Matt Miller - The Archives
Opening The Capitalist Mind
Fortune, March 19, 2007

We already have a huge welfare state hidden on corporate payrolls—time to move it where it belongs

John Edwards says we need to raise taxes to fix health care, and you can bet that Barack Obama and Hillary Clinton will eventually say so, too. Their red-blooded Republican foes will counter that raising taxes is always and everywhere evil, because it hurts the economy. Well, suppose I told you there was a way to square this circle, courtesy of a $500 billion health-related tax hike that could save the economy? And suppose I added that conservative economists would actually be okay with the idea? Too good to be true, you say? Well, welcome to what I call the "opening of the capitalist mind."

Start with the fact that business now spends a stunning $500 billion a year, or 4% of GDP, on health-care benefits. Let's say we shifted that cost to government-that's right, relieved business of it entirely-and, to make matters simple, combined it with other public funds to give citizens a voucher with which they could buy a private health plan. To pay for this without boosting the deficit, we'd raise taxes by an identical amount-not on business, of course, but on taxpayers broadly, via various gas or carbon taxes that would have the salutary side effect of helping cure our energy and environmental woes. Note that the total amount the country is spending on health care doesn't change under this scheme; we just shift the financing burden from business to the general population, via government. (To make the left happy, we can toss another 1% of GDP into the pot in new taxes to make sure the vouchers go to all today's uninsured as well. Presto, universal health coverage.)

What would business think of such an idea? Policy suggestions like this would ordinarily be dead on arrival, decried as a record $500 billion tax hike sure to sink the economy. But what if the business community rose as one to force politicians to get past such rhetoric—and publicly trumpeted the need for the new taxes? It's not as far-fetched as it sounds. Look what we'd be doing: We'd free business from the burden of financing health care. (Employers emotionally or paternalistically attached to their health role could still facilitate and arrange for coverage, just not fund it, as conservative Heritage Foundation scholar Stuart Butler lays out in a forthcoming paper for Bob Rubin's Hamilton Project.) The boon for competitiveness—not to mention shareholder value and the stock market-is obvious. And to seal the deal for skeptical capitalists, conservative economists declare that this brand of tax hike should have no impact on growth. "In one scenario we call health expenditures government, and in another we don't. What does it matter?" says Kevin Hassett, head of economics at the American Enterprise Institute and an advisor to John McCain. "It's hard to imagine that would have the negative growth effects" normally ascribed to tax increases in the economics literature.

If conservative economists do have objections to this health shift, Hassett explains, they will be based on ideological notions of what government should be doing, not on whether swapping a giant current business expense for a tax devoted to the same purpose has any economic consequence. When the dust cleared, though, taxes and spending as a share of GDP would officially rise in the U.S. by four or five percentage points. I know that seems like a lot, and that whenever the government-spending-to-GDP ratio goes up, it is typically seen as a sign of dreaded "bigger government." But remember, we're not talking about building some massive new welfare state here. We've had one of those for decades-it's just been hidden on corporate payrolls.

The moral of the story? We have reached a moment in the history of American capitalism where business's traditional Me-Tarzan-you-Jane-taxes-bad mindset is one of the biggest obstacles to pragmatically rethinking our health-care and pension systems. And make no mistake: If business doesn't help Washington fix these essentials before long, rising worker anxiety will produce a protectionist backlash that could wreck everything capitalists believe in. Instead of reflexively resisting the idea of government and taxes, therefore, business leaders must now do some constructive, nonideological thinking if they want to serve corporate America's self-interest-and the country's. As I said, welcome to the opening of the capitalist mind.