By NextBestFitPhase 1: Enactment & build · Step 1.12
Set up the new taxes
Months 0–18 · Treasury, IRS, SSADiscuss this step
How it is financed
Which taxes replace premiums and out-of-pocket costs?
The plan chooses
Five sources: (1) existing public funds redirected (Medicare, Medicaid, Marketplace subsidies); (2) a 7.5% employer health payroll tax, with the first $250,000 of each employer's payroll exempt; (3) a 4% income-based household premium above a size-adjusted exemption ($32,000 for a family of four); (4) top-end measures: a 7% surtax on income above $1M, taxing capital gains as ordinary income above $1M, and a 0.1% financial transactions tax; (5) whatever remains, $97.2B in the central case, from general revenue. State governments pay a maintenance-of-effort contribution equal to their former Medicaid share.
Payroll and income taxes replace premiums, which already function as a payroll tax: employers pay them from compensation. The employer tax is set below what offering employers paid in premiums (7.5% of payroll versus roughly 9–10% today), so most offering employers save and must pass the savings to wages. The household premium is visible and dedicated, so people see what the program costs. The top-end taxes make the overall financing progressive.
Payroll + income premium + top-end (chosen)
As described.
Pros
- +Progressive: households under about $150k generally come out ahead
- +Mirrors the existing flow of employer money
Cons
- −Non-offering employers (many small firms, gig platforms) face a new cost Over time this lowers wages for their workers.
- −Payroll and income taxes fall in recessions, exactly when demand for the program does not
Value-added tax (VAT)
A 6–8% broad VAT, as used by most OECD countries to fund health care.
Pros
- +Very broad base; hard to avoid; stable
- +Doesn't distort hiring decisions as much
Cons
- −Regressive unless offset with rebates
- −Requires building a new federal tax system No U.S. federal sales tax exists.
Deficit finance
Fund the federal increase with borrowing.
Pros
- +No new taxes
Cons
- −Federal health outlays more than double, since nearly all health spending runs through the Treasury; borrowing at that scale is unsustainable
- −Creates an incentive to underfund the program later
What this choice gives up
- Employers' discretion over the size of their health benefit.
- Tax-free health compensation: the ESI tax exclusion disappears.