Health Care and ‘Head Taxes’: An Unhealthy Combination

The divide in the health care policy debate couldn’t be any clearer. On one side: the Medicare for All proponents. On the other: the Obamacare with a Public Option proponents

Americans see the divide. But are we seeing the fundamental issues at play here? I don’t think so. We’ve been largely ignoring the huge historic contrast that separates these two rival approaches.

Let’s start with a point that economists Emmanuel Saez and Gabriel Zucman, two of the world’s top inequality experts, have begun making of late: What we shell out for health care amounts to a tax just like any other. Most Americans pay roughly the same amount of this health care “tax.” If you make $60,000 a year, you’ll pay the same premiums on a standard health insurance policy as someone who makes $6,000,000 a year.

Note that not all Americans face this health care tax. Poorer Americans who qualify for Medicaid don’t pay the full premium “tax,” and rich American families might pay more than middle-class families for health care, but only if they choose to add extras services into their insurance. The reality we all face: For the same coverage, all Americans other than the poor currently pay the same price.

The Obamacare with a Public Option plans maintain this structure. In tax parlance, this is akin to a “head tax,” a system under which all taxpayers pay the same dollar amount of tax, regardless of their means. Whether you rate as Joe Six-Pack or a corporate titan, you bear the same head tax burden.

I first learned about head tax systems years ago as a young tax lawyer. A crazy shareholder of one of my law firm’s corporate clients was challenging the constitutionality of the corporate income tax. I had the task of researching the legislative history of the 16th Amendment to the Constitution, the amendment that blesses the idea of an income tax.

The income tax needed blessing because the Constitution, as originally written, requires that any direct tax be apportioned among the states, according to population. “Capitation” taxes — the phrasing the Constitution uses to refer to head taxes — meet this requirement. If applied uniformly, they satisfy the requirement that a direct tax be apportioned by population.

Income taxes — levies based on how much individuals make — don’t satisfy this requirement, and the U.S. Supreme Court ruled an income tax enacted in 1894 unconstitutional on just this basis. The subsequent public furor over that court decision would focus widespread attention on the absurd unfairness of a head tax, under which a “hod carrier” would pay the same tax as a President.

Eventually, the American people spoke out loud enough to convince Congress and state legislators that a tax levied according to income would always be infinitely fairer than a head tax. In 1913, the Sixteenth Amendment became part of the U.S Constitution.

In the over a century since, Americans have borne the cost of all public goods — from military defense to public education — according to our ability to pay. The progressivity of our tax system has certainly flattened in recent years, but we still adhere to the basic principle that the dollar amount of people’s tax burden should be at least proportional to their means.

Except when it comes to health care. There, the head tax system reigns supreme. And it’s killing us. In some cases, literally.

Medicare for All plans would discard the health care head tax system in favor of one that embraces the principle of proportionality. They would largely fund American health care through the nation’s already existing progressive income tax. The greater your income under these plans, the greater share of health care costs you would bear.

Obamacare with a Public Option plans, by contrast, would not alter our current head tax system for health care. In fact, the “public option” wording here may be misleading. Yes, the insurance provider under a public option — the federal government — would be a public entity. But the premiums would remain essentially private. All individuals, except the poorest Americans, would bear their own costs, regardless of the insurance provider, public or private, they choose.

In effect, Medicare for All proponents would abolish the system where Joe Six-Pack pays the same tax as Jeff Bezos. Obamacare with a Public Option proponents would keep it.

Remarkably enough, millions of Joe Six-Packs have been content to pay the same health care tax as Jeff Bezos. But change may be in the wind. Remember, hod carriers once paid the same tax as Presidents.

Bob Lord, as Institute for Policy Studies associate fellow, practices tax law in Phoenix.