Flat Tax: A more rational medical and tax policy

http://www.NewsAndOpinion.com | FairTax or any other flat tax is a de facto health care reform. So, Flat tax— Basic medical system reform.

Most of our current health system woes originated in World War II when the government controlled wages and prices.

To attract needed workers in the war years, some corporate employers offered health insurance benefits as a supplement to wages, deducting the benefits from taxable income as an expense of doing business.

But this tax relief was only available to the corporate employer and not to the individual worker. The result: 25 years after the start of WWII, the proportion of the population covered with medical insurance had exploded by more than six times, from about 10 to 65 percent.

When the highest marginal income tax rate was 91 percent, this seemed great to the workers receiving the benefits. Corporate employees could use medical services with much less personal direct cost. And, naturally, they did, often assuming the services were free or prepaid, and just waiting to be utilized.

But eliminating direct payments between doctor and patient for most medical care produced incentives that led directly to financial and quality infirmities now plaguing our medical system.

When health insurance became the norm, medical costs inflated, following the laws of demand and supply. Government programs developed to provide relief from escalating health costs, such as Medicare and Medicaid, only aggravated the third-party payer problem. For example, Medicare spending exceeded the official predictions for the program by 900 percent, causing politicians to retaliate by over-regulating the medical and health insurance businesses. This, in turn, drove up costs even further as doctors and hospitals had to expend more of their resources on complying with regulations and staying out of jail.

Ironically, frugal people fueled some of this spending increase. After all, frugality implies using available resources to their fullest. One acquaintance told me that his grandmother rarely went to the doctor until Medicare; thereafter, she saw the doctor monthly, as Medicare covered monthly visits at minimal personal expense to her.

If buying medical services were like spending for most other goods, and had no affiliated tax gimmicks, we would control our health care costs much more effectively.

Which is why I believe the government needs to break the cycle of subsidizing the health care business one decade and punishing it the next. A flat tax system would be an excellent start.

Most of the current flat tax proposals would repeal existing tax deductions for spending on health and health insurance benefits. The illusion that somebody else is paying for medical care would evaporate, at least for workers who pay for their health insurance through their employers. (Those on government welfare programs, including Medicare as well as Medicaid, would likely still suffer from this delusion.)

A flat tax would reduce the job "lock-in" effect of employer-provided health insurance. Health insurance would work more like auto or home insurance — to protect assets against unforeseeable and uncommon expensive events. Consumers would buy it for this reason. Finally, faced with consumers using their own money and asking about prices, doctors and hospitals would have to become more competitive.

Flat tax proposals come in two major flavors: flat income tax and flat national sales tax. I personally favor the sales tax flavor partly because it would wipe out the Internal Revenue Service (IRS) and its intrusive ways, as well as the need for taxpayers to play amateur accountant. I also like the idea of taxing consumption instead of production.

Yes, I know there are many steps between here and there.

Perhaps the greatest barrier to eliminating all tax deductions is politicians' vested interest in the current system.

Tax deductions enable politicians to toss out little "jewels de jour" to voters. Dig deep enough and most can find a favored deduction, such as mortgage interest or earned income credits. These little jewels in the junk pile entice taxpayers and special interests into supporting the system.

In addition, politicians use tax law to promote their own pet ideas.

A flat tax system would do away with the preferential treatment of employer-paid health insurance and thousands of other special favors.

We the people would no longer pay for these tax gimmicks and could keep the extra income to spend as we please. Nor would we face penalties just because some lawmaker didn't like a particular activity.

If politicians can no longer expend little and big favors by manipulating our tax system, they would have much less power - and our medical costs will go down. I like that.

Editor's Note: Robert J. Cihak wrote this week's column.

Michael Arnold Glueck, M.D., is a multiple award winning writer who comments on medical-legal issues. Robert J. Cihak, M.D., is a Discovery Institute Senior Fellow and a past president of the Association of American Physicians and Surgeons. Both JWR contributors are Harvard trained diagnostic radiologists. Comment by clicking here.

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