, there will always be a steady demand for the services of those who employ this segment of the labor force. Your average Burger King isn't going to pack up and move to, say, Iowa, where the taxes are lower. Ditto dry cleaners, Wal*Marts, beauty salons, check-cashing stores, gas stations . . . With constant demand, even at an increased cost for labor, the workplaces and workers will remain.

This will not be universally true, of course. And while your average Burger King may not move to Iowa, it may raise its prices, or hire fewer kids to flop the Whoppers.

On the employee side, consider the savings offered by the plan. One emergency room visit easily costs more than the family deductible. Two and you've even blown past the average per-employee cost of the plan. Not everyone who currently lacks insurance goes to the emergency room twice a year, of course (neither do most of us who have insurance--that's why the call it insurance), but anyone who's had to fend off medical bill collectors should welcome this plan.

Finally, if the plan is implememted as written (always, always an if), individuals and employers will see property tax relief that will offset costs somewhat.