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The Equity Effect of Universal Health Care
A Guide to Reducing Income and Wealth Gaps through Public Health Care Financing
Universal health care, or Medicare for All, seeks to provide health care as a right and a public good to all
residents. This requires taking health care out of the market and financing it publicly, through the tax system.
Everyone gets the care they need, regardless of how much money they have.
Task forces in California, Oregon and Washington are planning a transition to universal health care, as are the
presidential candidates supporting a national Medicare for All program. But they face fear-mongering about tax
hikes, fueled by a reluctance among both advocates and legislative champions to openly discuss financing.
This brief takes a different approach. While it is true that most revenue would come from redirecting existing
funding streams, we look at who would be paying the taxes that replace premiums and out-of-pocket costs. We
conclude that at a time when wealth is transferred upwards at record levels, universal health care would lead to
a more equitable sharing of wealth and income.
Universal health care financing: from “how much” to “who pays”
Universal health care advocacy has long relied on talking about cost savings. That’s because all evidence
shows that publicly financed health care will reduce costs. Yet the truly powerful message remains hidden:
whose costs? That the health system will be cheaper in the aggregate is hardly meaningful to people if it is
unclear who will benefit. What really matters is that a publicly financed system will reverse who pays for it. In
the current market-based system, people with health issues and those with low and moderate incomes are
most burdened by health care costs. The wealthy, on the other hand, spend much less of their income on
health care. Universal health care flips this relationship between health and wealth: payments would be
independent of health status but increase with wealth and income. By changing how we pay for health care, we
can increase economic equity."
The equity effect of universal health care
In a universal, publicly financed health care system,
most of us will spend a smaller share of our income
on health care, while only the wealthy will contribute
more. All studies point to this equity effect, but what
makes it possible? Simply put, public financing
eliminates the set dollar amounts we pay for
premiums, deductibles and out-of-pocket costs, and
replaces these with tax rates proportional to our
income (or wealth, or consumption, depending on
what is being taxed). Instead of paying a fixed
amount, we contribute a percentage of our income,
which means those who earn more, will pay more.
This reverses the current distribution of health care
payments: in the market system, the more money a
household makes, the less they pay for health care
as a share of their income. In a universal, public
system, this regressive financing model will become
progressive: those with more money need to
contribute more. Although the degree of
progressivity will depend on the tax design, the
overall effect will be a shift toward greater
distributional equity. The following examples
illustrate this.
The first chart, reflecting a proposal by RAND for
financing universal health care in Oregon, shows
that a universal public system will turn a regressive !
Chart 1: Health Care Payments as a Share of
Household Income, Oregon proposal
Health Care Payments as Share of Income
5%
10%
15%
20%
25%
30%
Household Income as Percentage of the Federal Poverty Level
<139%
139-250%
251-400%
+401%
Existing System Single Payer
Chart 1 is based on RAND 2017, Table A.7, p.109.
payment curve into a progressive one. While the
existing system has poor and middle income
families pay the largest share of their incomes on
health care, the universal public system flips who
pays for health care: the more income a household
has, the more they would pay. In this proposal for
Oregon, this payment would be in the form of
income and payroll taxes.
How big this equity effect is — the degree of
progressivity — depends on how health care taxes
are designed. The second chart illustrates PERI’s
projections for universal health care in California.
Poorer and low income households would pay much
less in the universal system, whereas wealthy
households would pay more than they do now. Yet
the proposed tax mix — sales and gross receipt
taxes — produces a near flat line rather than a
progressive curve. This means most people would
pay a similar share for health care, despite their
different incomes and wealth. This is the effect of
taxes based on consumption. Everyone — poor and
rich — has to pay the same tax on a purchase they
make, regardless of their income or wealth.
Treating the smallest businesses equitably
Businesses can also benefit from the equity effect of
universal, publicly financed health care. The third
chart illustrates how health care payments made by
different size companies would be more progressive
in a national Medicare For All system, compared to
the current employer-sponsored insurance model. In
these two scenarios, small businesses would pay
significantly less, while large corporations would pay
more. The extent to which small businesses would
benefit depends on the type of tax, coupled with the
extent of bottom exemptions: in this particular model
(Chart 3) a gross receipts tax (GRT) appears more
progressive than a payroll tax. Further, small
businesses that currently do not offer insurance —
not shown in the chart — would see no change with
a GRT (which includes a larger bottom exemption),
but a slight increase with a payroll tax. However, this
model does not take into account that the costs of a
GRT tend to be passed on to consumers.
Advancing racial and gender equity
Equity effects would also benefit population groups
that are particularly impacted by fiscal, economic
and health care injustice. Public financing for
universal health care creates a positive distributional
effect for people of color and women, increasing
their net disposable incomes. While racial health
disparities are widely recognized, racial income
disparities caused by regressive health care
payments have received less attention. As people of
color tend to be overrepresented among lower-
income households, they are disproportionately
affected by regressive financing. Further, they are
more likely to be under- and uninsured, which tends
to increase out-of-pocket costs. Similarly, women,
and especially women of color, are more likely to
have lower incomes, which means high premiums
and cost-sharing affect them more than men. A
greater share of women’s income goes toward out-
of-pocket costs, also because women have greater
health care needs. Universal, publicly financed
health care would end this unjust distribution of
costs burdening people of color and women.
Which types of taxes have the greatest
potential for maximizing equity?
Universal, publicly financed health care increases
the progressivity of health care payments across
income groups. This means it redistributes
disposable income from higher to lower-income
households, and from white households to families
of color.
Chart 3: Change in health care payments by
businesses, national Medicare For All proposal
compared to existing system
Change in health care payments
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
Business Size: Number of Employees
0-9
10-19
20-99
100-499
500+
Payroll Tax Option Gross Receipts Tax Option
Chart 2 is based on PERI 2017, Table 14, p.45. (ESI is employer-
sponsored insurance). Note that overall spending rates are not
comparable to Chart 1, as the two studies differ in the payments included.
Chart 2: Health Care Payments as Share of
Household Income, California proposal
Health Care Payments as Share of Income
-2%
0%
2%
3%
5%
6%
Annual Household Income
$13k MediCal
$62.3k ESI
$227.6k
$340.4k
Existing System Healthy California
Existing Tax Deduction
New Tax Credit
Chart 3 is based on PERI 2018, Table 24, p.85.
Yet there are significant differences in how big this
equity effect is, depending on the type of taxes
chosen. To illustrate these differences Table 1
provides an overview and equity assessment of the
main financing proposals put forward in states that
are or have been considering universal health care
bills, and of a financing proposal for a national
Medical for All program. Based on the studies we
reviewed, Table 1 summarizes the proposed tax
structures and their projected distributional impacts
on households and businesses. This comparison
shows that when the financing design of universal
health care includes the following features, it will
maximize equity.
•Taxes that target the wealthy directly, such as
taxes on financial and physical assets, and on
capital income, will redistribute wealth from richer
to poorer households. Options include a new
health tax on wealth, increased tax rates on
unearned income, including capital gains, and
higher top marginal income tax rates. New York’s
universal health care bill mandates health care
taxes on unearned income.
•Graduated tax rates that increase with income
will ensure that taxpayers contribute according to
their ability. Although flat tax rates would be better
than fixed premiums, as people who earn or buy
more would pay more, they are regressive in so
Type of tax
Notable features
Distributional effects
Equity focus?
National
Medicare 4
All
(PERI study)
Taxes on payroll,
sales & wealth
(real and
financial assets);
capital gains tax
increase
Necessities excluded from
sales tax. Tax credit for
Medicaid population. Bottom
exemptions for other taxes (all
flat). During transition to payroll
tax, employer premiums remain
but are cut by 8%.
All except top 20% of households
would pay less than under the
existing system. All except very
large businesses would pay less.
Progressive, although the focus is on
even (over equitable) distribution of
universal health care savings. No
financing guidance in bills.
California
(PERI study)
Taxes on sales &
gross receipts
Necessities excluded from
sales tax. Tax credit for
Medicaid population. Bottom
exemption from gross receipts
tax.
Top 20% of households would pay
slightly more, others less.
Businesses would pay less,
especially small businesses
currently offering coverage.
Mildly progressive. Focus is on even
(over equitable) distribution of
savings. No financing guidance in
universal health care or study
commission bills.
New York
(Friedman &
RAND
studies)
Taxes on payroll
& unearned
income (interest,
dividends, capital
gains)
Payroll tax is graduated, has no
cap, employer pays 80%.
Bottom tax bracket is exempted
from both taxes.
All (Friedman) or most (RAND)
poor, low and middle income
households would pay less; the
wealthy would pay significantly
more.
Progressive. Type of taxes and equity
goal is built into universal health care
bill; actual tax schedule would set
degree of progressivity.
Oregon
(RAND
study)
Taxes on payroll
& earned income
Small businesses (90% of
employers) exempted from flat
payroll tax. Transitional “wage
passbacks" from employers to
workers.
All households under 400% FPL
would pay significantly less.
Higher incomes would pay more.
Progressive. Universal health care
and task force bills include
progressivity principle.
Vermont
(Governor’s
2014
proposal)
Payroll taxes and
premiums
Premium has sliding scale “on-
ramp” but is flat for middle
incomes and capped at the top.
Payroll taxes are flat.
90% of households would benefit
from net income increases. Small
businesses would pay significantly
more.
Progressive and regressive elements.
No equity focus, despite equity
principle in universal health care law.
Vermont
(HCHR
proposal)
Taxes on payroll,
earned &
unearned
income
Payroll tax is on wage disparity
rather than wages. Tax rates
depend on wage ratio and
business size. Income taxes
are not capped and have
bottom exemptions.
Low and middle income families
would pay less, and the wealthy
would pay more, also compared to
the Governor’s proposal. Small
businesses would pay much less
than large employers.
Highly progressive. Focus is on
reducing income inequity directly and
indirectly, including equity between
businesses.
Washington
(Friedman
study)
Taxes on payroll,
earned,
unearned &
corporate
income; plus
premium
Bottom exemption from taxes
(all of which are flat). Premium
is sliding scale at bottom end.
Targeted at middle class, no
changes for poorer or wealthier
households, although top 1%
would pay more. Benefits
businesses with expensive
existing coverage.
Mildly progressive. Universal health
care bill suggests employer
assessments and individual
premiums, though work group bill
does not.
Table 1: Comparison of Universal Health Care Financing Proposals
far as a higher share of poorer families’ income
would go toward health care payments. New York
and Oregon’s bills mandate some form of
graduated taxes.
•Exemptions for poorer households or for
necessary goods can mitigate the impact of
otherwise flat or regressive taxes. Several
proposals include exemptions targeted at
Medicaid beneficiaries and low-income people
more generally. However, some of these
measures, particularly tax credits for poor people,
may be politically unstable, as they are easily
revoked if attacked as special provisions for
certain groups.
•A highly progressive tax structure that applies
to everyone would be more sustainable in the
long run. Ultimately, a regressive tax (e.g. a tax on
consumption rather than income) does not
advance redistribution, even with exemptions or
credits. The sales tax proposed in California
curtails the equity effects of universal health care,
as seen in comparison with the federal proposal,
which uses a wealth tax to counterbalance the
sales tax’s regressive effects.
•Businesses must not be let off the hook when
moving from employer-sponsored insurance
(which currently covers over half the non-elderly
population) to publicly financed health care.
Capturing existing employer contributions is a key
reason for the popularity of payroll taxes in
current financing proposals. New York’s bill
mandates a graduated payroll tax with employers
paying 80% and workers 20%. Yet employers
tend to shift the cost of their premium share onto
workers by reducing wages. Once businesses
save costs with universal health care, positive
wage effects are expected, but this is unlikely to
happen automatically. The Oregon study suggests
wage passbacks during the transition period. A
more permanent incentive for increasing wages
was proposed by Vermont’s Healthcare Is a
Human Right campaign, which designed a payroll
tax that uses wage disparity as a factor in setting
tax rates. A gross receipts tax with a generous
bottom exemption could be a progressive
alternative to a standard payroll tax, according to
PERI’s calculations, especially since it avoids
employment disincentives. Yet a GRT may simply
shift the burden from businesses to consumers
(rather than from businesses to workers).
•Equity concerns apply to businesses too. If
small businesses are disproportionally burdened,
as in the flat payroll tax proposal by Vermont’s
governor, the financing of universal health care
may be jeopardized. Taxes on businesses require
graduated tax rates starting a zero or bottom
exemptions.
Addressing transition challenges through
equitable financing
Many proposals contain pro-active solutions to some
of the sticky financing questions that can affect the
transition to universal health care. As we have seen
in Vermont at the end of 2014, an ill-advised
financing plan that does not work for the majority of
people and businesses can slow down or even
derail universal health care. Here are some ideas on
how an equity focus can help:
•Sharing universal health care savings
equitably: savings for businesses must translate
into savings for workers. Oregon’s proposal seeks
to address this through wage passbacks to
workers.
What are wealth taxes?
Wealth taxes, also referred to as net worth taxes, are
applied on a recurring basis to the value of personal
financial assets, such as stocks, financial securities,
and trusts, and can also include taxes on the value of
physical assets, such as luxury goods and real estate.
The threshold of a wealth tax is typically set very high,
so that only millionaires or billionaires are affected.
Wealth taxes are different from taxes on the non-wage
income derived from the sale of financial assets (i.e.
capital gains) and from estate and inheritance taxes.
These taxes are imposed on the transfer of wealth,
whereas wealth taxes apply to the possession of
wealth. Nevertheless, all of these taxes are targeted at
individuals with great wealth, which means they
contribute directly to redistributing resources
downwards and to narrowing the wealth gap.
What are consumption taxes?
Taxes levied on the consumption of goods and
services include sales taxes as well as excise taxes
on alcohol, tobacco and gasoline (sometimes referred
to as sin taxes). In most other countries, value-added
taxes (VAT) are more common than sales taxes. VAT
is collected on the value added to a good or service
throughout the supply chain, rather than solely at the
final point of sale. The result, however, is the same:
the tax is passed on to the consumer. A different but
related approach is to tax the gross receipts or
revenue of a business. This is technically a business
rather than a consumption tax, but it is also passed on
to the consumer. All of these taxes tend to be
regressive, as they impose a flat tax rate and do not
take account of ability to pay.
•Incentivizing positive wage effects for
workers: Vermont’s HCHR campaign proposed a
tax on wage disparity to boost median wages
while avoid hiring disincentives. Since then, a new
transparency rule requiring the disclosure of the
CEO-worker pay ratio has spurred wage equity
related tax initiatives. Portland, Oregon, now
imposes a surtax on companies whose CEOs
earn more than 100 times the median worker pay,
and Bernie Sanders has proposed a corporate tax
based on compensation ratio at the federal level.
•Holding Medicaid recipients harmless: A tax
threshold, tax exemption or tax credit can ensure
that people who are too poor to pay premiums
now are not subject to paying taxes in the
universal system. If the financing mix includes a
sales (or gross receipts) tax, a tax credit should
also be extended to low- and moderate income
seniors. Although seniors would no longer pay
Medicare premiums and out-of-pocket costs, a tax
on consumption would cause an unexpected
burden, especially for those seniors who have
already paid payroll taxes into the current
Medicare system.
•Protecting the smallest businesses: A payroll
or gross receipts tax threshold or bottom
exemption can ensure that small businesses (e.g.
those with up to 10 workers, 60% of which do not
currently offer coverage) and the self-employed
do not face a sudden and disproportionate
increase in costs.
Studies referenced in Table 1:
•Friedman, Gerald. 2018. Economic Analysis of Single Payer Health Care in Washington State: Context, Savings, Costs, Financing. Whole Washington, Seattle,
WA.
•Friedman, Gerald. 2015. Economic Analysis of the New York Health Act. University of Massachusetts, Amherst, MA.
•Healthcare Is a Human Right Campaign. 2015. Equitable Financing Plan For Vermont’s Universal Healthcare System. Vermont Workers’ Center and NESRI.
•Liu, Jodi L., Chapin White, Sarah A. Nowak, Asa Wilks, Jamie Ryan, and Christine Eibner. 2017. An Assessment of the New York Health Act A Single-Payer Option
for New York State. RAND Corporation, Santa Monica, CA.
•Pollin, Robert, James Heintz, Peter Arno, and Jeanette Wicks-Lim. May 2017. Economic Analysis of the Healthy California Single-Payer Health Care Proposal
(SB-562). Political Economy Research Institute (PERI), University of Massachusetts, Amherst.
•Pollin, Robert, James Heintz, Peter Arno, Jeanette Wicks-Lim, and Michael Ash. November 2018. Economic Analysis of Medicare for All. Political Economy
Research Institute (PERI), University of Massachusetts, Amherst, MA.
•Shumlin, Peter. 2014. Green Mountain Care: A Comprehensive Model for Building Vermont’s Universal Health Care System. State of Vermont, Montpelier, VT.
•White, Chapin, Christine Eibner, Jodi L. Liu, Carter C. Price, Nora Leibowitz, Gretchen Morley, Jeanene Smith, Tina Edlund, and Jack Meyer. 2017. A
Comprehensive Assessment of Four Options for Financing Health Care Delivery in Oregon. RAND Corporation, Santa Monica, CA.
How to maximize universal health care’s impact on economic equity:
Five recommendations for advocates
1. Include explicit financing principles in universal health care bills, including parameters for tax design
and distributional outcomes.
2. Ensure that financing proposals are intentional about redistributing income and wealth from richer to
poorer households. The tax structure should be progressive for both people and businesses.
3. Ensure that corporations contribute according to their ability and pass savings on to workers.
4. Use the equity effect of publicly financed health care as an advocacy talking point and connect this
with demands for reducing wealth and income inequality. An equitable financing design can enhance
the political feasibility of universal health care, as the Vermont experience shows (which largely
faltered due to a flat tax proposal).
5. Don’t be afraid of “disruption”: shifting health care out of the market is an important and necessary
structural transformation. A timid financing design that mirrors current premium or tax conventions
risks perpetuating the same unjust fiscal policies that have facilitated economic inequity in the first
place. Many current tax rules benefit the wealthy. By shifting the resourcing of a major public good —
health care — to the wealthy, we can address that injustice.
NESRI October 2019