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Tim Worstall asks
...is a single payer system actually any cheaper, once the deadweight costs of...taxes are taken into account?
More here, this man would warm the heart of Doug Gibbs. I recall learning that deadweight losses from taxation are about 20 percent of revenue raised, which is just about the size of overhead costs for the private insurance industry. Don't ignore this sentence either:
The French system, the one that is generally rated as being number 1 globally, is neither single payer nor single provider.
Posted by Tyler Cowen on March 22, 2007 at 01:13 PM in Medicine | Permalink
Comments
Of course, the taxes and benefits of national health care together need not be distortionary, so long as the taxes' effect on labor supply counters effect of the health care subsidies on labor supply...
For instance, the French system, like our Social Security, caps the tax rate as a miximum of salary. This regressivity may counterbalance labor supply effects of the national health care subsidy.
Posted by: Keith at Mar 22, 2007 1:27:49 PM
I do not get this, although I get Worstall raising the issue.
Let me see if I get the argument.
Currently, the US government (funded through taxes, and under GWB, borrowing) spends roughly the equivalent of other industrialized countries on health care. Additionally, with a substantial tax subsidy, US businesses roughly double that in health care spending through insurance.
By shifting to a single payer system you are estimating an extra ~20% in dead weight loss? Due to distortions? What is the mechanism?
Posted by: theCoach at Mar 22, 2007 1:48:34 PM
Coach,
I don't get it either. How is shifting payment from one group of parties to another going to add 20% deadweight loss? 20%? It just doesn't make any sense.
Posted by: mickslam at Mar 22, 2007 2:28:20 PM
Mick, Coach:
Let's take a simple case: You have an apple that's worth 98 cents to you. I value the same apple at one dollar. Without taxes, you can sell me the apple for 99 cents, making both of us one penny better off. The economy is made up of millions of transactions like that.
Now suppose the government institutes a 5 percent sales tax on this sort of transaction. As a result, it's no longer worth it for us to make the exchange - the tax overwhelms the benefit to trade. So you keep your apple. I'm one penny worse off than I would be without the tax. You are one penny worse off as well. Since no transaction occurred, no tax was paid, so the government isn't better off either - it's just a deadweight loss, one with no offsetting benefits.
Most forms of taxation cause some distortion of that sort. The higher the tax, the more distortion. Tax sales and fewer sales occur. Tax employment and people work less. Tax profits and productive people find tax loopholes to report less profit, or go into the black market, or move to other countries.
The net effect could easily be to make people 20% worse off even if the government tries to spend exactly the same amount to provide the exact same services people previously bought on their own with what they now pay in taxes.
Posted by: Glen Raphael at Mar 22, 2007 3:30:06 PM
theCoah, mickslam:
All taxes create deadweight loss. When taxes increase, people stop doing some activities because they are no longer worthwhile. Deadweight loss is the loss to society of having forgone those productive activities. Wikipedia has a fair description of it, although the picture does not represent a tax increase.
Posted by: Zubon at Mar 22, 2007 3:35:37 PM
Its not the deadweight loss, it is the magnitude that I disagree with. 1% ok, 20% no way in hell for this particular tax. Recall that WE ARE ALREADY PAYING THIS SAME AMOUNT IN THE FORM OF INSURANCE PREMIUMS. Also, I doubt that paying out of taxes or payroll deductions makes much difference to deadweight losses. Its not some additional tax beyond what we are already paying. We're not going to get taxed and then pay insurance premiums too. So a deadweight loss of 20% is an order of magnitude larger than I expect. I expect deadweight losses for this to be on the order of 2%, in which case it is an excelent idea.
Note that we are not taxing health care, so we're not going to consume less health care. So in this case the dead weight loss has to come from consuming too much health care. This is the subsidy side of deadweight losses.
I understand deadweight losses.
Posted by: mickslam at Mar 22, 2007 3:54:49 PM
Mickslam, I do not think you understand deadweight loss in the sense it is being used here. What Worstall is talking about is that for every $1 you raise through taxes, you cost the society $1.20. That would be a 20% loss. Glen Raphael gives a simple example. My understanding of what determines this loss is mostly the marginal tax rate. Increasing a low marginal tax rate incurs less deadweight loss than increasing a high marginal tax rate. Certainly whether it is an extra tax to pay for health care or interstate highways does not matter. Either way, the claim is that in the US right now, the loss is 20% for the total budget. The marginal rate may be higher. So the government can certainly pay those premiums for us, but for every $1 the government spends we lose $1.20. This means that to get the same coverage if the government can't save 20% on the premiums it pays, we lose overall in the deal.
On the side, there may be some distortion present already due to the subsidization of current insurance premiums that a commentator on Worstall's site brings up, but I can't speak to that.
Posted by: mpowell at Mar 22, 2007 4:32:49 PM
The US has a per capita GDP (PPP of course) of about 1/4 to 1/3 larger than "Old Europe", or "Social Europe", e.g. countries like France, Germany, Italy, Spain, Belgium, the Netherlands.
They of course got beat up in WWII, and spent several decades converging with the US, but then they "got stuck". If not deadweight loss due to their overall "social" component and the accompanying taxes and regulations, then what explains this persistent GDP gap?
Posted by: happyjuggler0 at Mar 22, 2007 5:31:37 PM
Consider the case where both labor supply and the demand for health insurance are perfectly inelastic. In that case, the normal need for health care acts just like a tax, and if you replace that tax with a labor income tax paid to the government to support the same health care, there is no distortion. The subsidy from government provided health care exactly offsets the effect of the tax (assuming that the government provides the same health insurance package that is demanded inelastically in the absence of government coverage). In practice, neither labor supply nor the demand for health insurance are perfectly inelastic, but both are quite a bit more inelastic than your average curve. The 20% figure, I suppose, is derived from a “typical” market (widgets?) and would not be a good estimate in this case. Depending on how the tax is implemented, it could affect the demand for human capital, but I doubt this effect would be large, and it could well offset existing distortions (e.g. signaling).
Posted by: knzn at Mar 22, 2007 7:54:41 PM
All taxes create deadweight loss.
Erm. LVT?
Posted by: Bob Dobalina at Mar 22, 2007 10:59:27 PM
thanks knzn for explaining my point so very well. In this particular case, the deadweight loss will be far less than 20%.
Posted by: mickslam at Mar 23, 2007 11:07:59 AM
knzn falls into a common fallacy. For a correct analysis see here
http://www.marginalrevolution.com/marginalrevolution/2005/02/brad_is_wrong_s.html
Alex
Posted by: Alex Tabarrok at Mar 23, 2007 2:14:09 PM
Alex,
We're not disputing the fact that there is deadweight loss with this thought experiment and that there will be a deadweight loss when this is implemented. We're only disputing the the size of Tylers estimate. Even in your hypothetical example, the deadweight loss is not as large as it would be if there was a 100% tax and it was spent on things that you would not have purchased. In that case, the deadweight loss would be far larger than in the case you propose in your link. It's this magnitude that is the debate, not the loss itself.
My claim: The deadweight loss from this tax will be far less than 20%.
Posted by: mickslam at Mar 23, 2007 3:13:21 PM
Deadweight loss from income taxation of 20% is well within standard estimates. E.g. see this classic study
http://ideas.repec.org/a/aea/aecrev/v77y1987i1p11-23.html
for various commodity taxes the marginal deadweight loss can easily be 80-90% or even higher. See, for example,
http://ideas.repec.org/p/nbr/nberwo/7281.html
Alex
Posted by: Alex Tabarrok at Mar 23, 2007 3:45:50 PM
Mickslam and knzn, I agree that we are debating the magnitude of this loss but what Tyler and Alex have claimed, and correctly in my opinion, is that this tax will create a deadweight loss just the same as any other income tax. Alex's post on the 100% tax highlights the problem with the flaw in knzn's reasoning: when you shift the funding of something from the private sector to the public sector, that is precisely when you incur the deadweight cost (in that case a total loss, of course).
Looking at knzn's example in particular, it is precisely wrong to assume that the labor supply is inelastic. Right now, we work in order to pay for our own health care. But if the government were going to tax us to pay for it, then what happens? Well, I'll get the same health care regardless of how much I work. So I'll work less b/c I'm getting taxed at a higher rate and I'll still get the same health care!
We can debate the absolute inelasticity of labor supply, but there is no sense in which the response of labor to this tax would be any different than to any other tax. And any thought experiment which does not take into account this elasticity will of course miss the deadweight loss occurred by any tax. But there is a reasonable amount of evidence on the issue of labor elasticity, which is where the 20 percent comes from. Its by no means super-accurate, but it is a good ballpark number.
Posted by: mpowell at Mar 23, 2007 5:43:18 PM
Who says single-payer health insurance has to be financed by distortionary taxes? As I understand it, much of the Canadian system is financed by lump-sum taxes (mandatory insurance premiums). Presumably the poor get subsidized insurance, so there's some distortion, but there doesn't have to be all that much.
Posted by: Ragout at Mar 23, 2007 8:50:41 PM
I can't read the papers, but they do not really seem to be addressing this directly - of course I have no idea what the 4 parameters are that would get us an answer from less then 10% to 300%.
Is the mechanism by which this would affect this only in disincentive to work? Because if it is, I find that to be a positive - or at least I find using the witholding of health care as a punishment for not working to be morally reprehesible in this day and age. I do not know enough to figure out the details, but I would think that work could be incentivized differently, but perhaps it forever skews the tradeoffs between work and vacation, something I would not consider bad either.
Posted by: theCoach at Mar 23, 2007 11:04:12 PM
knzn actually specifies in the case of inelastic labor and health care.
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