If you have been unfortunate enough to catch the daily news on one of the mainstream media networks you will no doubt at some point have seen a snippet of our country’s parliamentary proceedings. Parliament is currently preoccupied with the issue of the Medicare rebate – a 30% discount on the price of private health insurance. The government wants to – and, now that they have bribed the Greens and independents with a sufficiently large amount of your money, will – remove the rebate for so-called¹ high income earners.

The justification is one we must suffer every day from those on the left (and those on the right seem almost afraid to challenge the notion): removing the discount for so-called high income earners will create a “fairer” distribution of income. For example, Health Minister Tanya Plibersek went to pains in one session to remind MPs that their health insurance is subsidised by lowly-paid workers like those who clean the parliamentary chamber at night².

First of all: is it? Are lowly-paid workers, such as the chamber cleaners, actually subsidising highly-paid workers? Given that the entire public health system is financed through tax dollars and that the rebate is also financed with tax dollars, then clearly the people subsidising it are, you guessed it, the so-called high income earners. These people pay significantly more tax than so-called low income earners and when government transfer payments are factored in then the so-called lowly-paid workers actually pay negative taxes (Figure 1; Figure 2).

Figure 1: Estimated taxes as a percentage of gross income, by quintile of household-weighted weekly gross household income, 1996-97 (Source)

Figure 2: % Share of Australian Taxes Paid (Source)

Transfer payments are one of the worst kinds of economic inefficiencies. Arthur Okun noted that “…the money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich”.

I certainly do not support the rebate in its current form but I would also be reluctant to call for its abolishment. We have a tricky situation created by the government’s guarantee of public health care – a guarantee it clearly cannot back up (unless you think rationing, i.e., queues, are a good way to distribute healthcare) – that, it would seem, has created a very real need for some incentive for people to voluntarily opt out of that Ponzi scheme (even though they still have to pay for it). The rebate therefore goes some way to alleviating a problem caused by the initial regulation by keeping people on the margin out of the public healthcare system.

A better solution than the 30% rebate would be to reverse the trend of more government to solve problems created by government, reduce the tax burden of public healthcare and get the government out of healthcare altogether. Government is the reason why healthcare is so expensive and why the so-called poor cannot afford insurance. It is the reason why there is a need for tax rebates to keep people out of the public system in the first place.  

Unfortunately, if we are being realistic the chance of removing government control of health in a modern social democracy is virtually nil and therefore the rebate should stay less we want longer healthcare queues and poorer service for the chamber cleaners. I leave you with Robert Lucas on the issue of “fairness”³ as defined by the Labor party:

Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution…But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.

[1] I use the term ‘so-called’ because I disapprove of segregating society into two arbitrary classes of people.

[2] I believe the logic behind this apparent ‘subsidy’ is that because the chamber cleaners likely do not have private health insurance, they are missing out on, ahem, “subsidising” the 30% rebate that the ‘rich’ enjoy. Let us just conveniently forget that the subsidy is paid for by taxes anyway (of which the ‘poor’ pay very little if any) and that the entire public health system – that the ‘rich’ do no use much of – is paid for out of the same taxes.

[3] I would of course opt for a different definition of what is ‘fair’: equality of opportunity (equality before the law) rather than the current definition of equality of outcomes.