What Can We Learn From Other Countries?

Books: T.R. Reid, The Healing of America & A Fine Mess

I recently read two books from T.R. Reid, a journalist and reporter from the Washington Post — a 2009 book about America’s healthcare system, “The Healing of America”, and a recently published book about tax laws, “A Fine Mess”. Though both were fairly simplistic and quick reads, it gave a great high level overview of the United States’ history on these issues, what makes it so complicated, and how other nations have approached them.

The Healing of America isn’t meant to solve the healthcare issue, but rather take a look at the model of other nations. In short, there are four models — the Bismarck, the Beveridge, the National Health Insurance, and Out-Of-Pocket Model — that consists of the healthcare principles of coverage, cost, quality, and choice. Reid personally visits a few of countries to examine these models and principles, and what they can offer to treat his right shoulder.

The Bismarck Model

Adopted by Germany, Japan, Belgium, and Switzerland, both providers (doctors and hospitals) and payers are private. Private insurance plans are usually financed by employers (with employee payroll deduction), cover everybody, and nonprofit. There are tight regulations of medical services and fees for cost controls.

Reid’s case study of this model comes from France, one of the world’s top healthcare systems. The key difference is the nonprofit aspect — insurers are not incentivized to provide a return to investors but rather paying for care — insurance funds cannot turn you down for a pre-existing condition, terminate your coverage if you lose your job, deny claims, and there is no deductible. This also means they spend way less on marketing and admin costs, 5% compared to 20% in the US. France also has a national Health Ministry that negotiates with providers for how much they can charge to keep cost controls. For patients, most prices amount to a third or a quarter of what we pay in the US. They enjoy being able to go to whichever provider they want, with little waiting, and incredibly cheap prices. The downsides, however, is paying for what patients can enjoy. Insurance funds are constantly running deficits and doctors don’t make nearly as much as they do in the US (though they go to college/med school for free).

Germany also enjoys generous benefits, freedom of choices, and its huge supply of providers means they spend less time waiting for care than the US. Though insurers negotiate directly with providers, the government controls the payments. They face similar challenges with France in costs as physicians feel they don’t receive enough while the government is worried about cost increases. In 2002, the German Health Ministry placed a “global budget” for insurers in which they don’t pay past X number of care. Doctors sometimes have to do more than the things covered by basic healthcare to make additional money.

Japan shares many of the same benefits — little waiting and low prices — but their citizens are mandated to purchase insurance, and they have no choice of plan. They have over 3,500 plans, compared to 14 in France and 200 in Germany, so providers are highly competitive and have to market themselves. The government negotiates one national Fee schedule that applies to every provider to keep costs low. The losers, again are the providers as doctors and hospitals struggle to make due and keep the practice open; however, the Japanese culture of prestige of doctors means there also isn’t a shortage of doctors.

The Beveridge Model

Adopted by Great Britain, Italy, Spain, Cuba, and Hong Kong, the government is both the provider and the payer, financed through taxes, aka socialized medicine. Most hospitals are owned by the government and most doctors are government employees. The government controls what doctors can do and charge.

The British adopt many mechanisms of keep costs low as patients are incentivized to use as much medical care as they want. They have had struggles with queues, but have poured a lot of money into reducing the waiting lists. The NHS pays doctors with capitation (per patient) and bonuses, to incentivize preventative care. Lastly, they control what is “worth” paying for through the agency NICE.

The National Health Insurance Model (NHI)

Adopted by Canada, Australia, Taiwan, and South Korea, healthcare providers are private, but there is single payer in the government that every citizen pays into. They have strong power to both negotiate lower prices and control costs of citizens.

Each of Canada’s provinces manages its own care and have 5 principles they must follow — public and not for profit, must pay for “medically necessary services”, accessibility, and be portable anywhere in the country. Many Canadians also have private insurance to pay for things aren’t covered. The main struggle Canadians face, as expected, are long waiting lists as the government is unable to keep up with the funding that Medicare needs. The system is constantly trying to save, making medicine a less desired profession.

The Out-Of-Pocket Model

For most underdeveloped countries without an established healthcare system, including Cambodia, India, and Egypt, medical care is paid out of pocket without insurance and government help.

The US System Today and its Problems

The US has elements of all these models — Bismarck for working people, Beveridge for military, vets, and Native Americans, NHI for the elderly with Medicare, and out of pocket for our uninsured. However, across the healthcare principles, we are the only developed country that doesn’t cover everybody. On quality, our outcomes are worse on most basic measures than other countries. We are by far the world’s biggest spenders on healthcare, despite the struggles the countries listed are having with expenditures.

As evident in other countries, there isn’t a perfect system. Whichever model we go with, someone will lose (compared to the as-is)— whether that be providers, the government/taxpayers, or patients. I think the more important question to ask is whether we as a nation believe an individual has the right to healthcare. All other industrialized nations have said ‘yes’, and although imperfect, are finding ways to offer that to patients. In the US, however, we haven’t come to that agreement.

In A Fine Mess, Reid looks at the riddled tax code of the US, its challenges, and the larger principles of taxation that countries use today. The principles on tax reform are the BBLR, a flat tax, and a progressive tax; the channels in which these can be employed are many including income, consumption, and capital gains.

The Broad Base, Low Rates (BBLR) Principle

The principle of BBLR is to keep the total taxable amount as large as possible but the tax rate to be low. For the reasons of simplicity and to deter high tax payers from engaging in complicated tax schemes, Reid claims this method is most widely accepted among economists as a gold standard. Tax provisions targeted to specific groups, says the OECD, “create additional efficiency losses, adverse effects to income distribution, and administrative and compliance costs”. In addition, there has been little evidence that tax deductions have led to any reduction in the activity the government is trying to incentivize.

Countries including Canada, Great Britain, and Germany, have all made steps to eliminate tax exemptions and credits. New Zealand has been the shining example of this principle in action, in which they have eliminated these deductions and lowered the income tax rate, without a loss in tax revenue. A median citizen pays about 17.5% income tax.

The problem with BBDR adoption is a political battle with its beneficiaries. As deductions in the tax code have been in place for decades, trying to get rid of a tax break is a position not many want to be in.

The Flat Tax

The Flat Tax is simple — everyone pays the same flat rate of tax. The flat tax is typically advocated by high-income taxpayers, as they are the main beneficiaries to a major tax break.

Estonia, in 1994, implemented a single 26% tax rate that applied to both income and corporations. In the first few years, its economy grew 11% and government revenues went up. Its success, although not clear how much of it is due to the flat tax, led many other eastern European countries to try the model, and it worked — in a time of growth. The problem came when the Great Recession hit and countries failed to collect enough revenue through the flat tax. As the government was forced to increase the tax, efforts began to dump to flat rate tax, and the political parties with that promise were put in power.

The problem with the Flat Tax include shifting the tax burden to the poor, and the realization that ultimately government revenues will be cut. There simply is not a rate that the average worker can pay whilst the government is collecting enough revenue.

A Supertax Experiment

The country with the 2nd highest ‘overall tax burden’ (GDP minus tax revenues), 45% of the nation’s total wealth, is France. France has a history of heavy taxation, but the public perception is different in the US in that taxes are a means of social cohesion and serving the country before business. Citizens enjoy a number of government services through their taxes including universal healthcare and free college tuition. However, in 2013, when a ‘supertax’ of 75% on the top income bracket was imposed, one of its largest faces in cinema left France to officially reside in Belgium; many others followed suit. The supertax was terminated after only two years.

The US System Today and its Problems

For starters, the perception that Americans pay the highest taxes in the world is simply untrue. The US rank 32nd in the top 35th richest countries in overall tax burden at 25%, and pay lower rates across income, sales, gas, taxes.

The US for the most part has a progressive income taxation system, but it breaks down for the top 1% due to what is considered ‘income’. The capital gains tax, which for many of the wealthiest individuals are their main source of income, are taxed at around 20%. Makers of $10 million annually paid a tax average of 20% of the income, while those that make more than $100 million paid effectively 18%. Investors also enjoy a ‘carried interest’ rule, allowing them to count their own salaries as capital gains if they are investing other people’s money.

In addition, the numerous tax provisions in the US tax code such as the mortgage interest deduction, the charitable contribution deduction, and countless other tax breaks ultimately benefit the rich the most. The tax credit for plug-in electric vehicles over $100k, which the average American does not benefit from, has cost the government $740 million alone.

The corporate tax system also have issues. The US pay one of the highest corporate tax rates at 35%, leading many of the world’s largest corporations to hire lawyers and consultants to find loopholes and take their profits offshore. As an American company does not have to pay corporate tax until its earnings are transferred back to the US, they leave it overseas. Apple, Google, and Microsoft have all famously set up offshore subsidiaries to pay little to no corporate tax on those profits. Pfizer has also tried to officially be listed as an Irish company. The problem here, is the loss of reinvestment of capital that these corporations have left idle abroad.

Moreover, tax provisions for corporations are a problem. Despite the law of a 35% corporate tax rate, a study by the Government Accountability Office (GAO) found that the effective tax rate paid by large US corporations was closer to 16%. Deductions, credits, and allowances given to large corporations have led to a tax loss of $181 billion.

What Can We Do?

Reid points to the BBLR principle to find solutions. One idea employed in many countries is the VAT, a sales tax applied to every stage of commerce. As a consumption tax, the VAT is broad, allowing for a reduction in activities we want to incentivize — labor and investment. The VAT has proved to be successful, generating about 33% of all tax revenue among OECD nations.

Fundamentally, the general public needs to be able to reconcile short term pains with the long term. Eliminating tax deductions hurt its beneficiaries, but allow for a lower overall tax rate. Lowering corporate tax rates will hurt revenues, but the current rate proves to be failing, and we need to better incentivize reinvestment in the economy.

As someone who have previously been a big proponent of treating capital gains as income tax, basically increasing the capital gains tax, this definitely challenged me. I think, however, the elasticity of individual investing would be interesting to explore. Do investors have other better options for investing in the stock market? Or would increasing the tax still prove to have the best return in wealth, where investment will not change?