Taxes on Corporate Profits Have Continued to Collapse

 

The Bureau of Economic Analysis (BEA) released earlier today its second estimate of GDP growth in the fourth quarter ot 2018.  (Confusingly, it was officially called the “third” estimate, but was only the second as what would have been the first, due in January, was never done due to Trump shutting down most agencies of the federal government in December and January due to his border wall dispute.)  Most public attention was rightly focussed on the downward revision in the estimate of real GDP growth in the fourth quarter, from a 2.6% annual rate estimated last month, to 2.2% now.  And current estimates are that growth in the first quarter of 2019 will be substantially less than that.

But there is much more in the BEA figures than just GDP growth.  The second report of the BEA also includes initial estimates of corporate profits and the taxes they pay (as well as much else).  The purpose of this note is to update an earlier post on this blog that examined what happened to corporate profit tax revenues following the Trump / GOP tax cuts of late 2017.  That earlier post was based on figures for just the first half of 2018.

We now have figures for the full year, and they confirm what had earlier been found – corporate profit tax revenues have indeed plummeted.  As seen in the chart at the top of this post, corporate profit taxes were in the range of only $150 to $160 billion (at annual rates) in the four quarters of 2018.  This was less than half the $300 to $350 billion range in the years before 2018.  And there is no sign that this collapse in revenues was due to special circumstances of one quarter or another.  We see it in all four quarters.

The collapse shows through even more clearly when one examines what they were as a share of corporate profits:

 

The rate fell from a range of generally 15 to 16%, and sometimes 17%, in the earlier years, to just 7.0% in 2018.  And it was an unusually steady rate of 7.0% throughout the year.  Note that under the Trump / GOP tax bill, the standard rate for corporate profit tax was cut from 35% previously to a new headline rate of 21%.  But the actual rate paid turned out (on average over all firms) to come to just 7.0%, or only one-third as much.  The tax bill proponents claimed that while the headline rate was being cut, they would close loopholes so the amount collected would not go down.  But instead loopholes were not only kept, but expanded, and revenues collected fell by more than half.

If the average corporate profit tax rate paid in 2018 had been not 7.0%, but rather at the rate it was on average over the three prior fiscal years (FY2015 to 2017) of 15.5%, an extra $192.2 billion in revenues would have been collected.

There was also a reduction in personal income taxes collected.  While the proportional fall was less, a much higher share of federal income taxes are now borne by individuals than by corporations.  (They were more evenly balanced decades ago, when the corporate profit tax rates were much higher – they reached over 50% in terms of the amount actually collected in the early 1950s.)  Federal personal income tax as a share of personal income was 9.2% in 2018, and again quite steady at that rate over each of the four quarters.  Over the three prior fiscal years of FY2015 to 2017, this rate averaged 9.6%.  Had it remained at that 9.6%, an extra $77.3 billion would have been collected in 2018.

The total reduction in tax revenues from these two sources in 2018 was therefore $270 billion.  While it is admittedly simplistic to extrapolate this out over ten years, if one nevertheless does (assuming, conservatively, real growth of 1% a year and price growth of 2%, for a total growth of about 3% a year), the total revenue loss would sum to $3.1 trillion.  And if one adds to this, as one should, the extra interest expense on what would now be a higher public debt (and assuming an average interest rate for government borrowing of 2.6%), the total loss grows to $3.5 trillion.

This is huge.  To give a sense of the magnitude, an earlier post on this blog found that revenues equal to the original forecast loss under the Trump / GOP tax plan (summing to $1.5 trillion over the next decade, and then continuing) would suffice to ensure the Social Security Trust Fund would be fully funded forever.  As things are now, if nothing is done the Trust Fund will run out in about 2034.  And Republicans insist that the gap is so large that nothing can be done, and that the system will have to crash unless retired seniors accept a sharp reduction in what are already low benefits.

But with losses under the Trump / GOP tax bill of $3.1 trillion over ten years, less than half of those losses would suffice to ensure Social Security could survive at contracted benefit levels.  One cannot argue that we can afford such a huge tax cut, but cannot afford what is needed to ensure Social Security remains solvent.

In the nearer term, the tax cuts have led to a large growth in the fiscal deficit.  Even the US Treasury itself is currently forecasting that the federal budget deficit will reach $1.1 trillion in FY2019 (5.2% of GDP), up from $779 billion in FY2018.  It is unprecedented to have such high fiscal deficits at a time of full employment, other than during World War II.  Proper fiscal management would call for something closer to a balanced budget, or even a surplus, in those periods when the economy is at full employment, while deficits should be expected (and indeed called for) during times of economic downturns, when unemployment is high.  But instead we are doing the opposite.  This will put the economy in a precarious position when the next economic downturn comes.  And eventually it will, as it always has.

End Gerrymandering by Focussing on the Process, Not on the Outcomes

A.  Introduction

There is little that is as destructive to a democracy as gerrymandering.  As has been noted by many, with gerrymandering the politicians are choosing their voters rather than the voters choosing their political representatives.

The diagrams above, in schematic form, show how gerrymandering works.  Suppose one has a state or region with 50 precincts, with 60% that are fully “blue” and 40% that are fully “red”, and where 5 districts need to be drawn.  If the blue party controls the process, they can draw the district lines as in the middle diagram, and win all 5 (100%) of the districts, with just 60% of the voters.  If, in contrast, the red party controls the process for some reason, they could draw the district boundaries as in the diagram on the right.  They would then win 3 of the 5 districts (60%) even though they only account for 40% of the voters.  It works by what is called in the business “packing and cracking”:  With the red party controlling the process, they “pack” as many blue voters as possible into a small number of districts (two in the example here, each with 90% blue voters), and then “crack” the rest by scattering them around in the remaining districts, each as a minority (three districts here, each with 40% blue voters and 60% red).

Gerrymandering leads to cynicism among voters, with the well-founded view that their votes just do not matter.  Possibly even worse, gerrymandering leads to increased polarization, as candidates in districts with lines drawn to be safe for one party or the other do not need to worry about seeking to appeal to voters of the opposite party.  Rather, their main concern is that a more extreme candidate from their own party will not challenge them in a primary, where only those of their own party (and normally mostly just the more extreme voters in their party) will vote.  And this is exactly what we have seen, especially since 2010 when gerrymandering became more sophisticated, widespread, and egregious than ever before.

Gerrymandering has grown in recent decades both because computing power and data sources have grown increasingly sophisticated, and because a higher share of states have had a single political party able to control the process in full (i.e. with both legislative chambers, and the governor when a part of the process, all under a single party’s control).  And especially following the 2010 elections, this has favored the Republicans.  As a result, while there has been one Democratic-controlled state (Maryland) on common lists of the states with the most egregious gerrymandering, most of the states with extreme gerrymandering were Republican-controlled.  Thus, for example, Professor Samuel Wang of Princeton, founder of the Princeton Gerrymandering Project, has identified a list of the eight most egregiously gerrymandered states (by a set of criteria he has helped develop), where one (Maryland) was Democratic-controlled, while the remaining seven were Republican.  Or the Washington Post calculated across all states an average of the degree of compactness of congressional districts:  Of the 15 states with the least compact districts, only two (Maryland and Illinois) were liberal Democratic-controlled states.  And in terms of the “efficiency gap” measure (which I will discuss below), seven states were gerrymandered following the 2010 elections in such a way as to yield two or more congressional seats each in their favor.  All seven were Republican-controlled.

With gerrymandering increasingly common and extreme, a number of cases have gone to the Supreme Court to try to stop it.  However, the Supreme Court has failed as yet to issue a definitive ruling ending the practice.  Rather, it has so far skirted the issue by resolving cases on more narrow grounds, or by sending cases back to lower courts for further consideration.  This may soon change, as the Supreme Court has agreed to take up two cases (affecting lines drawn for congressional districts in North Carolina and in Maryland), with oral arguments scheduled for March 26, 2019.  But it remains to be seen if these cases will lead to a definitive ruling on the practice of partisan gerrymandering or not.

This is not because of a lack of concern by the court.  Even conservative Justice Samuel Alito has conceded that “gerrymandering is distasteful”.  But he, along with the other conservative justices on the court, have ruled against the court taking a position on the gerrymandering cases brought before it, in part, at least, out of the concern that they do not have a clear standard by which to judge whether any particular case of gerrymandering was constitutionally excessive.  This goes back to a 2004 case (Vieth v. Jubelirer) in which the four most conservative justices of the time, led by Justice Antonin Scalia, opined that there could not be such a standard, while the four liberal justices argued that there could.  Justice Anthony Kennedy, in the middle, issued a concurring opinion with the conservative justices there was not then an acceptable such standard before them, but that he would not preclude the possibility of such a standard being developed at some point in the future.

Following this 2004 decision, political scientists and other scholars have sought to come up with such a standard.  Many have been suggested, such as a set of three tests proposed by Professor Wang of Princeton, or measures that focus on the share of seats won to the share of the votes cast, and more.  Probably most attention in recent years has been given to the “efficiency gap” measure proposed by Professor Nicholas Stephanopoulos and Eric McGhee.  The efficiency gap is the gap between the two main parties in the “wasted votes” each party received in some past election in the state (as a share of total votes in the state), where a wasted vote is the sum of all the votes for a losing candidate of that party, plus the votes in excess of 50% when that party’s candidate won.  This provides a direct measure of the two basic tactics of gerrymandering, as described above, of “packing” as many voters of one party as possible in a small number of districts (where they might receive 80 or 90% of the votes, but with all those above 50% “wasted”), and “cracking” (by splitting up the remaining voters of that party into a large number of districts where they will each be in a minority and hence will lose, with those votes then also “wasted”).

But there are problems with each of these measures, including the widely touted efficiency gap measure.  It has often been the case in recent years, in our divided society, that like-minded voters live close to each other, and particular districts in the state then will, as a result, often see the winner of the district receive a very high share of the votes.  Thus, even with no overt gerrymandering, the efficiency gap as measured will appear large.  Furthermore, at the opposite end of this spectrum, the measure will be extremely sensitive if a few districts are close to 50/50.  A shift of just a few percentage points in the vote will then lead one party or the other to lose and hence will then see a big jump in their share of wasted votes (the 49% received by one party or the other).

There is, however, a far more fundamental problem.  And that is that this is simply the wrong question to ask.  With all due respect to Justice Kennedy, and recognizing also that I am an economist and not a lawyer, I do not understand why the focus here is on the voting outcome, rather than on the process by which the district lines were drawn.  The voting outcome is not the standard by which other aspects of voter rights are judged.  Rather, the focus is on whether the process followed was fair and unbiased, with the outcome then whatever it is.

I would argue that the same should apply when district lines are drawn.  Was the process followed fair and unbiased?  The way to ensure that would be to remove the politicians from the process (both directly and indirectly), and to follow instead an automatic procedure by which district lines are drawn in accord with a small number of basic principles.

The next section below will first discuss the basic point that the focus when judging fairness and lack of bias should not be on whether we can come up with some measure based on the vote outcomes, but rather on whether the process that was followed to draw the district lines was fair and unbiased or not.  The section following will then discuss a particular process that illustrates how this could be done.  It would be automatic, and would produce a fair and unbiased drawing of voting district lines that meets the basic principles on which such a map should be based (districts of similar population, compactness, contiguity, and, to the extent consistent with these, respect for the boundaries of existing political jurisdictions such as counties or municipalities).  And while I believe this particular process would be a good one, I would not exclude that others are possible.  The important point is that the courts should require the states to follow some such process, and from the example presented we see that this is indeed feasible.  It is not an impossible task.

The penultimate section of the post will then discuss a few points that arise with any such system, and their implications, and end with a brief section summarizing the key points.

B.  A Fair Voting System Should Be Judged Based on the Process, Not on the Outcomes

Voting rights are fundamental in any democracy.  But in judging whether some aspect of the voting system is proper, we do not try to determine whether or not (by some defined specific measure) the resulting outcomes were improperly skewed or not.

Thus, for example, we take as a basic right that our ballot may be cast in secret.  No government official, nor anyone else for that matter, can insist on seeing how we voted.  Suppose that some state passed a law saying a government-appointed official will look over the shoulder of each of us as we vote, to determine whether we did it “right” or not.  We would expect the courts to strike this down, as an inappropriate process that contravenes our basic voting rights.  We would not expect the courts to say that they should look at the subsequent voting outcomes, and try to come up with some specific measure which would show, with certainty, whether the resulting outcomes were excessively influenced or not.  That would of course be absurd.

As another absurd example, suppose some state passed a law granting those registered in one of the major political parties, but not those registered in the other, access to more early days of voting than the other.  This would be explicitly partisan, and one would assume that the courts would not insist on limiting their assessment to an examination of the later voting outcomes to see whether, by some proposed measure, the resulting outcomes were excessively affected.  The voting system, to be fair, should not lead to a partisan advantage for one party or the other.  But gerrymandering does precisely that.

Yet the courts have so far asked declined to issue a definitive ruling on partisan gerrymandering, and have asked instead whether there might be some measure to determine, in the voting outcomes, whether gerrymandering had led to an excessive partisan advantage for the party drawing the district lines.  And there have been open admissions by senior political figures that district borders were in fact drawn up to provide a partisan advantage.  Indeed, principals involved in the two cases now before the Supreme Court have openly said that partisan advantage was the objective.  In North Carolina, David Lewis, the Republican chair of the committee in the state legislature responsible for drawing up the district lines, said during the debate that “I think electing Republicans is better than electing Democrats. So I drew this map to help foster what I think is better for the country.”

And in the case of Maryland, the Democratic governor of the state in 2010 at the time the congressional district lines were drawn, Martin O’Malley, spoke out in 2018 in writing and in interviews openly acknowledging that he and the Democrats had drawn the district lines for partisan advantage.  But he also now said that this was wrong and that he hoped the Supreme Court would rule against what they had done.

But how to remove partisanship when district lines are drawn?  As long as politicians are directly involved, with their political futures (and those of their colleagues) dependent on the district lines, it is human nature that biases will enter.  And it does not matter whether the biases are conscious and openly expressed, or unconscious and denied.  Furthermore, although possibly diminished, such biases will still enter even with independent commissions drawing the district lines.  There will be some political process by which the commissioners are appointed, and those who are appointed, even if independent, will still be human and will have certain preferences.

The way to address this would rather be to define some automatic process which, given the data on where people live and the specific principles to follow, will be able to draw up district lines that are both fair (follow the stated principles) and unbiased (are not drawn up in order to provide partisan advantage to one party).  In the next section I will present a particular process that would do this.

C.  An Automatic Process to Draw District Lines that are Fair and Unbiased

The boundaries for fair and unbiased districts should be drawn in accord with the following set of principles (and no more):

a)  One Person – One Vote:  Each district should have a similar population;

b)  Contiguity:  Each district must be geographically contiguous.  That is, one continuous boundary line will encompass the entire district and nothing more;

c)  Compactness:  While remaining consistent with the above, districts should be as compact as possible under some specified measure of compactness.

And while not such a fundamental principle, a reasonable objective is also, to the extent possible consistent with the basic principles above, that the district boundaries drawn should follow the lines of existing political jurisdictions (such as of counties or municipalities).

There will still be a need for decisions to be made on the basic process to follow and then on a number of the parameters and specific rules required for any such process.  Individual states will need to make such decisions, and can do so in accordance with their traditions and with what makes sense for their particular state.  But once these “rules of the game” are fully specified, there should then be a requirement that they will remain locked in for some lengthy period (at least to beyond whenever the next decennial redistricting will be needed), so that games cannot be played with the rules in order to bias a redistricting that may soon be coming up.  This will be discussed further below.

Such specific decisions will need to be made in order to fully define the application of the basic principles presented above.  To start, for the one person – one vote principle the Supreme Court has ruled that a 10% margin in population between the largest and smallest districts is an acceptable standard.  And many states have indeed chosen to follow this standard.  However, a state could, if it wished, choose to use a tighter standard, such as a margin in the populations between the largest and smallest districts of no more than 8%, or perhaps 5% or whatever.  A choice needs to be made.

Similarly, a specific measure of compactness will need to be specified.  Mathematically there are several different measures that could be used, but a good one which is both intuitive and relatively easy to apply is that the sum of the lengths of all the perimeters of each of the districts in the state should be minimized.  Note that since the outside borders of the state itself are fixed, this sum can be limited just to the perimeters that are internal to the state.  In essence, since states are to be divided up into component districts (and exhaustively so), the perimeter lines that do this with the shortest total length will lead to districts that are compact.  There will not be wavy lines, nor lines leading to elongated districts, as such lines will sum to a greater total length than possible alternatives.

What, then, would be a specific process (or algorithm) which could be used to draw district lines?  I will recommend one here, which should work well and would be consistent with the basic principles for a fair and unbiased set of district boundaries.  But other processes are possible.  A state could choose some such alternative (but then should stick to it).  The important point is that one should define a fully specified, automatic, and neutral process to draw such district lines, rather than try to determine whether some set of lines, drawn based on the “judgment” of politicians or of others, was “excessively” gerrymandered based on the voting outcomes observed.

Finally, the example will be based on what would be done to draw congressional district lines in a state.  But one could follow a similar process for drawing other such district lines, such as for state legislative districts.

The process would follow a series of steps:

Step 1: The first step would be to define a set of sub-districts within each county in a state (parish in Louisiana) and municipality (in those states where municipalities hold similar governmental responsibilities as a county).  These sub-districts would likely be the districts for county boards or legislative councils in most of the states, and one might typically have a dozen or more of these in such jurisdictions.  When those districts are also being redrawn as part of the decennial redistricting process, then they should be drawn first (based on the principles set out here), before the congressional district lines are drawn.

Each state would define, as appropriate for the institutions of that specific state, the sub-districts that will be used for the purpose of drawing the congressional district lines.  And if no such sub-jurisdictions exist in certain counties of certain states, one could draw up such sub-districts, purely for the purposes of this redistricting exercise, by dividing such counties into compact (based on minimization of the sum of the perimeters), equal population, districts.  While the number of such sub-districts would be defined (as part of the rules set for the process) based on the population of the affected counties, a reasonable number might generally be around 12 or 15.

These sub-districts will then be used in Step 4 below to even out the congressional districts.

Step 2:  An initial division of each state into a set of tentative congressional districts would then be drawn based on minimizing the sum of the lengths of the perimeter lines for all the districts, and requiring that all of the districts in the state have exactly the same population.  Following the 2010 census, the average population in a congressional district across the US was 710,767, but the exact number will vary by state depending on how many congressional seats the state was allocated.

Step 3: This first set of district lines will not, in general, follow county and municipal lines.  In this step 3, the initial set of district lines would then be shifted to the county or municipal line which is geographically closest to it (as defined by minimizing the geographic area that would be shifted in going to that county or city line, in comparison to whatever the alternative jurisdiction would be).  If the populations in the resulting congressional districts are then all within the 10% margin for the populations (or whatever percent margin is chosen by the state) between the largest and the smallest districts, then one is finished and the map is final.

Step 4:  But in general, there may be one or more districts where the resulting population exceeds or falls short of the 10% limit.  One would then make use of the political subdivisions of the counties and municipalities defined in Step 1 to bring them into line.  A specific set of rules for that process would need to be specified.  One such set would be to first determine which congressional district, as then drawn, deviated most from what the mean population should be for the districts in that state.  Suppose that district had too large of a population.  One would then shift one of the political subdivisions in that district from it to whichever adjacent congressional district had the least population (of all adjacent districts).  And the specific political subdivision shifted would then be the one which would have the least adverse impact on the measure of compactness (the sum of perimeter lengths).  Note that the impact on the compactness measure could indeed be positive (i.e. it could make the resulting congressional districts more compact), if the political subdivision eligible to be shifted were in a bend in the county or city line.

If the resulting congressional districts were all now within the 10% population margin (or whatever margin the state had chosen as its standard), one would be finished.  But if this is not the case, then one would repeat Step 4 over and over as necessary, each time for whatever district was then most out of line with the 10% margin.

That is it.  The result would be contiguous and relatively compact congressional districts, each with a similar population (within the 10% margin, or whatever margin is decided upon), and following borders of counties and municipalities or of political sub-divisions within those entities.

This would of course all be done on the computer, and can be once the rules and parameters are all decided as there will no longer be a role for opinion nor an opportunity for political bias to enter.  And while the initial data entry will be significant (as one would need to have the populations and perimeter lengths of each of the political subdivisions, and those of the counties and municipalities that they add up to), such data are now available from standard sources.  Indeed, the data entry needed would be far less than what is typically required for the computer programs used by our politicians to draw up their gerrymandered maps.

D.  Further Remarks

A few more points:

a)  The Redistricting Process, Once Decided, Should be Locked In for a Long Period:  As was discussed above, states will need to make a series of decisions to define fully the specific process it chooses to follow.  As illustrated in the case discussed above, states will need to decide on matters such as what will be the maximum margin of the populations between the largest and smallest districts (no more than 10%, by Supreme Court decision, but it could be less).  And rules will need to be set on, also as in the case discussed above, what measure of compactness to use, or the criterion on which district should be chosen first to have a shift of a sub-district in order to even out the population differences, and so on.

Such decisions will have an impact on the final districts arrived at.  And some of those districts will favor Republicans and some will favor Democrats, just by random.  There would then be a problem if the redistricting were controlled by one party in the state, and that party (through consultants who specialize in this) tried out dozens if not hundreds of possible choices on the parameters to see which would turn out to be most advantageous to it.  While the impact would be far less than what we have now with the deliberate gerrymandering, there could still be some effect.

To stem this, one should require that once choices are made on the process to follow and on the rules and other parameters needed to implement that process, there could not then be a change in that process for the immediately upcoming decennial redistricting.  They would only apply to those following.  While this would not be possible for the very first application of the system, there will likely be a good deal of attention paid by the public to these issues initially so such an attempt to bias the system would be difficult.

As noted, this is not likely to be a major problem, and any such system will not introduce the major biases we have seen in the deliberately gerrymandered maps of numerous states following the 2010 census.  But by locking in any decisions made for a long period, where any random bias in favor of one party in a map might well be reversed following the next census, there will be less of a possibility to game the system by changing the rules, just before a redistricting is due, to favor one party.

b)  Independent Commissions Do Not Suffice  – They Still Need to Decide How to Draw the District Maps:  A reform that has been increasingly advocated by many in recent years is to take the redistricting process out of the hands of the politicians, and instead to appoint independent commissions to draw up the maps.  There are seven states currently with non-partisan or bipartisan, nominally independent, commissions that draw the lines for both congressional and state legislative districts, and a further six who do this for state legislative districts only.  Furthermore, several additional states will use such commissions starting with the redistricting that follows the 2020 census.  Finally, there is Iowa.  While technically not an independent commission, district lines in Iowa are drawn up by non-partisan legislative staff, with the state legislature then approving it or not on a straight up or down vote.  If not approved, the process starts over, and if not approved after three votes it goes to the Iowa Supreme Court.

While certainly a step in the right direction, a problem with such independent commissions is that the process by which members are appointed can be highly politicized.  And even if not overtly politicized, the members appointed will have personal views on who they favor, and it is difficult even with the best of intentions to ensure such views do not enter.

But more fundamentally, even a well-intentioned independent commission will need to make choices on what is, and what is not, a “good” district map.  While most states list certain objectives for the redistricting process in either their state constitutions or in legislation, these are typically vague, such as saying the maps should try to preserve “communities of interest”, but with no clarity on what this in practice means.  Thirty-eight states also call for “compactness”, but few specify what that really means.  Indeed, only two states (Colorado and Iowa) define a specific measure of compactness.  Both states say that compactness should be measured by the sum of the perimeter lines being minimized (the same measure I used in the process discussed above).  However, in the case of Iowa this is taken along with a second measure of compactness (the absolute value of the difference between the length and the width of a district), and it is not clear how these two criteria are to be judged against each other when they differ.  Furthermore, in all states, including Colorado and Iowa, the compactness objective is just one of many objectives, and how to judge tradeoffs between the diverse objectives is not specified.

Even a well-intentioned independent commission will need to have clear criteria to judge what is a good map and what is not.  But once these criteria are fully specified, there is then no need for further opinion to enter, and hence no need for an independent commission.

c)  Appropriate and Inappropriate Principles to Follow: As discussed above, the basic principles that should be followed are:  1) One person – One vote, 2) Contiguity, and 3) Compactness.  Plus, to the extent possible consistent with this, the lines of existing political jurisdictions of a state (such as counties and municipalities) should be respected.

But while most states do call for this (with one person – one vote required by Supreme Court decision, but decided only in 1964), they also call for their district maps to abide by a number of other objectives.  Examples include the preservation of “communities of interest”, as discussed above, where 21 states call for this for their state legislative districts and 16 for their congressional districts (where one should note that congressional districting is not relevant in 7 states as they have only one member of Congress).  Further examples of what are “required” or “allowed” to be considered include preservation of political subdivision lines (45 states); preservation of “district cores” (8 states); and protection of incumbents (8 states).  Interestingly, 10 states explicitly prohibit consideration of the protection of incumbents.  And various states include other factors to consider or not consider as well.

But many, indeed most, of these considerations are left vague.  What does it mean that “communities of interest” are to be preserved where possible?  Who defines what the relevant communities are?  What is the district “core” that is to be preserved?  And as discussed above, there is a similar issue with the stated objective of “compactness”, as while 38 states call for it, only Colorado and Iowa are clear on how it is defined (but then vague on what trade-offs are to be accepted against other objectives).

The result of such multiple objectives, mostly vaguely defined and with no guidance on trade-offs, is that it is easy to come up with the heavily gerrymandered maps we have seen and the resulting strong bias in favor of one political party over the other.  Any district can be rationalized in terms of at least one of the vague objectives (such as preserving a “community of interest”).  These are loopholes which allow the politicians to draw maps favorable to themselves, and should be eliminated.

d)  Racial Preferences: The US has a long history of using gerrymandering (as well as other measures) to effectively disenfranchise minority groups, in particular African-Americans.  This has been especially the case in the American South, under the Jim Crow laws that were in effect through to the 1960s.  The Voting Rights Act of 1965 aimed to change this.  It required states (in particular under amendments to Section 2 passed in 1982 when the Act was reauthorized) to ensure minority groups would be able to have an effective voice in their choice of political representatives, including, under certain circumstances, through the creation of congressional and other legislative districts where the previously disenfranchised minority group would be in the majority (“majority-minority districts”).

However, it has not worked out that way.  Indeed, the creation of majority-minority districts, with African-Americans packed into as small a number of districts as possible and with the rest then scattered across a large number of remaining districts, is precisely what one would do under classic gerrymandering (packing and cracking) designed to limit, not enable, the political influence of such groups.  With the passage of these amendments to the Voting Rights Act in 1982, and then a Supreme Court decision in 1986 which upheld this (Thornburg v. Gingles), Republicans realized in the redistricting following the 1990 census that they could then, in those states where they controlled the process, use this as a means to gerrymander districts to their political advantage.  Newt Gingrich, in particular, encouraged this strategy, and the resulting Republican gains in the South in 1992 and 1994 were an important factor in leading to the Republican take-over of the Congress following the 1994 elections (for the first time in 40 years), with Gingrich then becoming the House Speaker.

Note also that while the Supreme Court, in a 5-4 decision in 2013, essentially gutted a key section of the Voting Rights Act, the section they declared to be unconstitutional was Section 5.  This was the section that required pre-approval by federal authorities of changes in voting statutes in those jurisdictions of the country (mostly the states of the South) with a history of discrimination as defined in the statute.  Left in place was Section 2 of the Voting Rights Act, the section under which the gerrymandering of districts on racial lines has been justified.  It is perhaps not surprising that Republicans have welcomed keeping this Section 2 while protesting Section 5.

One should also recognize that this racial gerrymandering of districts in the South has not led to most African-Americans in the region being represented in Congress by African-Americans.  One can calculate from the raw data (reported here in Ballotpedia, based on US Census data), that as of 2015, 12 of the 71 congressional districts in the core South (Louisiana, Mississippi, Alabama, Georgia, South Carolina, North Carolina, Virginia, and Tennessee) had a majority of African-American residents.  These were all just a single district in each of the states, other than two in North Carolina and four in Georgia.  But the majority of African Americans in those states did not live in those twelve districts.  Of the 13.2 million African-Americans in those eight states, just 5.0 million lived in those twelve districts, while 8.2 million were scattered around the remaining districts.  By packing as many African-Americans as possible in a small number of districts, the Republican legislators were able to create a large number of safe districts for their own party, and the African-Americans in those districts effectively had little say in who was then elected.

The Voting Rights Act was an important measure forward, drafted in reaction to the Jim Crow laws that had effectively undermined the right to vote of African-Americans.  And defined relative to the Jim Crow system, it was progress.  However, relative to a system that draws up district lines in a fair and unbiased manner, it would be a step backwards.  A system where minorities are packed into a small number of districts, with the rest then scattered across most of the districts, is just standard gerrymandering designed to minimize, not to ensure, the political rights of the minority groups.

E.  Conclusion

Politicians drawing district lines to favor one party and to ensure their own re-election fundamentally undermines democracy.  Supreme Court justices have themselves called it “distasteful”.  However, to address gerrymandering the court has sought some measure which could be used to ascertain whether the resulting voting outcomes were biased to a degree that could be considered unconstitutional.

But this is not the right question.  One does not judge other aspects of whether the voting process is fair or not by whether the resulting outcomes were by some measure “excessively” affected or not.  It is not clear why such an approach, focused on vote outcomes, should apply to gerrymandering.  Rather, the focus should be on whether the process followed was fair and unbiased or not.

And one can certainly define a fair and unbiased process to draw district lines.  The key is that the process, once established, should be automatic and follow the agreed set of basic principles that define what the districts should be – that they should be of similar population, compact, contiguous, and where possible and consistent with these principles, follow the lines of existing political jurisdictions.

One such process was outlined above.  But there are other possibilities.  The key is that the courts should require, in the name of ensuring a fair vote, that states must decide on some such process and implement it.  And the citizenry should demand the same.

Market Competition as a Path to Making Medicare Available for All

A.  Introduction

Since taking office just two years ago, the Trump administration has done all it legally could to undermine Obamacare.  The share of the US population without health insurance had been brought down to historic lows under Obama, but they have now moved back up, with roughly half of the gains now lost.  The chart above (from Gallup) traces its path.

This vulnerability of health cover gains to an antagonistic administration has led many Democrats to look for a more fundamental reform that would be better protected.  Many are now calling for an expansion of the popular and successful Medicare program to the full population – it is currently restricted just to those aged 65 and above.  Some form of Medicare-for-All has now been endorsed by most of the candidates that have so far announced they are seeking the Democratic nomination to run for president in 2020, although the specifics differ.

But while Medicare-for-All is popular as an ultimate goal, the path to get there as well as specifics on what the final structure might look like are far from clear (and differ across candidates, even when different alternatives are each labeled “Medicare-for-All”).  There are justifiable concerns on whether there will be disruptions along the way.  And the candidates favoring Medicare-for-All have yet to set out all the details on how that process would work.

But there is no need for the process to be disruptive.  The purpose of this blog post is to set out a possible path where personal choice in a system of market competition can lead to a health insurance system where Medicare is at least available for all who desire it, and where the private insurance that remains will need to be at least as efficient and as attractive to consumers as Medicare.

The specifics will be laid out below, but briefly, the proposal is built around two main observations.  One is that Medicare is a far more efficient, and hence lower cost, system than private health insurance is in the US.  As was discussed in an earlier post on this blog, administrative expenses account for only 2.4% of the cost of traditional Medicare.  All the rest (97.6%) goes to health care providers.  Private health insurers, in contrast, have non-medical expenses of 12% of their total costs, or five times as much.  Medicare is less costly to administer as it is a simpler system and enjoys huge economies of scale.  Private health insurers, in contrast, have set up complex systems of multiple plans and networks of health care providers, pay very generous salaries to CEOs and other senior staff who are skilled at operating in the resulting highly fragmented system, and pay out high profits as well (that in normal years account for roughly one-quarter of that 12% margin).

With Medicare so much more efficient, why has it not pushed out the more costly private insurance providers?  The answer is simple:  Congress has legislated that Medicare is not allowed to compete with them.  And that is the second point:  Remove these legislated constraints, and allow Medicare-managed plans to compete with the private insurance companies (at a price set so that it breaks even).  Americans will then be able to choose, and in this way transition to a system where enrollment in Medicare-managed insurance services is available to all.  And over time, such competition can be expected to lead most to enroll in the Medicare-managed options.  They will be cheaper for a given quality, due to Medicare’s greater efficiency.

There will still be a role for private insurance.  For those competing with Medicare straight on, the private insurers that remain will have to be able to provide as good a product at as good a cost.  But also, private insurers will remain to offer insurance services that supplement what a Medicare insurance plan would provide.  Such optional private insurance would cover services (such as dental services) or costs (Medicare covers just 80% after the deductible) that the basic Medicare plan does not cover.  Medicare will then be the primary insurer, and the private insurance the secondary.  And, importantly, note that in this system the individual will still be receiving all the services that they receive under their current health plans.  This addresses the concern of some that a Medicare-like plan would not be as complete or as comprehensive as what they might have now.  With the optional supplemental, their insurance could cover exactly what they have now, or even more.  Medicare would be providing a core level of coverage, and then, for those who so choose, supplemental private plans can bring the coverage to all that they have now.  But the cost will be lower, as they will gain from the low cost of Medicare for those core services.

More specifically, how would this work?

B.  Allow Medicare to Compete in the Market for Individual Health Insurance Plans

A central part of the Obamacare reforms was the creation of a marketplace where individuals, who do not otherwise have access to a health insurance plan (such as through an employer), could choose to purchase an individual health insurance plan.  As originally proposed, and indeed as initially passed by the House of Representatives, a publicly managed health insurance plan would have been made available (at a premium rate that would cover its full costs) in addition to whatever plans were offered by private insurers.  This would have addressed the problem in the Obamacare markets of often excessive complexity (with constantly changing private plans entering or leaving the different markets), as well as limited and sometimes even no competition in certain regions.  A public option would have always been available everywhere.  But to secure the 60 votes needed to pass in the Senate, the public option had to be dropped (at the insistence of Senator Joe Lieberman of Connecticut).

It could, and should, be introduced now.  Such a public option could be managed by Medicare, and could then piggy-back on the management systems and networks of hospitals, doctors, and other health care providers who already work with Medicare.  However, the insurance plan itself would be broader than what Medicare covers for the elderly, and would meet the standards for a comprehensive health care plan as defined under Obamacare.  Medicare for the elderly is, by design, only partial (for example, it covers only 80% of the cost, after a modest deductible), plus it does not cover services such as for pregnancies.  A public option plan administered by Medicare in the Obamacare marketplace would rather provide services as would be covered under the core “silver plan” option in those markets (the option that is the basis for the determination of the subsidies for low-income households).  And one might consider offering as options plans at the “bronze” and “gold” levels as well.

Such a Medicare-managed public option would provide competition in the Obamacare exchanges.  An important difficulty, especially in the Republican states that have not been supportive of offering such health insurance, is that in certain states (or counties within those states) there have been few health insurers competing with each other, and indeed often only one.  The exchanges are organized by state, and even when insurers decide to offer insurance cover within some state, they may decide to offer it only to residents of certain counties within that state.  The private insurers operate with an expensive business model, built typically around organizing networks of doctors with whom they negotiate individual rates for health care services provided.  It is costly to set this up, and not worthwhile unless they have a substantial number of individuals enrolled in their particular plan.

But one should also recognize that there is a strong incentive in the current Obamacare markets for an individual insurer to provide cover in a particular area if no other insurer is there to compete with them.  That is because the federal subsidy to a low-income individual subscribing to an insurance plan depends on the difference between what insurers charge for a silver-level plan (specifically the second lowest cost for such a plan, if there are two or more insurers in the market) and some given percentage of that individual’s household income (with that share phased out for higher incomes).  What that means is that with no other insurer providing competition in some locale, the one that is offering insurance can charge very high rates for their plans and then receive high federal subsidies.  The ones who then lose in this (aside from the federal taxpayer) are households of middle or higher income who would want to purchase private health insurance, but whose income is above the cutoff for eligibility for the federal subsidies.

The result is that the states with the most expensive health insurance plan costs are those that have sought to undermine the Obamacare marketplace (leading to less competition), while the lowest costs are in those states that have encouraged the Obamacare exchanges and thus have multiple insurers competing with each other.  For example, the two states with the most expensive premium rates in 2019 (average for the benchmark silver plans) were Wyoming (average monthly premium for a 40-year-old of $865, before subsidies) and Nebraska (premium of $838).  Each had only one health insurer provider on the exchanges.  At the other end, the five states with the least expensive average premia, all with multiple providers, were Minnesota ($326), Massachusetts ($332), Rhode Island ($336), Indiana ($339), and New Jersey ($352).  These are not generally considered to be low-cost states, but the cost of the insurance plans in Wyoming and Nebraska were two and a half times higher.

The competition of a Medicare-managed public provider would bring down those extremely high insurance costs in the states with limited or no competition.  And at such lower rates, the total being spent by the federal government to support access by individuals to health insurance will come down.  But to achieve this, Congress will have to allow such competition from a public provider, and management through Medicare would be the most efficient way to do this.  One would still have any private providers who wish to compete.  But consumers would then have a choice.

C.  Allow Medicare to Compete in the Market for Employer-Sponsored Health Insurance Cover

While the market for individual health insurance cover is important to extending the availability of affordable health care to those otherwise without insurance cover, employer-sponsored health insurance plans account for a much higher share of the population.  Excluding those with government-sponsored plans via Medicare, Medicaid, and other such public programs, employer-sponsored plans accounted for 76% of the remaining population, individual plans for 11%, and the uninsured for 14%.

These employer-sponsored plans are dominant in the US for historical reasons.  They receive special tax breaks, which began during World War II.  Due to the tax breaks, it is cheaper for the firm to arrange for employee health insurance through the firm (even though it is in the end paid for by the employee, as part of their total compensation package), than to pay the employee an overall wage with the employee then purchasing the health insurance on his or her own.  The employer can deduct it as a business expense.  But this has led to the highly fragmented system of health insurance cover in the US, with each employer negotiating with private insurers for what will be provided through their firm, with resulting high costs for such insurance.

As many have noted, no one would design such a health care funding system from scratch.  But it is what the US has now, and there is justifiable concern over whether some individuals might encounter significant disruptions when switching over to a more rational system, whether Medicare-for-All or anything else.  It is a concern which needs to be respected, as we need health care treatment when we need it, and one does not want to be locked out of access, even if temporarily, during some transition.  How can this risk be avoided?

One could manage this by avoiding a compulsory switch in insurance plans, but rather provide as an option insurance through a Medicare-managed plan.  That is, a Medicare-managed insurance plan, similar in what is covered to current Medicare, would be allowed to compete with current insurance providers, and employers would have the option to switch to that Medicare plan, either immediately or at some later point, as they wish, to manage health insurance for their employees.

Furthermore, this Medicare-managed insurance could serve as a core insurance plan, to be supplemented by a private insurance plan which could cover costs and health care services that Medicare does not cover (such as dental and vision).  These could be similar to Medicare Supplement plans (often called a Medigap plan), or indeed any private insurance plan that provides additional coverage to what Medicare provides.  Medicare is then the primary insurer, while the private supplemental plan is secondary and covers whatever costs (up to whatever that supplemental plan covers) that are not paid for under the core Medicare plan.

In this way, an individual’s effective coverage could be exactly the same as what they receive now under their current employer-sponsored plan.  Employers would still sponsor these supplemental plans, as an addition to the core Medicare-managed plan that they would also choose (and pay for, like any other insurance plan).  But the cost of the Medicare-managed plus private supplemental plans would typically be less than the cost of the purely private plans, due to the far greater efficiency of Medicare.  And with this supplemental coverage, one would address the concern of many that what they now receive through their employer-sponsored plan is a level of benefits that are greater than what Medicare itself covers.  They don’t want to lose that.  But with such supplemental plans, one could bring what is covered up to exactly what they are covering now.

This is not uncommon.  Personally, I am enrolled in Medicare, while I have (though my former employer) additional cover by a secondary private insurer.  And I pay monthly premia to Medicare and through my former employer to the private insurer for this coverage (with those premia supplemented by my former employer, as part of my retirement package).  With the supplemental coverage, I have exactly the same health care services and share of costs covered as what I had before I became eligible for Medicare.  But the cost to me (and my former employer) is less.  One should recognize that for retirees this is in part due to Medicare for the elderly receiving general fiscal subsidies through the government budget.  But the far greater efficiency of Medicare that allows it to keep its administrative costs low (at just 2.4% of what it spends, with the rest going to health care service providers, as compared to a 12% cost share for private insurance) would lead to lower costs for Medicare than for private providers even without such fiscal support.

Such supplemental coverage is also common internationally.  Canada and France, for example, both have widely admired single-payer health insurance systems (what Medicare-for-All would be), and in both one can purchase supplemental coverage from private insurers for costs and services that are not covered under the core, government managed, single-payer plans.

Under this proposed scheme for the US, the decision by a company of whether to purchase cover from Medicare need not be compulsory.  The company could, if it wished, choose to remain with its current private insurer.  But what would be necessary would be for Congress to remove the restriction that prohibits Medicare from competing with private insurance providers.  Medicare would then be allowed to offer such plans at a price which covers its costs.  Companies could then, if they so chose, purchase such core cover from Medicare and additionally, to supplement such insurance with a private secondary plan.  One would expect that given the high cost of medical services everywhere (but especially in the US) they will take a close look at the comparative costs and value provided, and choose the plan (or set of plans) which is most advantageous to them.

Over time, one would expect a shift towards the Medicare-managed plans, given its greater efficiency.  And private plans, in order to be competitive for the core (primary) insurance available from Medicare, would be forced to improve their own efficiency, or face a smaller and smaller market share.  If they can compete, that is fine.  But given their track record up to now, one would expect that they will leave that market largely to Medicare, and focus instead on providing supplemental coverage for the firms to select from.

D.  Avoiding Cherry-Picking by the Private Insurers

An issue to consider, but which can be addressed, is whether in such a system the private insurers will be able to “cherry-pick” the more lucrative, lower risk, population, leaving those with higher health care costs to the Medicare-managed options.  The result would be higher expenses for the public options, which would require them either to raise their rates (if they price to break even) or require a fiscal subsidy from the general government budget.  And if the public options were forced to raise their rates, there would no longer be a level playing field in the market, effective competition would be undermined, and lower-efficiency private insurers could then remain in the market, raising our overall health system costs.

This is an issue that needs to be addressed in any insurance system, and was addressed for the Obamacare exchanges as originally structured.  While the Trump administration has sought to undermine these, they do provide a guide to what is needed.

Specifically, all insurers on the Obamacare exchanges are required to take on anyone in the geographic region who chooses to enroll in their particular plan, even if they have pre-existing conditions.  This is the key requirement which keeps private insurers from cherry-picking lower-cost enrollees, and excluding those who will likely have higher costs.  However, this then needs to be complemented with: 1) the individual mandate; 2) minimum standards on what constitutes an adequate health insurance plan; and 3) what is in essence a reinsurance system across insurers to compensate those who ended up with high-cost enrollees, by payments from those insurers with what turned out to be a lower cost pool (the “risk corridor” program).  These were all in the original Obamacare system, but: 1) the individual mandate was dropped in the December 2017 Republican tax cut (after the Trump administration said they would no longer enforce it anyway);  2) the Trump administration has weakened the minimum standards; and 3) Senator Marco Rubio was able in late 2015 to insert a provision in a must-pass budget bill which blocked any federal spending to even out payments in the risk corridor program.

Without these measures, it will be impossible to sustain the requirement that insurers provide access to everyone, at a price which reflects the health care risks of the population as a whole. With no individual mandate, those who are currently healthy could choose to free-ride on the system, and enroll in one of the health care plans only when they might literally be on the way to the hospital, or, in a less extreme example, only aim to enroll at the point when they know they will soon have high medical expenses (such as when they decide to have a baby, or to have some non-urgent but expensive medical procedure done).  The need for good minimum standards for health care plans is related to this.  Those who are relatively healthy might decide to enroll in an insurance plan that covers little, but, when diagnosed with say a cancer or some other such medical condition, then and only then enroll in a medical insurance plan that provides good cover for such treatments.  The good medical insurance plans would either soon go bankrupt, or be forced also to reduce what they cover in a race to the bottom.

Finally, risk sharing across insurers is in fact common (it is called reinsurance), and was especially important in the new Obamacare markets as the mix of those who would enroll in the plans, especially in the early years, could not be known.  Thus, as part of Obamacare, a system of “risk corridors” was introduced where insurers who ended up with an expensive mix of enrollees (those with severe medical conditions to treat) would be compensated by those with an unexpectedly low-cost mix of enrollees, with the federal government in the middle to smooth out the payments over time.  The Congressional Budget Office estimated in 2014 that while the payment flows would be substantial ($186 billion over ten years) the inflows would match the outflows, leaving no net budgetary cost.  However, Senator Rubio’s amendment effectively blocked this, as he (incorrectly) characterized the risk corridor program to be a “bailout” fund for the insurers.  But the effect of Rubio’s amendment was to lead smaller insurers and newly established health care coops to exit the market (as they did not have the financial resources to wait for inflows and outflows to even out), reducing competition by leaving only a limited number of the large, deep pocket, insurers who could survive such a wait, and then, with the more limited competition, jack up the insurance premia rates.  The result, as we will discuss immediately below, was to increase, not decrease, federal budgetary costs, while pricing out access to the markets of those with incomes too high to receive the federal subsidies.

Despite these efforts to kill Obamacare and block the extension of health insurance coverage to those Americans who have not had it, another provision in the Obamacare structure has allowed it to survive, at least so far and albeit in a more restrictive (but higher cost) form.  And that is due to the way the system of federal subsidies are provided to those of lower-income households in order to make it possible for them to purchase health insurance at a price they can afford.  As discussed above, these federal subsidies cover the difference between some percentage of a household’s income (with that percentage depending on their income) and the cost of a benchmark silver-level plan in their region.

More specifically, those with incomes up to 400% of the federal poverty line (400% would be $49,960 for an individual in 2019, or $103,000 for a family of four) are eligible to receive a federal subsidy to purchase a qualifying health insurance plan.  The subsidy is equal to the difference between the cost of the benchmark silver-level plan and a percentage of their income, on a sliding scale that starts at 2.08% of income for those earning 133% of the poverty line, and goes up to 9.86% for those earning 400%.  The mathematical result of this is that if the cost of the benchmark health insurance plan goes up by $1, they will receive an extra $1 of subsidy (as their income, and hence their contribution, is still the same).

The result is that measures such as the blocking of the risk corridor program by Senator Rubio’s amendment, or the Trump administration’s decision not to enforce (and then to remove altogether) the individual mandate, or the weakening the standards of what has to be covered in a qualifying health insurance plan, have all had the effect of the insurance companies being forced to raise the insurance premium rates sharply.  While those with incomes up to 400% of the poverty line were not affected by this (they pay the same share of their income), those with incomes higher than the 400% limit have been effectively priced out of these markets.  Only those (whose incomes are above that 400%) with some expensive medical condition might remain, but this then further biases the risk pool to those with high medical expenses.  Finally and importantly, these measures to undermine the markets have led to higher, not lower, federal budgetary costs, as the federal subsidies go up dollar for dollar with the higher premium rates.

So we know how to structure the markets to ensure there will be no cherry-picking of low risk, low cost, enrollees, leaving the high-cost patients for the Medicare-managed option.  But it needs to be done.  The requirement that all the insurance plans accept any enrollee will stop this.  This then needs to be complemented with the individual mandate, minimum standards for the health insurance plans, and some form of risk corridors (reinsurance) program.  The issue is not that this is impossible to do, but rather that the Trump administration (and Republicans in Congress) have sought to undermine it.

This discussion has been couched in terms of the market for individual insurance plans, but the same principles apply in the market for employer-sponsored health insurance.  While not as much discussed, the Affordable Care Act also included an employer mandate (phased in over time), with penalties for firms with 50 employees or more who do not offer a health insurance plan meeting minimum standards to their employees.  There were also tax credits provided to smaller firms who offer such insurance plans.

But the cherry-picking concern is less of an issue for such employer-based coverage than it is for coverage of individuals.  This is because there will be a reasonable degree of risk diversification across individuals (the mix of those with more expensive medical needs and those with less) even with just 100 employees or so.  And smaller firms can often subscribe together with others in the industry to a plan that covers them as a group, thus providing a reasonable degree of diversification.  With the insurance covering everyone in the firm (or group of firms), there will be less of a possibility of trying to cherry-pick among them.

The possibility of cherry-picking is therefore something that needs to be considered when designing some insurance system.  If not addressed, it could lead to a loading of the more costly enrollees onto a public option, thus increasing its costs and requiring either higher premia to subscribe to it or government budget support.  But we know how to address the issue.  The primary tool, which we should want in any case, is to require health insurers to be open to any enrollees, and not block those with pre-existing conditions.  But this then needs to be balanced with the individual mandate, minimum standards for what qualifies as a genuine health insurance plan, and means to reinsure exceptional risks across insurers.  The Obamacare reforms had these, and one cannot say that we do not know how to address the issue.

E.  Conclusion

These proposals are not radical.  And while there has been much discussion of allowing a public option to provide competition for insurance plans in the Obamacare markets, I have not seen much discussion of allowing a Medicare-managed option in the market for employer-sponsored health insurance plans.  Yet the latter market is far larger than the market for private, individual, plans, and a key part of the proposal is to allow such competition here as well.

Allowing such options would enable a smooth transition to Medicare-managed health insurance that would be available to all Americans.  And over time one would expect many if not most to choose such Medicare-managed options. Medicare has demonstrated that it is managed with far great efficiency than private health insurers, and thus it can offer better plans at lower cost than private insurers currently do.  If the private insurers are then able to improve their competitiveness by reducing their costs to what Medicare has been able to achieve, then they may remain.  But I expect that most of them will choose to compete in the markets for supplemental coverage, offering plans that complement the core Medicare-managed plan and which would offer a range of options from which employers can choose for their employer-sponsored health insurance cover.

Conservatives may question, and indeed likely will question, whether government-managed anything can be as efficient, much less more efficient, than privately provided services.  While the facts are clear (Medicare does exist, we have the data on what it costs, and we have the data on what private health insurance costs), some will still not accept this.  However, with such a belief, conservatives should not then be opposed to allowing Medicare-managed health insurance options to compete with the private insurers.  If what they believe is true, the publicly-managed options would be too expensive for an inferior product, and few would enroll in it.

But I suspect that the private insurers realize they would not be able to compete with the Medicare-managed insurance options unless they were able to bring their costs down to a comparable level.  And they do not want to do this as they (and their senior staff) benefit enormously from the current fragmented, high cost, system.  That is, there are important vested interests who will be opposed to opening up the system to competition from Medicare-managed options.  It should be no surprise that they, and the politicians they contribute generously to, will be opposed.

The Savings from Lower Administrative Costs in a Medicare-for-All System

 

A.  Introduction

One of the most important issues facing the US is our high cost of health care.  We have a terribly inefficient system, with the highest costs in the world (reaching 18% of GDP, which is 50% more than in the second most expensive country and close to double the average of the OECD countries), yet with only mediocre results compared to other countries.  It is a market-based system, with competing health care providers (doctors, hospitals, and so on) and competing private health insurance companies.  However, the extremely wide variation in prices for the same treatments and procedures (often varying by a factor of ten or more) is a clear sign that this market is not working as it should.  And those skilled at exploiting these inefficiencies are able to profit handsomely, with CEOs and other senior staff of the major private insurance companies paid well.  Indeed, total compensation packages have occasionally even topped $100 million.

Despite so much spending, the US is still far from providing affordable access to health care for our entire population.  While the situation improved substantially following the introduction of Obamacare (with the share of the US population without any form of health insurance falling by about 40% after Obamacare went into effect), the Trump administration is doing all it can to reverse these gains.

Faced with these issues, a number of analysts and politicians (Senator Bernie Sanders as just the most prominent) have proposed that the US move to what is termed a “single-payer” system, such as what they have in Canada, France, and a number of other countries.  In a single-payer system, doctors, hospitals, and healthcare service providers remain as they are now, as independent and typically private agents serving their patients.  The only difference is that there is only one insurer, run as a government agency.  This is what the US has in the popular Medicare system, but Medicare is restricted only to those aged 65 and above.  Hence in the US context, a single-payer system for all is often referred to as “Medicare-for-All”.

A key question is whether a Medicare-for-All system would reduce the high cost of healthcare in the US.  Those opposed to any such government managed programs have argued that costs would rise.  And they have issued reports with headline findings that can only be interpreted as being deliberately misleading.  For example, in late July, Charles Blahous (a former Bush administration official) issued an analysis through the Mercatus Center of George Mason University (a center that has received major funding from the Koch Brothers) that concluded government spending would rise by $32.6 trillion over ten years under a Medicare-for-All system.  This has received a good deal of press coverage, and is being used (as I write this) in a number of ads being televised by Republican candidates in the 2018 midterm elections.

But while worded carefully, this claim is misleading in the extreme.  First of all, that such high amounts will be spent on health care should not be a surprise, when added up over ten years.  Total US health care spending is expected to reach $3.7 trillion this year, would rise to $5.7 trillion by 2026 if nothing is done, and would total $45.0 trillion over the ten-year period of 2017 to 2026 (using National Health Expenditure data and forecasts, which will be discussed in detail below).  The portion of this covered by various forms of personal health insurance (both private and public, such as Medicare, but excluding the military and the VA) is expected to reach $2.7 trillion this year, $4.2 trillion by 2026, and would sum to $33.1 trillion over the ten years 2017 to 2026.

So high amounts will be spent on health care, unless measures are taken to improve efficiency and reduce costs.  In per capita terms, the US population will be spending in 2018 an average of $8,190 per person through the various forms of personal health insurance our system currently employs.  This is, without question, a lot.  It will be an estimated 17.9% of the median wage this year.  But if we had the far lower administrative costs that Medicare has been able to achieve for the health insurance it manages directly, instead of the significantly higher administrative costs incurred under a variety of mostly private health insurance plans (discussed below), the average per capita cost would be just $7,480 per person in 2018.  There would also be other savings (such as what health care providers will enjoy from a simplified system, which we will also discuss below), but the savings from those sources, while certainly significant, are harder to estimate.  The $7,480 figure simply reflects savings from lower administrative costs on the part of the insurers if we were able to achieve what Medicare already does.

Thus the correct question is whether we should prefer sending a check for $8,190 per person to Aetna, Cigna, United Healthcare, and the other insurers (and including what is paid through taxes for Medicare and other publicly managed insurance), or a check for $7,480 just to Medicare under a Medicare-for-All system.  The doctors we see would be the same, and the treatments and procedures would also be the same as what we have now.  The savings here is purely from more efficient administration of our health insurance.  That the check in one case goes just to the government, and in the other to a mix of private and public insurers, should not be, in itself, of consequence.  But the Blahous argument, in saying that we cannot afford the $32.6 trillion he forecasts for healthcare spending over ten years, is that for some reason a larger check (of $8,190) to our current mix of insurers is fine while we cannot afford to send instead a smaller check (of $7,480) if that check goes to a government entity.  This is silly.

For the nation as a whole, the savings from the greater efficiency of a Medicare-for-All system is substantial.  As we will see, it would add up to $204 billion in 2016, had this system been in place that year, growing to $365 billion by 2026.  For the ten year period from 2017 to 2026, the savings would sum to $2.9 trillion.  This is not a small sum.

This main point is that we should look at the data, and not presume certain outcomes based on ideology or political beliefs.  We will thus start in this blog post with an examination of what administrative costs actually are, for Medicare and for private insurance.  We will see that the cost for administering Medicare, for the portion of Medicare managed directly by government, is far less than what is spent to administer other health insurance, including in particular private health insurance.  There are many reasons for this, where the most important is the relative simplicity and scale of the Medicare system.  An annex to this blog will discuss in detail what these various factors are for the different health insurance systems that could be folded into a Medicare-for-All system.  We will also discuss in that annex why Medicare is able to achieve its far lower administrative costs, and address some of the arguments that have mistakenly asserted that this is not the case, despite the evidence.

Taking the administrative costs that Medicare has been able to achieve as a base, we will then calculate what the savings would add up to, per year for the US as a whole, under a Medicare-for-All system.  The basic result is depicted in the chart at the top of this post, and as noted above, the savings from greater administrative efficiency would rise from $204 billion in 2016 (had the system been in place then) to $365 billion in 2026.

These savings are substantial.  But there are also other savings, which are, however, more difficult to estimate.  The penultimate section of this post will discuss several.  They include savings that will be possible in the administrative and clerical costs at doctor’s offices and at hospitals and other healthcare facilities.  Doctors, hospitals, and other facilities must hire specialist staff to deal with the complex and fragmented system of insurance in the US, and the costs from this are substantial.  There will also be savings on the part of employers, who must now manage and oversee the contracts they have with private insurers.

A final, concluding, section will summarize the key issues and discuss briefly why such an obvious and large saving in costs has not been politically possible in the US (at least so far).  The short answer:  Vested interests profit substantially under the current fragmented system, and it should not be a surprise that they do not want to see it replaced.  With extra spending in the hundreds of billions of dollars each year, there is a lot to be gained by those skilled at operating in this fragmented system.

B.  The Cost of Administering Current Health Insurance Plans

It is often difficult to estimate what costs and savings might be under some major reform, as we do not yet know what will happen.  But this is not the case for estimating administrative costs for health insurance.  We already have excellent data on what those costs actually are for a variety of different health insurance providers, including Medicare.

The primary sources of the data are the National Health Expenditure Accounts (NHE), produced annually by the Centers for Medicare and Medicaid Services, and the Annual Report of the Medicare Trustees.  The current NHE (released in February 2018) provides detailed historical figures on health expenditures (broken down in numerous ways) through to 2016, plus forecasts for many of the series to 2026.  And the Annual Report of the Medicare Trustees (with the most recent released in June 2018), provides detailed financial accounts, including of government administrative costs, for the different components of Medicare and the supporting trust funds (with past as well as forecast expenditures and revenues).

Table 19 of the historical tables in the most recent NHE provides a detailed break down of health care expenditures in 2016 by payer (mostly various insurance programs, both public and private).  The expenditures shown include what is spent on administration by government entities (separately for state and federal, although I have aggregated the two in the table below), and for what they term the “net cost of health insurance”.  The net cost of private health insurance includes all elements of the difference between what the private insurer receives in premium payments, and what the insurer pays out for health services provided by doctors, hospitals, and so on.  Thus it includes such items as profits earned by the insurer.  For simplicity, I will use “administrative costs” to include all these elements, including profits, even though this is a broad use of the term.

Table 19 of the NHE shows Medicare expenditures for all components of Medicare on just one line.  While it shows separately the administrative costs incurred by government in the administration of Medicare (with all of it federal, as states are not involved), and the administrative costs (as defined above) incurred by private insurers for the Medicare programs that they manage, the NHE does not show separately which of those costs (government and private) are linked to which Medicare programs.

For those figures one must turn to the Medicare Trustees Annual Report.  Medicare Parts A and B are managed directly by Medicare officials, and provide payments for services by hospitals (Part A) and doctors (Part B).  Medicare Part C (also now called Medicare Advantage) is managed by private insurers on behalf of Medicare, and cover services that would otherwise be covered by Medicare directly in Medicare Parts A and B.  And the relatively recent Medicare Part D (for prescription drugs) is also managed by private insurers, either as a stand-alone cover or folded into Medicare Advantage plans.

Any such combination of numbers from two separate sources will often lead to somewhat different estimates for those figures that can be compared directly with each other.  There might be slight differences in definitions, or in concepts such as whether expenses are recorded as incurred or as paid, or something else.  But the figures which could be compared here were close.  In particular, the figure for total Medicare expenditures in calendar year 2016 was $678.8 billion in the Trustees report and $672.1 billion in the NHE, a difference of just 1%.  Of greater relative importance, the Trustees report has a figure for government administration (for all Medicare programs combined) of $9.3 billion, while the NHE has a figure of $10.5 billion.  However, while the difference between these two figures may appear to be large, what matters is not so much the difference between these two, but rather the difference (as a share of total costs) between either of these and the much higher cost share for privately managed insurance (as we will see below).  We will in any case run scenarios in Section C below with each of the two different estimates for government administrative costs in Medicare, and see that the overall effect of choosing one rather than the other is not large.

Based on these sources, the costs paid in 2016 under most of the major health insurance programs in the US were:

Current Expenditures for Health Care and for Administrative Costs 

   2016 data ($ billions)

Gross Cost

Gov’t Admin

Private Admin

Total Admin

Total   as %

Private Health Insurance

$1,123.4

$129.6

$129.6

11.5%

Medicare:

$678.8

    Gov’t Administered

$390.7

$9.3

$9.3

2.4%

    Privately Administered

$288.1

$36.3

$36.3

12.6%

Medicaid

$565.6

$24.2

$36.1

$60.3

10.7%

CHIP (Children’s Health Insurance Program)

$16.9

$1.5

$1.4

$2.9

17.3%

Worker’s Compensation

$50.7

$2.3

$16.4

$18.8

37.0%

Total: 

$2,435.3

$37.4

$219.8

$257.2

10.6%

* Medicare Gov’t Admin –   NHE estimate

$390.7

$10.5

$10.5

2.7%

Sources:  Medicare expenditures, other than private administrative costs, are from the 2018 Medicare Trustees Annual Report.  All other figures are from the NHE accounts, Table 19 (historical), released in February 2018.

 

The table leaves out the health care programs of the Department of Defense and the Veterans’ Administration (as they operate under special conditions, with many of the services provided directly), as well as a number of smaller government and other programs (such as for Native Americans, or worksite or school-based health programs).  Those programs have been set aside here due to their special nature.  But while significant, the $2,435.3 billion of expenditures in the programs listed in the table account for 89% of the total spent in the US in 2016 on all health care services to individuals covered through either some form of health insurance or third-party payer.  While some portion of the remaining 11% could perhaps be folded into a Medicare-for-All system (thus leading to even higher savings), we will focus in this post on the 89%.

The table shows that the administrative cost ratios vary over a wide range, from just 2.4% for the health insurance Medicare administers directly (using the Medicare Trustees figures, or 2.7% based on the NHE figures), up to 37% for the administration of the health portions of Workers’ Compensation.  The administrative cost for direct private health insurance is 11.5% on average, while the administrative cost for the privately managed portions of Medicare (Medicare Part C and Part D) is a similar, but somewhat higher, 12.6%.

This wide variation in administrative cost ratios provides clues on what is going on.  These will be discussed in the Annex to this post for those interested.  Briefly, the programs (other than government-administered Medicare) are complex, fragmented, have to make case by case assessments of whether the claim is eligible (as for Workers’ Compensation plans) or whether the individual meets the enrollment requirements (as for Medicaid and CHIP – the Children’s Health Insurance Program), and do not benefit from the scale economies that Medicare enjoys.

But while such explanations are of interest in understanding why Medicare can be provided at such a lower cost than private and other insurance, the key finding, in the end, is that it is.  The data are clear.  The next section will use this to calculate what overall savings would be at the national level if we were to move to a system with the cost efficiencies of Medicare.

C.  National Savings in Administrative Costs from a Medicare-for-All System

Medicare (for the portion managed directly by government) costs far less to administer than our current health insurance system with its complex and fragmented mix of plans (most of which are privately managed).  Only 2.4% of the cost of the portion of Medicare managed directly by government was needed for administration of the program in 2016, while the costs to administer the other identified health insurance programs range between 10.7% (for Medicaid) and 11.5% (for private health insurance) to 37% (for workers’ compensation plans).  With $2.4 trillion spent on these health insurance plans (in 2016), the savings from a more efficient approach to administration will be significant.

An estimate of what the nation-wide savings would be can then be calculated based on figures in the NHE forecasts of health expenditures (by health insurance program) for the 2017 to 2026 period (Table 17 of the forecasts), coupled with the Medicare system forecasts provided in the Medicare Trustees Annual Report.  Applying the share of administrative costs in the portion of Medicare managed directly by government (2.4% in 2016, but then using the year by year forecasts of the Medicare trustees for the full forecast period), rather than what the administrative cost ratios would have been for the other programs that would be folded into a Medicare-for-All system (private health insurance, Medicaid, CHIP, and Workers’ Compensation), using their 2016 cost ratios, yields the savings shown in the chart above.

Had a Medicare-for-All system been in effect in 2016, we would have saved $204 billion in administration, with this growing over time (with the overall growth in health expenditures over time) to an estimated $365 billion by 2026.  The savings over ten years (2017 to 2026) would be $2.9 trillion, and would by itself bring down the cost of health care (for the programs covered) from a ten year total of $33.1 trillion forecast now, to $30.2 trillion with the reform.  There would be other savings as well (discussed in the next section below), but they are more difficult to quantify.  However, a very rough estimate is that they could be double the magnitude of the savings from the more efficient administration of health insurance alone.  See the next section below for a discussion.

The calculations here required a mix of data from the NHE and from the Medicare Trustees report, and as I noted above, the estimates of the cost of government administration in these two sources were not quite the same.  The Medicare Trustees report gave a figure for government administrative costs of the overall Medicare system of $9.3 billion in 2016 (and then year by year forecasts going forward to 2026), while the NHE estimate was $10.5 billion in 2016.  As shown in the last line of the table above, the $10.5 billion figure would lead to an administrative cost share of 2.7%, compared to the 2.4% figure if the cost was at the NHE figure of $10.5 billion.  The savings in moving to a Medicare-for-All system would then not be as large.

But the impact of this would be small.  One can calculate what the cost savings would be assuming government administration would cost 2.7% rather than the 2.4% figure in the Medicare Trustees report (with also its forecasts going forward), using the same process as above.  The total national savings would have been $199 billion in 2016 rather than $204 billion, growing to savings of $345 billion in 2026 rather than $365 billion.  The ten-year total savings would be $2.7 trillion rather than $2.9 trillion.  The savings under either estimate would be large.

D.  Other Efficiency Savings in a Medicare-for-All System 

The $2.9 trillion (or $2.7 trillion) figure for savings over ten years from moving to a Medicare-for-All system comes solely from the lower administrative costs that we know can be achieved in a Medicare type system – we know because we know what Medicare in fact costs.  But there are other savings as well that will be gained by moving to this simpler system, and this section will discuss several of them.  How much would be saved is more difficult to estimate, so we have kept these savings separate.  But some rough figures are possible.

But before going to these other sources of efficiency gains, we should mention one possible source of lower costs which has often been discussed by others, but which I would not include here.  It has often been asserted that Medicare pays doctors, hospitals, and other health service providers, less than what other insurance plans pay.  But first, it is not clear whether this is in fact true.  It might be, but I have not seen reliable data to back it up.  The problem is that most of what is paid to doctors, hospitals, and others by private health insurance plans is now at network negotiated rates, and these rates are kept as trade secrets.  It is not in the interest of the doctors and other health care providers to reveal them (as it would undermine their bargaining power with other insurers), nor in the interest of the insurance companies to reveal them (as other insurers would gain a competitive advantage in their negotiations with the providers).  Indeed, secrecy clauses are common in the negotiated agreements.

In the absence of such publicly available data, one is limited to citing either anecdotal cases, or statements by various health care providers who have a vested interest in trying to persuade Medicare to pay them more.  Neither will be reliable.

But second, and aside from this difficulty in knowing what the truth really is, the focus in this blog post is solely on the gains that could be achieved by moving to a more efficient system.  If doctors and hospitals are indeed paid less under Medicare, costs would go down, but this would be in the nature of what economists call a transfer payment, not an efficiency gain.  Efficiency gains come from being able to do more with less (e.g. administer more at a lower cost).  Transfers are a payment from one party to another, with no net gain – the gain to one party is offset by a loss of the same amount to the other.

Excluding such transfers (if they in fact exist), what are other efficiency gains that one would obtain with a Medicare-for-All system (other than the gains from lower administrative costs for the health insurance itself, which we estimated above)?  There are several:

a)  Doctors offices now need to employ specialists in handling billing, who are able to handle the numerous (and often changing) health insurance plans their patients are enrolled in.  These specialists are critical, and good ones are paid well, as they are needed if the doctors want to be paid in full for the services they provided.  Based on personal experience, I am often amazed that the staff good at this are indeed able to stay on top of the numerous health insurance plans they must deal with (I find it difficult enough to stay on top of just my own).  While essential to ensuring the doctors can survive financially, such staff are a significant cost.  While one will still need to ensure proper billing under any Medicare-for-All system, it would be far simpler.

b)  Similarly, hospitals and other medical facilities need to employ such specialist staff to handle billing.  The same issues arise.  They must contend with numerous health insurance plans, each with its own set of requirements, and ensure the bills they file with the insurers will compensate the facilities properly (and from their perspective most advantageously) for the services provided.  This is not easy to do under the present highly complex system, and would be far simpler under Medicare-for-All.

c)  There are also costs that must be borne by employers in managing the primarily employer-based health insurance system used in the US.  The employer must work out which health insurance provider would work best for them, negotiate a complex but critical and expensive contract, and then oversee the insurer to ensure they are providing services in accordance with that contract.  Firms must often hire specialist (and expensive) consultants to advise them on how best to do this.  With the cost of healthcare so high in the US, these health insurance contracts are costly.  It is important to get them right.  But all this necessary oversight is also a major cost for the firm.

How much might then be saved from such sources by moving to a more efficient Medicare-for-All system?  This is not so easy to estimate, but one study looked at the costs in the US from such expenses and compared them to similarly measured expenses in Canada, which has a single-payer system.  As noted above, a Medicare-for-All system is a single-payer system, and thus (along with the other similarities between the US and Canadian economies, such as the similar levels of income) the difference between what the costs are in the US and the costs in Canada for the same services can provide an estimate of how much might be saved by moving to a single-payer, Medicare-for-All system.

The study was prepared by Steffie Woolhander (lead author – Harvard Medical School), along with Terry Campbell, and David Himmelstein, and was published in the New England Journal of Medicine, August 2003.  They drew from a variety of sources to arrive at their estimates, and some had to be approximate.  The data is also from 1999 – almost 20 years ago.  Things may have changed, but with the upward trend in costs over time in the US, the cost shares now are likely even worse.  The authors presented the basic figures in per capita terms (and all in US dollars), and I have scaled them up to what they would be in 2016 (assuming the shares are unchanged) in accordance with the overall growth in US personal health care spending (from the NHE accounts).

The results are:

Admin costs 1999/2016

Per capita in $

Per capita in $

Per capita     in $

Total in $ billion

US –    1999

Canada – 1999

US excess – 1999

US excess – 2016

Insurance overheads

$259

$47

$212

$156.9

Doctors, hospitals, other

$743

$252

$491

$363.3

    Doctors only

$324

$107

$217

$160.6

    Hospitals & other facilities

$419

$145

$274

$202.8

Employers’ admin costs

$57

$8

$49

$36.3

Total:

$1,059

$307

$752

$556.5

Total excluding Insurance overheads

$399.6

Source:  Calculated from Woolhander, Campbell, and Himmelstein, “Costs of Health Care Administration in the United States and Canada”, New England Journal of Medicine, 349: 768-775, August 21, 2003.

Note:  “Insurance overheads” exclude health insurer profits as well as certain expenses (such as for advertising and marketing).

 

The first three columns show the estimated spending in per capita terms (and in US dollars) for each category of costs, for the US, for Canada, and then for the difference between the two.  US spending is always higher.  Thus, for example, for the line labeled “doctors”, the authors estimate that doctor’s offices have to spend an average of $324 per every US resident for expenses related to billing and other dealings with health insurance companies in 1999.  The cost in Canada with its single-payer system, in contrast, is on average just $107 per resident (in US dollar terms).  The difference is $217 per person, in 1999.  Grossing this up to the US population, and rescaled to total health care expenditures in the US in 2016 relative to 1999, the excess cost in the US in 2016 is an estimated $160.6 billion.  This is what would be saved in the US in 2016 if doctor’s offices were able to manage their health insurance billings with the same efficiency as they can in Canada.

The other lines show the estimated savings from other sources.  The top line is for insurance overheads.  The estimate here is that the US would have been able to save $156.9 billion in 2016 if health insurance administration were as efficient as what is found in Canada with its single-payer system.  While on the surface this appears to be less than the $204 billion savings estimated (for 2016) if the US moved to a Medicare-for-All system, they are in fact consistent.  The estimate in Woolhander, et. al., of the excessive cost of health insurance administration excludes what is paid out in insurance company profits and certain other expenses (such as advertising and marketing).  As discussed in the Annex below, insurance company profits can add one-third to administrative costs, so a $150 billion cost would become $200 billion when one uses the same definitions for what is encompassed.  The two estimates are in fact surprisingly consistent, even though very different approaches were used for the estimation of each.

Overall, the US would have saved about $400 billion (excluding the savings from lower expenses at the insurance companies) had a single-payer system been in effect in 2016, according to these estimates.  That is double the estimated $204 billion in savings from lower administration costs at the health insurers alone, estimated in the section above.  These additional cost savings from moving to a Medicare-for-All system are clearly significant, but are often ignored in the debate on how much would be saved from efficiency gains in a Medicare-for-All system.  They are (I would acknowledge) rough estimates.  They cannot be estimated with the same precision as one can for the savings from the more efficient administration of health insurance alone under a Medicare-for-All system.  But neither should they be forgotten.

E.  Summary and Conclusion

Medicare is a well-managed and popular program.  It is a single-payer system, but currently restricted to those aged 65 and above.  And administrative costs, on that portion of Medicare managed directly by government, are only 2.4%.  This 2.4% is far below the 11.5% administrative cost share for regular private health insurance, or 12.6% for that portion of Medicare that is managed through private health insurance companies.

And even with such low costs, Medicare is a popular program, where numerous surveys have found Medicare to be more highly rated (including in terms of user experiences with the program) than private health insurance plans (see, for example, here, here, here, and here).

Creating a Medicare-like system to cover also those Americans below the age of 65 would not be difficult.  We already have the model of Medicare itself to see what could be done and how such a system can be managed.  And we also have the examples of other countries, such as Canada, that show that such systems are not only feasible but can work well.  It is also not, as conservative critics often assert, a government “takeover” of healthcare (a criticism also often used in attacks on Obamacare):  Under a single-payer system, the providers of health care services (doctors, hospitals, and so on) remain as they are now, as private or non-profit entities, competing with each other in the services they offer.

Nor would an extension of health insurance under a Medicare-like system to those below age 65 lead to issues for the current Medicare system.  This has now become an attack line being asserted in numerous Republican political campaigns this fall, including in a signed piece by President Trump published on October 10 by USA Today.  This was in essence a campaign ad (but published for free), which fact checkers immediately saw contained numerous false statements.  As Glenn Kessler noted in the Washington Post, “almost every sentence contained a misleading statement or a falsehood”.

There is no reason why extending a Medicare-like system to those below age 65 should somehow harm Medicare.  The cost for the health insurance for those below age 65 would be paid for by sending the checks we currently must send to private insurers (such as Aetna or United Healthcare), instead to the new single-payer insurer.  As noted above, with such an entity copying the Medicare management system and achieving its low administrative costs, we would have been able to reduce the average per person cost of healthcare in 2018 from the $8,190 we are paying now, to $7,480 instead, a savings of $710 for each of us.  That $7,480 would still need to be paid in, but it is far better to send in $7,480 to the single-payer (for the same health care services as we now receive) than to send in $8,190 to the mix of insurers we now have.

Furthermore, these savings are solely from the more efficient administration of health insurance that we see can be done in Medicare.  There will also be very substantial savings from other sources in a Medicare-for-All system, including in what doctors and hospitals must now spend to deal with our currently highly fragmented and complex health insurance system, and savings by employers in what they must spend to manage their employer-based private health insurance plans.  The magnitude of such additional savings are more difficult to estimate, but they might be on the order of double the size of savings from the more efficient administration of the health insurance itself.  That is, total savings in 2016 might have been on the order of $600 billion, or three times the $200 billion in savings from more efficient administration of health insurance alone.

And such savings (or rather the lack of it under our current complex and fragmented system) can account for a significant share of the far higher cost of health care in the US than elsewhere.  As noted before, health care costs about 18% of GDP in the US, or 50% more than in the second most expensive country where it is just 12%.  Had the US been able to save $600 billion in health care expenditures in 2016 by moving to a Medicare-for-All system, US healthcare spending would have been reduced from 18% of GDP to below 15% (more precisely, from 17.9% in 2016 to 14.7%).  This, by itself, would have gotten us over halfway to what other countries spend.  More should be done, to be sure, but such a reform would be a major step.

So why has it not been done?  While the lower costs under a Medicare-for-All system would be attractive to most of us, one needs also to recognize that those higher costs are a windfall to those who are skilled at operating within our complex and fragmented system.  That is, there are vested interests who benefit under the current system, and the dollar amounts involved are massive.  Private health insurers, and their key staff (CEOs and others), profit handsomely under this system, and it should not be surprising that they lobby aggressively to keep it.  Under a Medicare-for-All system, there would be no need (or a greatly reduced need, if some niches remain) for such private health insurance.

This is not to deny that there will be issues in any such transition.  Just the paperwork involved to ensure everyone is enrolled properly will be a massive undertaking (although for all those currently enrolled in some health insurance plan, mostly via employer-based plans, the paperwork could presumably be transferred automatically to the new program).  Nor can one guarantee that while on average health care consumers will save, that each and every one will.  But the same is true in any tax reform, where even if taxes on average are being cut, there are some who end up paying more.

One should also acknowledge that many doctors and hospitals are concerned that in a Medicare-for-All system they will have little choice but to agree to the Medicare-approved rates for their services.  However, it is not clear this is much different from the current system for the doctors, where they must either agree to accept the in-network rates negotiated with the private health insurers, or expect few patients.  And surveys of doctors on their support for a Medicare-for-All system show a turnaround from earlier opposition to strong support.  A survey published in August 2017 found 56% of physicians in support (and 41% opposed), a flip from the results of a similar survey in 2008 (when only 42% were in support, and 58% opposed).  A key reason appears to be the costs and difficulties (discussed above) doctors face in dealing with the multiple, fragmented, insurance plans they must contend with now.  Even the American Medical Association, a staunch opponent of Medicare when it was approved in the 1960s, and an opponent ever since, may now be changing its views.

Finally, 70% of Americans now support a Medicare-for-All system, according to a recent Reuters survey.  It is time for such a system.

 

 


Annex:  The Causes of the Wide Variation in Administrative Cost Shares

a.  The Wide Range of Administrative Cost Shares

Administrative cost shares vary enormously across different health insurance programs, from just 2.4% for government-managed Medicare to 37% for health insurance provided through Workers’ Compensation plans.  The figures are shown above in the top table in the post.  Some might say that this cannot be – that they are all providing health insurance so why should the differ by so much.  But they can and they do, and this annex will discuss why.

Take the case of Workers’ Compensation first.  Workers’ Compensation insurance was established by states in the US starting in 1902 (Maryland was the first).  Most states passed laws between 1910 and 1920 requiring businesses to arrange for such insurance, and by 1920 all but five states (all in the South) had such coverage (and by 1948 all states had it).  And in most (but not all) states, health care benefits are provided through the purchase of privately managed insurance.

But these programs are expensive to administer.  Each individual claim must be scrutinized to determine that it was in fact due to a covered workplace injury.  This leads to the extremely high (37%) administrative cost share.  If the injury is indeed covered, the workers’ compensation insurance arranged by the business will pay for the associated health care costs.  But if it is not, the injury will now normally be covered by the individual’s regular health care insurance.  The treatment is still needed, and is provided.  The issue is only who pays for it.

Hence the time and effort spent to ascertain whether the injury was in fact due to a covered workplace injury is a pure social cost, and would not be needed (at least for the health care treatments) in a Medicare-for-All system.  The injuries would still be treated, but funds would not need to be spent to see whether the costs can be shifted from one insurer to a different one.  And when each individual claim must be assessed (with many then rejected), the administrative costs for Workers’ Compensation plans can be a high share of what is in the end paid for healthcare treatments.

When workers’ compensation programs were first set up, in the early 20th century, individual health insurance was not common.  Such health insurance (set up through employers) only began to be widespread during World War II, when the Roosevelt administration approved favorable tax treatment of such insurance by businesses (who were trying to attract workers, but were subject to general wage and price controls).  But workers’ compensation programs continue to exist, despite their high administrative costs.  And from the point of view of the private insurer providing the workers’ compensation cover, spending such money to assess liability for some injury makes sense, as (from the private perspective of the individual insurer) they would gain if the health treatment costs can be shifted to a different insurer.  But such expenditures do not make sense from the perspective of society as a whole.  They are just a cost.  And under a Medicare-for-All system the injury would simply be treated, with no need to ascertain if one insurer or a different one was responsible for making the payment.  Overall costs would be less, with the same health care treatments provided.

There are similar socially wasteful expenditures in other health insurance programs, which drive up their administrative costs.  CHIP (Children’s Health Insurance Program) has a relatively high administrative cost share (17.3% in 2016) in part because it is relatively small ($16.9 billion in expenditures in 2016, which can be compared to the $678.8 billion for Medicare), so it does not enjoy the economies of scale of other programs, but also because eligibility for the program must be assessed for each individual participating.  While rules vary by state, children and teens are generally eligible for CHIP coverage up to age 18, for families whose incomes are below some limit, but who are not receiving Medicaid (or in coordination with Medicaid in certain cases).  The CHIP insurance for the children and teens is then either free or low-cost, depending on family income.

Confirming that children to be enrolled under CHIP meet the eligibility requirements is costly.  Hence it is not surprising that this (along with the lack of the economies of scale that larger programs can take advantage of) leads to the relatively high share for administrative costs.  But this eligibility question would not be an issue that would need to be individually assessed in a Medicare-for-All system.  It is a socially wasteful expenditure that is required only because the program needs to confirm those enrolled meet the specific eligibility requirements of this narrow program.  And a Medicare-for-All system would of course enjoy huge economy of scale advantages.

Medicaid also has to bear the cost of assessing whether eligibility requirements have been met, and certain states are indeed now making those eligibility requirements even more burdensome and complex (in the apparent hope of reducing enrollment).  Most recently, the Trump administration in early 2018 issued new rules allowing states to impose work requirements on those enrolled in Medicaid, and several states have now started to impose such restrictions.  But such requirements are themselves costly to assess.  While enrollment in Medicaid may then fall (leading to the health care costs of those individuals being shifted on to someone else), administrative costs as a share of what is spent will rise.  But from the point of view of society as a whole, shifting the cost of health treatment for those individuals who would otherwise be enrolled in Medicare on to someone else does not save on the overall cost of health care.  And indeed, if it shifts such treatment from doctor’s offices to treatment in emergency rooms, the cost will go up, and probably by a lot.

This would no longer be an issue in a Medicare-for-All system.  There would be no need to waste funds on assessing whether the individual meets the eligibility requirements of some specific health insurance program or another.

Despite such special costs. the overall costs of administration for Medicaid were 10.7% in 2016.  This is a bit below the cost for regular private insurance of 11.5%, and probably reflects the significant economies of scale Medicaid is able to benefit from.  And while a significant share of the Medicaid administrative costs are incurred by private insurers contracted to manage the Medicaid programs in many of the states ($36 billion of the $60 billion total for administration according to the NHE figures), government itself takes on a significant share of the administration.  And the overall administrative cost combined is still less than what private health insurance requires (as a share).

b)  The Cost of Administering Private Health Insurance

Which brings us to the question of why private health insurance costs so much to administer, at 11.5% of the total paid for such insurance.  Medicare, when administered directly by government, has a cost of just 2.4%.  Why does private insurance cost so much more?

First, a note on terminology.  Up to this point, as we have discussed various government health insurance plans (such as Medicaid or CHIP), we have not had to distinguish the total cost of the health insurance plans (the total of what is paid out in benefits to health care providers, plus what is paid for administration) from the total paid for the insurance cover.  We need to be more precise for private insurance cover.  One has the total paid in any period (a year in these figures) in insurance premia by the subscribers, and the total in what is paid by the private insurer in each such period to cover benefits.  The NHE has estimates for each of these, and then calculates the difference between the two as the “net cost of health insurance”.  We have referred to this as a broad concept of administrative costs, as it includes any profits earned by the insurers as part of their current operations.  But private insurers have an additional source of earnings, and that is from revenues on invested capital.  Premia are paid upfront and benefits paid out later (in overall probabilistic terms), and an important source of income to insurers comes from what they earn on those funds as they are invested in various asset markets, such as stocks and bonds, real estate, commodities, and so on.

For private insurance we should therefore be clear that what we have so far referred to as the “total cost” of the health insurance is synonymous with the total premia paid (which some sources refer to as “underwriting revenue”).  Subtracting the total paid to health care providers under the insurance policies from the total paid in premia will then lead to the broad concept of administrative costs, including profits earned from the current period insurance operations.  On top of this, private insurers will generate earnings from investments on their accumulated capital (obtained, in part, from premia being paid in before benefits are paid out).  For the figures here we are excluding these latter earnings.  Such earnings will be on top of those obtained from their current insurance operations.

Why then, do private insurers incur administrative costs (as defined here) of 11.5% when government-administered Medicare has a far lower cost of just 2.4%?

There are a number of reasons.  First, private health insurance is a tremendously fragmented system, where health plans are mostly organized at the individual firm level.  This is costly, and the cost share varies systematically by firm size.  Administrative costs (including insurer profits) will typically range between 5 and 15% of the total paid for the insurance in firms with greater than 50 employees, between 15 and 25% in firms with fewer than 50 employees, and (in the period before the Obamacare market exchanges were set up) between 25 and 40% of the total for individuals seeking health insurance (see, for example, this report from the Commonwealth Fund).

These high and rising costs (in inverse direction to firm size) arise as there are significant fixed costs in setting up any such system at some firm, which leads to a high cost-share when there are fewer workers to spread it over.  Commissions paid to insurance brokers also play a role, as the use of brokers is typical and especially significant for the small-group market.  The Commonwealth Fund report cites figures indicating these commissions can account for 4 to 11% of the total in premia paid for insurance in such markets.  And in those cases where the insurers themselves take on the risk (as opposed to simply managing the claims process while the firm itself pays the claims – this is called “self-insurance”, and is typical in large firms with 1,000 employees or more, as it ends up cheaper for such firms), the insurers must then invest significant resources in assessing the risk of the pool of workers covered in order to price the policy appropriately.  The costs the insurance company will need to pay out will depend not only on the local cost of health care services (which can vary tremendously across different parts of the country), but also by the industry of the firm (as the health risks of the typical workers employed will vary by industry) and specifics of the firm being covered (such as the average age of the workers employed, the male/female ratio, and other such factors).

There are also high fixed costs of the insurers themselves under their business model.  They typically offer dozens of insurance plans, each with different features on what is covered and by how much.  And most of the plans are built around networks of care providers (doctors, hospitals, and so on) with whom they have individually negotiated “in-network” prices for subscribers of the particular health insurance plan.  These in-network prices can still vary tremendously (even by a factor of ten or more, for those I have been able to check with my own insurer, and all for the same metropolitan area), and are set through some negotiation process.  The price eventually agreed to reflects some balance in negotiating strength.  If you are a hospital chain that dominates in some metro area, you will be able to negotiate a price close to what you wish to charge as the insurer has to include hospital services.  Similarly, if you are an insurance company that dominates in some metro area, then the hospitals have to agree to charge something close to what you are willing to pay, as otherwise they will not have many patients.  And individual doctors operating in private practices will generally have very little negotiating power.

But such negotiations (for each and every health care provider, and then for each possible service) are expensive to carry out, regardless of the outcome.  And while some argue that such negotiations hold down the cost of health care, it is not at all clear that such is the case.  The US, after all and as noted before, has by far the most expensive health care services in the world (close to double the average in OECD countries, as a share of GDP), and yet achieves only mediocre results.  Furthermore, the actual volume of health care services provided in the US (as measured, for example, by doctor consultations per capita per year, or hospital beds per 1,000 of population, and so on) has the US at close to the bottom among OECD countries.  The problem is not excessive health care services utilized, but rather their high cost in the US.  Negotiated in-network pricing has not helped, and quite possibly (due to the resulting fragmentation into non-competing markets) has hurt.

This complex and fragmented system does lead, however, to high rewards to those who are good at operating in it.  Hence CEOs (and other senior staff) of insurance companies skilled at this are rewarded handsomely, with such CEOs typically receiving compensation of more than $10 million a year, and in some cases far more.  Indeed, as recounted in an earlier blog post, the CEO of UnitedHealth Care personally received total compensation of more than $1.3 billion over his 15-year tenure of 1991 to 2006 (even after the SEC forced him to forfeit stock options worth a further $620 million due to illegalities in how they were priced).  Such salaries are reflected in the administrative costs of the health insurance plans offered, and account for a substantial share of it.

Finally, this complex and fragmented market has also led to high profits for the private health insurance companies.  If this were due to the exceptional efficiency of certain of the health insurance firms as compared to others, all in a competitive market, then such high profits of such firms might be explained.  But there is no indication that health insurance markets operate anywhere close to what economists would call “perfect competition”.  The extremely wide variation in prices for the same health care services (often by a factor of ten or more) is a clear sign of markets that are nowhere close to perfectly competitive.

And the amount paid to cover such profits is high.  For example, an examination of health insurance markets in New York State found (in data for 2006) that profits from underwriting (i.e. excluding profits from capital invested) accounted for 4.9% of total underwriting revenue (the total premia paid) before taxes, or roughly one-third of the total 14.9% in administrative costs (including underwriting profits).  After taxes, it would be roughly one-quarter of the total.  Applying that ratio to the 11.5% administrative cost share found in the NHE accounts for the nation as a whole in 2016, the charge to cover profits would be close to 3% points.  That, by itself, would be greater than the 2.4% cost share for government-managed Medicare.

c)  The Cost of Administering the Portion of Medicare Managed Directly by Government

Why, then, does the portion of Medicare (Parts A and B) managed directly by government cost so little?  It is fundamentally because Medicare does not bear many of the costs discussed above for the other insurance plans, and can spread the costs that remain over a far larger enrollment base.  Specifically:

1)  Medicare enjoys huge economy of scale advantages:  The portion of Medicare managed directly by government is huge, at $390.7 billion spent in 2016 ($381.4 billion of which went to health care providers, and only $9.3 billion to administration).  And this is for a single plan.  Private health insurers instead each manage dozens of plans covering millions of firms (at rates which vary firm to firm, depending on the risk pool).

2)  Medicare does not have to make a determination for each individual claim as to whether it will be covered (as Workers’ Compensation plans must), nor whether the individual is eligible (other than whether they are of age 65 or more, and have paid the relevant premia and taxes).  That is, Medicare does not need to contend with the complex (and now being made increasingly complex) eligibility requirements for participants in Medicaid, CHIP, and other such programs.

3)  Medicare has one set of compensation rates, which doctors and hospitals accept or not.  The compensation rates vary by region and other such factors, but they are not individually negotiated each year with each of the possible providers.

4)  And Medicare does not have the costs private insurers need to pay to retain the CEOs and other senior staff who are skilled at operating within the fragmented US healthcare system, nor do they pay large amounts for marketing and such.  Nor does Medicare pay profits, and profits, as noted above, are high for private health insurers in the US.

It is this “business model” of Medicare which keeps its costs down.  It is a relatively simple model (relative to that of private insurers – no health care payment system is simple in an absolute sense), and enjoys great economies of scale.  Thus Medicare can keep its costs down, and needs to spend on administration only a fraction of what private health insurers spend.

d)  The Conservative Critics of Medicare Costs

There are critics who contend that Medicare costs are not in fact low.  These critics have issued analyses through such groups as the Heritage Foundation (conservative, with major funding from the Koch brothers), the Cato Institute (conservative – libertarian), lobby groups with a vested interest, and publications that link back to these analyses.  But these arguments are flawed.  Indeed, some of the responses to the assertions are so obvious that one must assume that ideology (a view that it is impossible for government to be more efficient) was the primary driver.

These critics make three primary arguments:

1)  First, several contend that Medicare does not pay for, nor include in its recorded administrative costs, the costs incurred by Social Security and other government agencies that provide services that are essential to Medicare’s operations.  For example, initial enrollment in Medicare at age 65 is handled through the Social Security Administration, and Medicare premia payments (for Parts B and D) are normally collected out of Social Security checks.

However, while it is true that Social Security provides such services to Medicare, it is not true that Medicare does not pay for this.  A simple look at the Medicare income and expenses tables in the Medicare Trustees Annual Report will show what those payments are.  For example, for fiscal year 2017, Tables V.H1 and V.H.2 (on pages 217 and 218 of the 2018 report) indicate that $980,805,000 was paid to the Social Security Administration under the Medicare HI Trust Fund (“Hospital Insurance”, for Part A) and $1,247,226,000 under the Medicare SMI Trust Fund (“Supplementary Medical Insurance”, for Parts B and D).  These are substantial amounts, and they are not hidden.

And the tables similarly show the amounts paid by Medicare (as components in its administrative costs) to other government agencies for services they provide to Medicare.  These include payments made to the FBI and the Department of Justice (for fraud and abuse control), to the Office of the Secretary of Health and Human Services (HHS, for oversight) as well as to other HHS offices (such as the Inspector General), to the US Treasury, and to a number of others.  They are all shown.  The conservative critics who assert Medicare expenses do not include payments for such services simply never looked.

2)  Second, the critics argue that while private insurers must raise the capital they need to fund their operations, and that that capital has a cost, the costs of funding Medicare’s “capital” are not counted but rather are hidden away in the overall government budget.

But this reflects a fundamental confusion on the capital requirements of established insurers, whether private or public.  Insurers are not banks.  Banks raise funds (at a cost) and then lends them out.  Insurers take in premia payments from those insured, and at some later time make payments out under the insurance policies for covered costs.  On average, the payments they make come later than the payments they receive in premia, and hence they have capital to invest.  That capital is invested in stocks and bonds, real estate, commodities, or whatever, they make a return on those investments, and that return is factored into, and can reduce (not raise), the premia they need to charge to cover their overall costs.

Private insurers hence generate earnings from their capital, as it is invested as an asset.  It is not a cost.  Furthermore, Medicare operates in fundamentally the same way as other insurers.  The Medicare Trust Funds (HI and SMI) reflect funds that have been paid in and not yet expended in covered claims or other expenses, and they earn interest on the balances in those trust funds (at the long-term US Treasury bond rate).  The accounting is all there to be seen, for those interested, in the Medicare Trustees Annual Report.

3)  Probably most importantly, the conservative critics of Medicare assert that it is incorrect to calculate administrative costs as a share of the total costs paid.  Rather, they say those costs should be calculated per person enrolled.  Since older people have far higher medical costs each year than younger people do (which is certainly true), they argue that the low administrative cost share seen in Medicare (when taken as a share of total costs) is actually a reflection of the high health care costs of the elderly.

But there are two problems with this.  First, when elderly people see doctors at a pace of say 10 times a year rather than perhaps once a year when younger, they will be generating 10 times as many bills that need to be recorded and properly paid.  Each bill must go through the system, checked for possible fraud, and then paid in the correct amount.  That will cost more, indeed one should expect it will cost 10 times as much.  And if anything, medical procedures are more complicated for the elderly (as they have more complicated medical conditions), so it should be expected that the costs to process the more complex bills will indeed go up more than in proportion to the amount spent.  The conservative critics assert the costs of administering this do not go up with the more frequent billing, but rather are the same, flat, rate per person regardless of how many, how complex, and how costly the medical interventions are that they have in any given year.

Second, one has data.  The Medicare Parts C (Medicare Advantage) and D (for drugs) are managed via private health insurers.  And this Medicare is for the same elderly population that government-managed Medicare covers.  If what the conservative critics assert is correct, then the cost of administering these privately-managed Medicare programs should be similar to the cost of administering the portion of Medicare that government manages directly.  But this is not the case.  Government-managed Medicare spent only 2.4% on administration in 2016, while privately-managed Medicare spent 12.6%.  These are far from the same.

Indeed, the 12.6% administrative cost share for the privately-managed portion of Medicare is similar to, but a bit more than, the 11.5% share seen with regular private health insurance.  This is what one would expect, where the somewhat higher cost share might well be because of the greater complexity of the medical interventions required for the elderly population.

The government-managed portion of Medicare has a far low administrative cost share than private health insurance.  The conservative critics have not looked at the data.

Taxes on Corporate Profits Have Collapsed

A.  Introduction:  The Plunge in Corporate Profit Tax Revenues

Corporate profit tax revenues have collapsed following the passage by Congress last December of the Trump-endorsed Republican tax plan.  And this is not because corporate profits have decreased:  They have kept going up.  The initial figures, for the first half of 2018, show federal corporate profit taxes (also referred to as corporate income taxes) collected have fallen to an annual rate of roughly just $150 billion.  This is only half, or less, of the $300 to $350 billion collected (at annual rates) over the past several years.  See the chart above.

The estimates on corporate profit taxes actually being paid through the first half of 2018 come from the National Income and Product Accounts (NIPA, and commonly also referred to as the GDP accounts) produced by the Bureau of Economic Analysis.  The figures are collected as part of the process of producing the GDP accounts, but for various reasons the figures on corporate profit taxes are not released with the initial GDP estimates (which come out at the end of the month that follows the end of each quarter), but rather one month later (i.e. on August 29 this time, for the estimates for the April to June quarter).  The quarterly estimates are seasonally adjusted (which is important, as tax payments have a strong seasonality to them), and are then shown at annual rates.  While we already saw such a collapse in corporate tax revenues in the figures for the first quarter of 2018 (first published in May), it is always best with the estimates of GDP and its components to wait until a second quarter’s figures are available to see whether any change is confirmed.  And it was.

This initial data on what is actually now being collected in taxes following the passage of the Republican tax plan last December suggests that the revenue losses will be substantially higher than the $1.5 trillion over ten years that the staff at the Joint Committee on Taxation (the official arbiters for Congress on such matters) forecast.  Indeed, the plunge in corporate profit tax collections alone looks likely to well exceed this.  On top of this, there were also sharp cuts in non-corporate business taxes and in income taxes for those in higher income groups.

This blog post will look at what the initial figures are revealing on the tax revenues being collected, as estimated in the GDP accounts.  The focus will be on corporate income taxes, although in looking at the total tax revenue losses we will also look briefly at what the initial data is indicating on reductions in individual income taxes being paid.

The chart above shows what the reduction has been in corporate profit taxes in dollar terms.  In the next section below we will look at this in terms of the taxes as a share of corporate profits.  That implicit average actual tax rate is more meaningful for comparisons over time, and it has also plunged.  And the implicit actual rate now being paid, of only about 7% for the taxes at the federal government level, shows how misleading it is to focus on the headline rate of tax on corporate profits of 21% (down from 35% before the new law).  The actual rate being paid is only one-third of this, as a consequence of the numerous loopholes built into the law.  The Republican proponents of the bill had argued that while they were cutting the headline rate from 35% to 21%, they were also (they asserted) ending many of the loopholes which allowed corporations to pay less.  But in fact numerous loopholes were added or expanded.

The next section of the post will then look at this in the longer term context, with figures on the implicit corporate profit tax rate going back to 1950.  The implicit rate has fallen steadily over time, from a rate that reached over 50% in the early 1950s, to just 7% now.  While Trump and his Republican colleagues argued the cut in corporate taxes was necessary in order for the economy to grow, the economy in fact grew at a faster pace in the 1950s and 1960s, when the rate paid varied between 30 and 50%, than it has in recent decades despite the now far lower rates corporations face.

But this is for the federal tax on corporate profits alone.  There are also taxes on corporate profits imposed at the state and local level, as well as by foreign governments (although such foreign taxes are then generally deductible from the taxes due domestically).  This overall tax burden is more meaningful for understanding whether the overall burden is too high.  But, as we shall see below, that rate has also fallen steadily over time.  There is again no evidence that lower rates lead to higher growth.

The final substantive section of the post will then look more closely at the magnitude of the revenue losses from the December bill.  They are massive, and based on the initial evidence could very well total over $2 trillion over ten years for the losses on the corporate profit tax alone.  The losses from the other tax cuts in the new law, primarily for the wealthy and for non-corporate business, will add to this.  A very rough estimate is that the losses in individual income tax revenues may total an additional $1 trillion, bringing the total to over $3 trillion.  This is double the $1.5 trillion loss in revenues originally forecast.

But first, an analysis of what we see from the initial evidence on what is being paid.

B.  Profit Taxes as a Share of Corporate Profits

The chart at the top of this post shows what has been collected, by quarter (but shown at an annual rate), by the federal tax on corporate profits over the last several years.  Those figures are in dollars, and show a fall in the first half of 2018 of a half or more compared to what was collected in recent years.  But for comparisons over time, it is more meaningful to look at the implicit corporate tax rate, as corporate profits change over time (and generally grow over time).  And this can be done as the National Income and Product Accounts include an estimate of what corporate profits have been, as part of its assessment of how national income is distributed among the major functional groups.

That share since 2013 has been:

Between 2013 and 2016, the implicit rate (quarter by quarter) varied between about 15 and 17%.  It came down to about 14% for most of 2017 for some reason (possibly tied to the change in administration in Washington, with its new interpretation of regulatory and tax rules), but one cannot know from the aggregate figures alone.  But the rate then fell sharply, by half, to just 7% after the new tax law entered into effect.

A point to note is that the corporate profit figures provided here are corporate profits as estimated in the National Income and Product Accounts.  They are a measure of what corporate profits actually are, in an economic sense, and will in general differ from what corporate profits are as defined for tax purposes.  Thus, for example, accelerated depreciation allowed for tax purposes will reduce taxable corporate profits.  But the BEA estimates for the NIPA accounts will reflect not the accelerated depreciation allowed for tax purposes, but rather an estimate of what depreciation actually was.  Thus the figures as shown in the chart above will be a measure of what the true average corporate tax rate actually was, before the adjustments made (as permitted under tax law) to arrive at taxable corporate profits.

That average rate is now just 7%.  That is only one-third of the headline rate under the new law of 21%.  Provisions in the tax code allow corporations to pay far less in tax than what the headline rate would suggest.  This is not new (the headline rate previously was 35%, but the actual average rate paid was just 15 to 17% between 2013 and 2016, and 14% in most of 2017).  But Trump administration officials had asserted that many of the loopholes allowing for lower taxes would be ended under the new tax law, so that the actual rate paid would be closer to the headline rate.  But this clearly did not happen.  As many independent analysts pointed out before the bill was passed, the new tax law had numerous provisions which would allow the system to be gamed.  And we now see the result of that in the figures.

C.  Corporate Taxes in a Longer Term Context

The cuts in corporate profit taxes are not new.  Taxes on corporate profits in the US used to be far higher:

In the early 1950s, the federal tax on corporate profits (actually paid, not the headline rate) reached over 50%.  While it then fell, it kept to a rate of between about 30% and 50% through the 1950s and 60s.  And this was a period of good economic growth in the US – substantially faster than it has been since.  A high tax rate on corporate profits did not block growth.  Indeed, if one looked just at the simple correlation, one might conclude that a higher tax on corporate profits acts as a spur to growth.  But this would be too simplistic, and I would not argue that.  But what one can safely conclude is that a high rate of tax on corporate profits does not act as a block to more rapid growth.

There have also been important distributional consequences, however.  Corporate wealth is primarily owned by the wealthy (duh), and the sharp decline in taxes paid on corporate profits means that a larger share of the overall tax burden has been shifted to taxes on individual incomes, which are primarily borne by the middle classes.  Based on figures in the NIPA accounts, in 1950 taxes on individual incomes (including Social Security taxes) accounted for 47% of total federal taxes, while taxes on corporate profits accounted for 35% (with the rest primarily various excise taxes such as on fuels, liquor, tobacco, etc., plus import duties).  By 2017, however, the share of taxes on individual incomes had grown to 87.4%, while the share on corporate profits had declined to just 8.6%.  There was a gigantic shift away from taxes on wealth to taxes on individual incomes – taxes that are borne primarily by the middle class.  And that share will now fall further in 2018, by about half.

The chart above is for federal corporate profit taxes alone.  It could be argued that what matters to growth is not just the corporate profit taxes paid at the federal level, but all such taxes, including those paid at the state and local level, as well as to foreign governments (although the taxes paid abroad are generally deductible on their domestic taxes, so that will be a wash).

That chart looks like:

This follows the same path as the chart for federal corporate profit taxes alone, with a similar decline.  With the federal share of such taxes averaging 84% over the period (up to 2017), this is not surprising.  The federal share will now fall sharply in 2018, due to the new tax law.  But over the 1950 to 2017 period, the chart covering all taxes on corporate profits is basically a close to proportionate increase over what the tax has been at the federal level alone.

So the same pattern holds, and the total of the taxes on corporate profits varied between 33% to over 50% in the 1950s and 60s, to between 15 and 20% in recent years before the plunge in the first half of 2018 to just 10%.  But the relatively high taxes in the 1950s and 60s did not lead to slow growth in those years, nor did the low taxes in recent decades lead to more rapid growth.  Rather, one had the reverse.

D.  An Estimate of the Revenue Losses Due to the Tax Bill

These initial figures on the taxes actually being paid following the passage of the Republican tax bill allow us to make an estimate of what the revenue losses will turn out to be.  These will be very rough estimates, as we only have data for half a year, and one should be cautious in extrapolating this to what the losses will be over a decade.  But they can give us a sense of the magnitude.  And it is large.  As we will see below, based on the evidence so far the revenue losses (from the cuts in both corporate taxes and in personal income taxes) might be over $3 trillion over ten years, or about double the $1.5 trillion loss estimate originally forecast.

First, for the federal taxes on corporate profits, as the largest changes are there:  As was discussed before (and seen in the charts above), corporate profit taxes paid as a share of corporate profits were relatively flat between 2013 and 2016, varying between 15 and 17% each quarter, before falling to 14% for most of 2017.  For the full 2013 to 2017 period, the simple average was 15.3%.  The implicit rate then fell to just 7.0% in the first half of 2018.  Had the rate instead remained at 15.3%, corporate profit taxes collected in 2018 would have been $184 billion higher (on an annual basis).

This is not small, and is twice as high as the estimate of the staff of the Joint Committee on Taxation of revenue losses of $91 billion in FY2019 (the first full year under the new tax regime) from all the tax measures affecting businesses (including non-corporate businesses, and covering both domestic business and overseas business).  It is three times as high as the estimated loss of $60 billion in FY18, but the new tax law did not affect the first quarter of FY2018 (October to December).

One should be cautious with any extrapolation of this loss estimate going forward, as not only is the time period of actual experience under the new tax regime short (only a half year), but the law is also a complicated one, with certain provisions changing over time.  But a simple extrapolation over ten years, based on the assumption that corporate profits grow at just a modest 3% a year in nominal terms (meaning 1% a year in real terms if inflation is 2% a year), and that the tax rate on corporate profits will be 7.0% a year (as seen so far in 2018) rather than the 15.3% of recent years, implies that the reduction in corporate profit tax revenues will sum to about $2.1 trillion.

Note that the losses would be greater (everything else equal) if the assumed growth rate of corporate profits is higher.  But the results are not very sensitive to this.  The total losses over ten years would be $2.2 trillion, for example, at an assumed nominal growth rate of 4% (i.e. with inflation still at 2%, then with corporate profits growing at 2% a year in real terms, or double the 1% rate of the base scenario).  Note this also counters the argument of some that such tax cuts will lead to such a large spurt in growth that total tax collections will rise despite the cut in the rates.  As will be discussed below, there is no evidence that this has ever been the case in the US.  But even assuming there were, the argument is undermined by the basic arithmetic.  In the example here, a doubling of the assumed growth rate of profits (from 1% in real terms to 2%) would imply taxes on corporate profits would still fall by $2.0 trillion over the next ten years.  This is not far from the $2.1 trillion loss if there is no rise at all in the growth of corporate profits.  And a doubling of the real growth rate is far above what anyone would reasonably assume could follow from such a cut in the tax rate.

Second, there were also substantial cuts in individual income taxes, although primarily for the wealthy.  While far less in proportional terms, the substantially higher taxes that are now paid by individuals than by corporations means that this is also significant for the totals.

Specifically, individual (federal) income taxes as a share of GDP in the NIPA accounts were quite steady in the quarterly GDP accounts for the period from 2015Q1 to 2017Q4, varying only between 8.22% and 8.44%.  The average was 8.31%.  But then this fell to an average of 7.89% in the first half of 2018 (7.90% in the first quarter, and 7.87% in the second quarter).  Had the rate remained at 8.31%, then $86 billion more in revenues (at an annual rate) would have been collected.

Extrapolating this out for ten years, assuming again just a modest rate of growth for GDP of 3% a year in nominal terms (i.e. just 1% a year in real terms if inflation is 2% a year), the total loss would be $1.0 trillion.  With a higher rate of growth, and everything else the same, the losses would again be larger.  This extrapolation is, however, particularly fraught, as the Republicans wrote into their bill that the cuts in individual taxes would be reversed in 2026.  They did this to keep the forecast cost of the tax bill to the $1.5 trillion envelope they had set, and an effort is already underway to make this permanent (Speaker Paul Ryan has said he will schedule a vote on this in September).  But even if we left out the tax revenue losses in the final two years of the period, the losses in individual taxes would still reach about $0.8 trillion.

Adding the lower revenues from the taxes on corporate profits and the taxes on individual incomes, the total revenue losses would come, over the ten years, to about $3 trillion.  This is double the $1.5 trillion loss that had been forecast.  It is not a small difference.

To give a sense of the magnitude, the loss in 2018 alone (a total of $270 billion) would allow a doubling of the entire budgets (based on FY2017 actual outlays) of the Departments of Education, Housing and Urban Development, and Labor; the Environmental Protection Agency; all international assistance programs (foreign aid); NASA; the National Science Foundation; the Army Corps of Engineers (civil works); and the Small Business Administration.  Note I am not arguing that all of their budgets should necessarily be doubled (although many should, indeed, be significantly increased).  Rather, the point is simply to give readers a sense of the size of the revenues lost as a consequence of the tax cut bill.

As another comparison to give a sense of the magnitude, just half of the lost revenue (now and into the future) would suffice to fund fully the Social Security Trust Fund for the foreseeable future.  If nothing is done, the Social Security Trust Fund will run out at some point around 2034.  Republicans have asserted that nothing can be done for Social Security except to scale back (already low) Social Security pensions.  This is not true.  Just half of the revenues that will be lost under the tax cut bill would suffice to ensure the pensions can be paid in full for at least 75 years (the forecast period used by the Social Security trustees).

But as noted above, proponents of the tax cuts argue that the lower taxes will spur growth.  This has been discussed in earlier posts on this blog, where we have seen that there is no evidence that this will follow.  There are not only basic conceptual problems with this argument (a misreading of basic economics), but also no indication in what we have in fact observed for the economy that this has ever been the case (whether in the years immediately following the major tax cuts of Reagan or Bush, nor if one focuses on the longer term).

Administration officials have not surprisingly argued that the relatively rapid pace of growth in the second quarter of 2018 (of 4.2% at an annual rate in the end-August BEA estimates) is evidence of the tax cut working as intended.  But it is not.  Not only should one not place much weight on one quarter’s figures (the quarterly figures bounce around), but this followed first-quarter figures which were modest at best (with GDP growth of an estimated 2.2% at an annual rate).

But more fundamentally, one should dig into the GDP figures to see what is going on.  The argument that tax cuts (especially cuts in corporate profit taxes) will spur growth is based on the presumption that such cuts will spur business investment.  More such investment, especially in equipment, could lead to higher productivity and hence higher growth.  But growth in business investment in equipment has slowed in the first half of 2018.  Such investment grew at the rates of 9.1%, 9.7%, 9.8%, and 9.9% through the four quarters of 2017 (all at annual rates).  It then decelerated to a pace of 8.5% in the first quarter of 2018 and to a pace of 4.4% in the second quarter.  While still early (these figures too bounce around a good deal), the evidence so far is the exact opposite of what proponents have argued the tax cut bill would do.

So what might be going on?  As noted before, there is first of all a good deal of volatility in the quarterly figures for GDP growth.  But to the extent growth has accelerated this year, a more likely explanation is simple Keynesian stimulus.  Taxes were cut, and while most of the cuts went to the rich, some did go to the lower and middle classes.  In addition, government spending is now rising, while it been kept flat or falling for most of the Obama years (since 2010).  It is not surprising that such stimulus would spur growth in the short run.

The problem is that with the economy now running at or close to full capacity, such stimulus will not last for long.  And when it was needed, in the years from 2010 until 2016, as the economy recovered from the 2008/09 downturn (but slowly), such stimulus measures were repeatedly blocked by a Republican-controlled Congress.  This sequence for fiscal policy is the exact opposite of the path that should have been followed.  Contractionary policies were followed after 2010 when unemployment was still high, while expansionary fiscal policies are being followed now, when unemployment is low.  The result is that the fiscal deficit is rising soon to exceed $1 trillion in a year (5% of GDP), which is unprecedented for a period with the economy at full employment.

E.  Conclusion

We now have initial figures on what is being collected in taxes following the tax cut bill of last December.  While still early, the figures for the first two quarters of 2018 are nonetheless clear for corporate profit taxes:  They have fallen by half.  Corporate profit taxes paid would be an estimated $184 billion higher in 2018 had the tax rate remained at the level it had been over the last several years.

While this post has not focused on personal income taxes, they too were cut.  The reduction here was more modest – only by about 5% overall (although certain groups got far more, while others less).  But with their greater importance in overall federal tax collections, this 5% reduction is leading to an estimated $86 billion reduction in revenues (in 2018) from this source.

Based on what has been observed in the first two quarters of 2018, the two taxes together (corporate and individual) will see a combined reduction in taxes paid of about $270 billion in 2018.  Extrapolating over ten years, the combined losses may be on the order of $3 trillion.

These losses are huge.  And they are double what had been earlier forecast for the tax bill.  Just half of what is being lost would suffice to ensure Social Security would be fully funded for the foreseeable future.  And the rest could fund programs to rebuild and strengthen the physical infrastructure and human capital on which growth ultimately depends.  Or some could be used to reduce the deficit and pay down the public debt.  But instead, massive tax cuts are going to the rich.