Wednesday, January 16, 2008

How to give everyone healthcare and get rid of the income tax

There are many reasons why having an income tax and a big government is dangerous. First, the centralization of power is a threat to freedom and this centralization of power can only be acheived when the government has control of a large percentage of the country's wealth. Second, the main beneficiaries of the big government are those most connected to the government: the politicians, the recipients of corporate welfare, and other special interests seeking special privileges. Third, the money spent by the government is generally for the benefit of the government, not for the benefit of the people.

In order to stop this, we must get rid of the income tax, but when this proposal is made, progressive and liberals argue that the people proposing such a measure are selfish and greedy. So I will make a simpler proposal that isn't quite as good as getting rid of the income tax, but it's a lot better than our current income tax.

The proposal is that all the money collected by income taxes should be destroyed. After receiving the money, the government can electronically remove it from the money supply. In this scenario, we would still pay the same amount of income tax, but I believe the country would be a lot better off.

For starters, there would be no war in Iraq because we couldn't possibly afford to start aggressive wars against other countries. Instead of spending more on our military than the rest of the world combined, we'd have to spend in proportion to what a country of our size has and needs. This would wipe out hundreds of billions of dollars of spending and result in us bringing most of our 500,000 or so troops back home. We'd have a much smaller military overall.

Our military-industrial complex is responsible for about 5% of our GDP. Let's say that translates into roughly 5% of the workforce. In 2006, there were about 106M full time workers in the USA. So 5% of that would be about 5.3M workers that are part of our military-industrial complex. This sounds about right to me because there are about 1.8M full-time workers in the US Military and the rest can be accounted for by companies that make weapons and support the military. Let's say we cut that by half (I consider that pretty modest). That would mean we could remove 2.6M workers from a military that provides little benefit to Americans. How could these workers (many of them highly skilled) be useful to the economy? Well how about 1M more new healthcare workers in the form of doctors, nurses, technicians, and hospital workers. How about 500K new primary and secondary teachers? How about hundreds of thousands skilled engineers working on medical technology instead of missile and fighter jet technology? It's not just the workers but also all the resources that each of those workers represent in terms of buildings, computer equipment, energy, etc.,

When people ask why don't we have healthcare for all Americans, it's not because we don't have high enough taxes. It's because we take away resources that could be used to provide healthcare and use it for something most of us don't need, i.e. a military empire.

When I look at the healthcare proposals floated by Edwards, Obama, and Clinton, I don't see anything there about addressing the fundamental problem. Let's assume for the moment that we don't have spare capacity in our healthcare system (I don't know of many emergency rooms that don't have lines and doctors offices that don't have enough patients). Assuming then it's not simply a matter of efficiency, there are only two ways to provide healthcare to all Americans. The first way is to provide less healthcare to some Americans in order to provide some healthcare to all Americans. The second way is to increase the amount of healthcare in America. I don't like the former and I don't think any of my wealthy liberal friends are going to like increased waits for doctor appointments and fewer choices. So I think we all really want the latter to happen. For that to happen, we need millions of more healthcare workers and the facilities that go along with them. Simple supply and demand shows that in order to get more of that, the prices will have to go up in order to attract more workers into the healthcare industry. On the other hand, the prices will go down if there are millions of workers that are available to enter this industry. I am not sure where they are going to get all these skilled workers from otherwise.

In summary, the only way to get the healthcare we need is for the government to stop spending our resources on things that don't benefit Americans. I pick on the military-industrial complex because it is the biggest target. There are others as well. If we didn't have the income tax, this would automatically happen. Or if the government just destroyed that money, it wouldn't be available to spend either and it would make all the other existing money more valuable. Either way, we'd end up with a lot more of the things people actually want, like healthcare.


adam said...


I'm all about re-allocating resources for more appropriate endeavors, but I'm confused about where the money for healthcare comes from if you get rid of the income tax. The majority of government revenue comes from personal income tax, with a small amount coming from corporate tax revenue. There are some other revenue sources, but they're a drop in the bucket. There's nothing left if you eliminate the income tax. If there's no revenue, there's probably no government.

Are you suggesting that we further privatize the bulk of health and human services? If so, what incentive does the healthcare industry have to provide affordable services to people? Why would pharmaceutical companies choose to research and develop drugs that may be important for public health instead of drugs that are incredible money makers, like Viagra.

Believe me, I am not a huge fan of the current tax system, and I believe that the entire federal budget needs a serious overhaul. However, I also believe that the Healthcare system is currently serving at least two masters: shareholders and patients. The way things are right now, shareholders are more important than patients, because money is king.

- a

Jon Perlow said...


Revenue from personal income tax is $1,247 billion of $2,662 billion in total revenue. So less than half of the government revenue comes from the income tax. Defense spending is $717 billion and interest on the federal debt is $261 billion. So 78% of the personal income tax is just used to finance our empire and pay the interest on financing our empire.

Read my post on healthcare. The market for healthcare has been completely destroyed by government interference. What we have is a managed market. It's not completley centrally planned but it has many of the characteristics of a centrally planned market. What I want to do is make the market for healthcare work like the market for computers. In a free market, competition causes prices to go down over time. In a free market, the services supplied reflect the demand of consumers.

You ask what incentive does the healthcare industry have to provide affordable services to people. What incentive does Dell have to offer affordable computers? What incentive does the supermarket down the street from me have to provide cheap fruits and vegetables? What incentive do airlines have to offer cheap flights to Europe? The answer is that in a free market, producers face competition and the ones that can offer cheaper and better products stand to make more profit. The seeking of profit drives innovation and cost cutting. This is to the benefit of the consumers. We need to make healthcare work like a real free market. We need to undo 70 years of government interference.

In terms of pharmaceuticals, what determines which drugs are important to public health. Viagra makes a lot of money because there is a lot of demand for it. The market has spoken. Apparently, people place a lot of value on being able to have sex later in life (I certainly don't blame them). If there's something important to public health, the market will demand it. Malaria in Africa is often brought up. If America and Europe didn't have subsidies and tarrifs that make it impossible for African farmers to compete, Africa would have more wealth and pharmaceutical companies would then be able to invest in that market. Everybody labels the pharmaceutical as evil, but I think having a real free market instead of the managed market we currently have would fix that. Also, although pharmaceutical invest billions of dollars into R&D, the FDA only approved 19 new drugs in 2007. The approval process is daunting. If we do anything more to introduce more regulations or reduce the opportunity for profit, capital will leave the pharmaceutical market so fast that we won't have any investment in new drugs. Merck's P/E is already 23 and the stock has been flat over five years. US Treasuries would have been a better investment. The pharmaceutical ETF (PPH) hasn't done much better. People talk about the greed of this industry, but in a capitalist system, greed is good. It drives innovation. If we make it so these companies can't earn profits, the government is going to have to nationalize them in order to keep them capitalized. And governments have a terrible record of allocating capital.

The healthcare system is totally broken. The best way to fix that is to have the people consuming healthcare in control of how the money is spent. When an HMO is in control of how the money is spent and the person enrolled in the HMO has no choice in choosing the HMO because it's the one picked by his company, the market totally fails. This is why healthcare costs are rising at double digit rates every year and the main beneficiaries are the HMOs and not the patients. If you think this will get better by having universal healthcare, just look at how much money the HMOs spend lobbying the politicians. That money will come back to them at a very nice rate of return.

joel said...

Ah, good to be back. I've missed reading your posts, Jon.

Anyway, I'm still catching up, so two comments:

1) I think you confuse matters by linking Income Tax, the war, and healthcare. At the very least, the Income Tax is progressive (or could be), which seems more "fair" to me than other forms of taxation. At the very least, repealing the Income Tax (or removing a large portion of the money supply) is orthogonal to the discussion on diverting resources to the War Machine instead of Healthcare (and the link that cash is the "finite" resource that connects the two is at least somewhat tenuous given the government's tendencies to print more money and to spend more than we take in). Anyway, my point is that they're separate conversations.

2) It's very dangerous to justify a free market in healthcare by citing examples of luxury goods (computers). Dell has pressure to produce cheap computers BOTH because there's competition but also because people can chose to not buy a computer (instead, they can buy organic fruit with that money). And in making that choice, there's not much harm to society (or themselves, really). Healthcare is different: there is some natural limit to what people can afford, of course, but healthcare is generally a necessity. I will forgo almost anything else in order to get my cancer treated or my broken leg fixed. It's not a real choice. Or worse, I do make an economic choice and decide not to buy medical insurance--which practically guarantees I'll go bankrupt (or not get treatment) if I have a medical emergency.

As long as there is not an abundance of medical resources, as reflected in your statements about lines at doctors' offices (which is another complex issue that deals with broad-ranging topics like medical school admission, etc), Healthcare is not a safe space for the Free Market...

Vijay said...

Jon, fantastic blog. I'm really glad you're exposing friends with generally leftist views to some basic economics and libertarian politics.

Joel, regarding your first point, the link Jon made is spot-on. As soon as you cede power to the central government there is no way to guarantee that it won't be used for harmful purposes (such as waging an aggressive war overseas). But it's more than just the income tax, it's the Federal Reserve system, which allows for the welfare-warfare state that we suffer from today by printing money out of thin air. The result is that we suffer from a collapsing currency and destruction of purchasing power for the lower and middle classes.

Regarding your second point, it matters not that health care is a necessity (perceived or otherwise) for some people. Even if demand is constant, the free market provides benefits to all consumers by providing increasing products and services at diminishing prices.

Socializing health care destroys the price signal and makes it impossible for the consumer to communicate with the producer about which services are necessary and require the most investment and research. It's like chopping off the invisible hand.

We should also consider the VA hospitals and the abysmal treatment of veterans before falling for an Utopian vision of socialized health care.

I would also like to point you to this article in the New York Times on Canadian health care.

Jon is also correct; the health care system we suffer from today is anything but a free market. Checkout this Economist article


joel said...

Hi Vijay,

Just a couple of points:

"Joel, regarding your first point, the link Jon made is spot-on. As soon as you cede power to the central government there is no way to guarantee that it won't be used for harmful purposes (such as waging an aggressive war overseas)."

I suppose I read the scope of Jon's original post differently. It sounds like you're reading Jon's post as "let's take power away from the government because they can't be trusted." So I'll refocus on that (and address healthcare a bit later).

Ultimately, that's a broad, ideological statement (to be fair, your words were more even-keeled: "there is no way to guarantee that it won't be used for harmful purposes" but the spirit is the same). These are always hard to argue with, so I guess I'll just say that it's sad to me. I'd prefer to have more hope for what a government could be and make sure we have the appropriate checks in place (which today, we probably don't) to ensure it doesn't get carried away. I'd like to think that, working together, we can figure out a way to curb poverty, homelessness, needless sickness. That, organized appropriately, we can lift up society as a whole (even if that means some limited redistribution of wealth). I am NOT advocating communism--as an MBA I am a true believe in the capitalist system. However, I don't believe it's the panacea that Libertarians seem to think it is. I fear that pure capitalists will take advantage of the less fortunate, will abuse public goods, and will be short-sighted to the detriment of long-term planning (which may be OK for business but is very dangerous for society). Again, this is a tough one to debate/discuss because it's ideological (which, I suppose, is why I read Jon's post with a focus on the individual policies/programs as opposed to the message you took from it).

Now to healthcare. I think we probably fundamentally disagree. The system we have today is NOT a true free market, I agree. Indeed, I'm not even 100% convinced that socialized medicine is the right model. I AM convinced, however, about the inherent good of Universal Healthcare.

I am open to ideas about how we get to Universal Healthcare. I don't think the Free Market will get us there with some invisible hand...

You offered "the free market provides benefits to all consumers by providing increasing products and services at diminishing prices." This is just not true, universally. Poor customers who cannot afford something do not benefit from the free market. This may be OK for computers (though let's not forget that it took a non-profit charitable donation to start up the OLPC--$100 laptop). It's not OK for healthcare. I fear that a true free market in healthcare would encourage insurance companies to reject claims outright on the bet that customers won't have the education or resources to fight them. I fear that they'll refuse to insure higher-risk, lower-income (less profitable) individuals.

The implicit assumption, I assume, is that the Free Market will encourage some creative, low-cost, efficient provider to offer low-cost health care (low cost enough that EVERYONE will be able to afford it)... Do you really believe that that will happen? How does it look for that entrepreneur in terms of the kind of healthcare that they would be able to provide (access to doctors, high-tech equipment, life-saving drugs)?

Ultimately, the free market forces people to make trade-offs based on an internal "utility" function. How much is this toy worth to me? Is that money better spent elsewhere? Of course, that happens in capital markets, too. Should that happen in healthcare? Is a child born into a poorer family worth less than a child born into a wealthy family?

(I hate to do that, but by advocating a purely free market for healthcare, well, you made me do it :-) )

It's interesting where Canada is going with a Two Tier model: a universal healthcare system in which you can pay more for faster service. The question is whether there is an acceptable equilibrium or whether we’ll start to see the “rich get richer and the poor get poorer…”


Jon Perlow said...

Joel, although you say you're not advocating communism, I am not sure what you are advocating. You're saying that "organized appropriately, we, can lift up society as a whole." Who is the "we"? Is it the government? We need to stomp out this idea that the government can provide us with anything we need. The government isn't some magical entity that can create homes and healthcare. Homes are created by home builders and sick people need doctors, nurses, and medicine. If government was so good at providing these things to us, why wouldn't want it to provide everything to us? Why shouldn't government manufacture cell phones, design our computers, grow our food, and build our cars? I don't think you're suggesting that government is particularly good at providing healthcare but bad at providing those other things. History is littered with examples of governments that did perform this type of central planning. Millions of Chinese staved to death in communist China. In communist Russia, people stood on lines to get basic consumer goods while the government produced a surplus of all kinds of goods that weren't needed.

There are fundamental reasons why the government is terrible at providing services. First, governments are run by people who get paid fixed salaries and spend other people's money (i.e. the taxpayers). Companies, on the other hand, have owners who risk their own capital. They have an incentive to make sure that money is used as efficiently as possible. Second, in one structure, the government is granted a monopoly. With any monopoly, there is no competition driving down prices and driving up quality. Just consider how much the prices of airplane travel fell in India when they deregulated the industry and allowed private companies to offer air travel. In a free market, companies must provide valuable services at low prices and high quality. Otherwise, people will not purchase their services and instead go with a competitor. This would drive the company out of business. In a other cases, the government competes with private industry, but the government always grants itself unfair advantages like special subsidies. This distorts the market by sucking resources away from more efficient producers and harms the consumer and tax payers who pay more for a lower quality product.

In terms of healthcare, you jump to the conclusion that the free market will not provide everybody with healthcare. I argue that this is just not true. The free market will provide everybody with healthcare, but not necessarily identical healthcare. Wealthier people will get better healthcare, just like they get better/safer cars, better food, bigger houses, and nicer cell phones. But poor people still find a way to travel, still have access to food, still find homes to live in, and still get cell phones. I'd argue that even in the cases where they don't, it's often because of distortions to the free market (e.g. paying farmers to grow less food, rent control policies that distort the market, taxes and regulations that increase costs).

With healthcare, I believe we will have a lot more healthcare if get rid of the current system and make healthcare work like a free market. I think we will have so much additional healthcare that the few remaining people that can't afford healthcare will get free healthcare from charities. You brought up OLPC and how it's non-profit. Non-profits are great and they are part of the free market. Nobody here is saying we shouldn't have charity. Charities operate in the free market as well. People donate to charities that make the most effective use of their money. I think Donors Choose is amazing. In a free market, I think there would be a Donors Choose for people needing expensive surgeries or treatment. When I received my Donors Choose report, the pleasure I got from helping those kids made me go back to the site and donate again. I think the amount of pleasure be an order of magnitudes more if it were for helping somebody get treatment.

I think in a real free market for healthcare, we'd have innovations we can hardly imagine now. For starters, there are many laws and regulations that require doctors to do things that lower cost labor could perform. This is because doctors are part of the American Medical Association and this a guild system designed to reduce the supply of doctors. Does it really take somebody with 4 years of medical school and three years of residency to diagnose 90% of the problems that make people go to their primary care doctor. In a free market, people could go to Walgreens or Walmart and see somebody without a long wait at a very low cost for most basic needs.

Another area where we interfere with the free market is that doctors can't make contacts with patients. This results in extremely high costs for malpractice and most malpractice suits are not the result of negligence but rather bad outcomes. This is to the benefit of the lawyers because all those costs ultimately get passed on to the consumers. With reform here, we could have standard and reasonable awards for bad outcomes and only allow malpractice suits in the case where there is clear negligence.

You brought up a child born to a poor family versus a wealthy family. The goal shouldn't be to provide them with equal healthcare. If that were the goal, we would be satisfied with providing them with equally bad healthcare. The goal should be to provide them with the best possible healthcare. In a real free market, we will have more healthcare and higher quality healthcare than in the managed market. The wealthier child may get better healthcare than the poor child, but they will both receive better healthcare than they would otherwise receive in the managed market.

I think you took the wrong takeaway from Canada. They didn't go with the two tier model. They explicitly outlawed private healthcare. Despite that, a private healthcare system is developing because the public healthcare system is so bad that doctors are blatantly violating the law. We don't want this model in America. A true free market would provide much better healthcare at lower costs. People in this country are already flying to Thailand for heart surgery at one-tenth the cost. That is the free market at work. If we got rid of our current system and moved to a true free market, prices would drop and quality would go up.

joel said...

I'm not sure what I'm exactly advocating for a healthcare system, either. As soon as I do, though, I'll run for President.

Lots of time spent trashing the current healthcare system, all of which sounded like valid critique to me, so I won't defend any part of the current system--AMA included. It's definitely broken and doesn’t accomplish my core goal.

I'm going to try numbering points/issues as Blogger has no good way of quoting text... (can someone fix that?)

1) We both agree that communism is terrible, though I don't think it's for the reasons you say. I think Communism kills any incentive at entrepreneurial endeavor (invention). Furthermore, central planning for an entire nation is a fundamentally impossible task that, as you note, creates perverse incentives and results in disastrous resource allocation.

1a) I do NOT actually think that government’s primary problem is a principal-agent problem, as you state. Government officials can be voted out power (and out of financial compensation) for doing a bad job. Of course, the principal-agent issue does still exist, but I don't think it's primary. (and there are all kinds of principal-agent problems in the Free Market, too, by the way)

2) I think we both agree that it's the government's role to create rules (laws).

3) I think we (probably) both agree that it's the government's role to provide certain societal services (police, fire, national security), though we may disagree on the extent.

3) I think that it's also the government's role to redistribute resources, to some extent, in order to provide a minimum quality of life and "opportunity" for all Americans. I think you may disagree with me here.

4) You think that the Free Market, if not interfered with, serves all demand perfectly in all cases. I disagree with you here.

Please correct me, of course, if I'm misrepresenting anything here.

Assuming that I'm not, I'll try to explain why I don't buy point 4. You say "But poor people still find a way to travel, still have access to food, still find homes to live in, and still get cell phones." I've got to tell you, I've stared at your sentence for 20 minutes and have decided that I'm moving to your world (if I can afford the ticket, which may be the trick ;-)). Seriously. Poor people do not travel nor do they have cells phones. Life is tough, but I'm OK with that as neither travel nor a cell phone is a necessity. Many poor people don't have food or housing, either, which are necessities. And many of those who DO have food and housing can thank government redistribution of resources for it. Here, government has “interfered” with the free market because we decided that it was the right thing for society to do.

In the same vein, I don't have faith that the Magical Invisible Hand Will Provide healthcare for everyone. Maybe we emulate the food-support and housing-support models for healthare (physician stamps? free clinics?) Note that there are significant free-market aspects to these programs, which I think are great (e.g. supermarkets still must compete in order to win the food-stamp business)--I'm not anti-free market. **But the government tries to redistribute wealth in a way that at least guarantees a minimum level of service (food) for everyone.**

That's what I'm advocating and, as in food and housing, I am very doubtful that the free market ALONE can guarantee a minimum level of service to everyone. In fact, I can guarantee that the Free Market along WON’T guarantee a minimum level of service to everyone. In every free market, it becomes unprofitable to serve certain customers, so they remain unserved (in fact, "unprofitable" isn't the cutoff, "lower IRR than another opportunity" is. Capitalist forces will say "if I can make a higher return on this dollar by using it to make a video game than I can by using it to provide healthcare, then that's what I'll do with the dollar." In MANY MANY MANY cases, I completely agree with that incentive system for resource allocation. In providing healthcare for a society, I'm not OK with it.

Now, note that I actually agree with you that many aspects of "healthcare" ought to operate in a free market (the market for diagnostic equipment, for example; and the AMA should be broken up by the government as an anti-competitive monopoly). Our fundamental disagreement may be that I believe government should guarantee a minimum level of care for all people, and I don't think that the Free Market, alone, can guarantee that. I don't think that there will be a profitable way to treat the hundreds of thousands of unemployed (and uninsured, of course) cancer patients. I don't see any way that the Free Market can serve an indigent person in need of health care. There are all kinds of shades of gray that make this ACTUALLY a hard problem, but you're taking such a hard black-and-white line, that I need to check: do you think that, as a society, we should devote resources to treating sick people who have no money?

If you agree, can you explain how these people will be served? In your rich child - poor child argument (to a statement I never made about advocating "equal" healthcare, by the way) you ASSUME that the Free Market will guarantee some level of treatment for the poor child. I'd be fine with different levels of healthcare as long as the poor child gets some basic healthcare. I just don't believe that a poor child gets ANY healthcare in your pure-play Free Market world.

There is an interesting overlap with Education here (I hesitate to expand the scope, so feel free to ignore if you want to stay focused). Education is also broken in this country, though at least we all seem to agree that it's a communal responsibility to ensure every child is educated at some minimum level (do we agree on that?). Here, I'll anticipate your argument and agree with you in advance--that the lack of free market forces is a major reason why our educational system is so weak and so I'm an advocate of vouchers, charter schools, and disbanding teacher's unions. However, I would NOT advocate a pure-play free market here, again because some demand won't be filled, which I believe is unacceptable.

Man, I love the debate but it takes so long to type. Let’s grab a couple of podiums and just have it out, old school style… You’ve got my number.

Jon Perlow said...

Just to hit on one of your points because I don't have time right now to respond to all of them.

The government does redistribute resources. For the most part, it redistributes wealth from poor and middle class people to the corporations and people that are most connected to the government. You really need to read What Gas the Government Done to Our Money and the essay by Murray N. Rothbard. If you don't understand how our money works and how the inflation tax is an enormous invisible tax paid mostly by the poor and middle class, you will never be able to understand how our financial system really works and who benefits from it.