Healthcare, education and taxation in the land of Oz (a fairy tale)


The debate on the private health insurance (PHI) rebate continues. So I thought it timely to distract readers of the CoRE Economics blog with a fairy tale. This is a story of Pat, who lives in the land of Oz.

Now, Pat has a family and wants the best for her family. She values education and healthcare highly. Pat is middle class – not wealthy but able to make the choice between, say, a new car or sending her children to a private school. And she could buy private health insurance for her family so long as she and the family have cheaper holidays.

But Pat has a problem. In the land of Oz, people who put a high value on education and healthcare are required to pay extra taxation. So Pat faces a dilemma. With the extra tax burden she is not sure that she can afford the best school for her children. Similarly, while the thought of having her child wait for an operation due to, say, a sporting injury, fills her with despair, Pat is not sure that she can afford private health insurance given the extra tax burden.

Clearly this is a rather sad fairy tale. But it describes the situation in Australia.

The debate about the PHI rebate is a debate about taxation and about ‘paying twice’. Fortunately one commentator, Henry Ergas, seems to recognise this (albeit in the pay-walled Australian). Similarly, the debate about government funding for private schools is a debate about taxation and ‘paying twice’.

Every person who buys PHI or who sends their child to a private school saves the government money. By using PHI they reduce the government’s cost of funding the public health system. By sending their child to a private school (which can be the local catholic school just as much as an ‘elite’ grammar) they reduce the government’s cost of funding the public school system. These people still pay their taxes – to fund the public school system and the public health system – and traditionally they have received a ‘partial refund’ through government grants to private schools and through the PHI rebate. But make no mistake. These people, who have the temerity to value education and healthcare highly, pay twice. They pay for the public system through their taxes and they pay again for the private services that reduce their need for the public system.

What sort of society has a taxation system that penalises those who value health and education highly? Australia!

Of course, the wealthier families tend to buy PHI and send their children to private schools. But the elderly and those with young families also place a high value on PHI – whether or not they are rich. And plenty of families of modest means are working to send their children to the best possible schools – and forgoing cars, holidays, bigger houses and the like to be able to afford the fees.

I have no problems with having progressive (or more progressive) taxes in Australia. But let’s tax those who are rich, not those who happen to value education and health. Let’s not use poor proxies for being wealthy to set our taxes. And let’s not hide taxes in our health care and education systems.


31 Responses to "Healthcare, education and taxation in the land of Oz (a fairy tale)"
  1. What then is that space on my tax return for ‘days with PHI coverage’? How can I pay twice when one of my payments is refunded to me…

  2. ‘people who put a high value on education and healthcare are required to pay extra taxation.’ No they’re not… they’re required to pay private school fees and private health insurance costs. These are not taxes, they’re services that will almost exclusively benefit Pat and her children, and they’re optional.

    If Pat and her family is forced into the public health system then yes, she may find that elective surgery involves waiting. Government spending on health involves some unfortunate choices. I suppose you’re suggesting we should radically increase taxes on the wealthy so that we can afford a gold plated instant service healthcare system? Pat will only pay once then. 

    In the meantime, taxes pay for a public school and health system that makes Australia a happy, wealthy and productive society. Pat may choose not use them herself, but as a wealthy family her and her children are obviously benefiting from a healthy and skilled Australian workforce – the one that builds the roads she drives on and staffs the hospitals and schools she uses.

  3. Lindsay – the rebate is 30% not 100% and is about to become 0% for many people. That IS the debate about the PHI rebate.

    Francis – your bias shows by your characterisation of Pat as wealthy. Do you really think people who send their children to the catholic school system (for example) are wealthy? If so, you need to get out more. 

    Yes – I would like a comprehensive Medicare with PHI as a top-up insurance. This would be fair and equitable and would not artificially penalise the elderly and chronically ill. You appear to want these people to pay for both Medicare and PHI. This is a strange, regressive approach to tax policy.

    Perhaps you believe we should have more taxes on big houses, people who take overseas holidays, people who drink red wine or those who have more than one colour television? These expenditures are also correlated with wealth but such taxes are distortionary and bad economics. So is taxing people who value health and education by making them pay twice. I prefer an economically efficient and progressive tax system where everyone pays their fair share according to their income and wealth – not according to whether they value education more than a car.

  4. I’d only get PHI in order to avoid the Medicare surcharge…. Most countries I know of use taxes to fund public schools and health care at least for the worse off (e.g. Medicaid in the US even) and people who want to have the private version have to pay for it. Nothing special about Australia.

  5. Because people with PHI would never use A&E, never get PBS drugs, would never go to the doctor and get a rebate from Medicare, would never claim the tax deduction for health costs over $1500 (or whatever it now is).

  6. Sorry, perhaps I’m being thick. Are you actually arguing that we should completely drop the PHI rebate and there should be no transfers from government to private schools? Because these payments distort our perceptions of how we should spend our money?
    If that is the case, then I wholeheartedly agree with you. But that will mean that your exemplar definitely won’t be able to afford either – unless you’re planning to return those funds through tax cuts? Which would be fine, it’s just not clear!

  7. Stephen, 

    so you’re the economist, what sort of marginal tax rates are you talking about to replace the costs associated with PHI and private schooling. It’s all very well to state your objections in abstract, but any real evaluation of your point needs to have at least some rough numbers attached.


  8. Wow, so much whinging!

    The legislation won’t affect the rebate paid by individuals earning $83,000 a year or less, or of families earning a total of $166,000 a year or less.

    The 30 per cent rebate will drop to 20 per cent for individuals earning between $83,000 and $96,000, and families earning between $166,000 to $192,000 a year.

    It will fall to 10 per cent for individuals on between $96,000 to $129,000, and families on $192,000 to $258,000. There will be no rebate for individuals earning $129,000 a year or more, and for families earning more than $258,000.

    Hardly people of ‘modest means’. I’m sure they’ll live.

  9. Martin

    Good point. It is a lot easier to get the numbers for schooling so lets see what it would cost to move to a simple system where all students get funded equally by government for education and if a student and their family decided to ‘buy more’ education by attending a private school they would not be penalized. 

    Let’s use the information in this ACER document as our starting point:

    Using the figures in here the government funding for each public school student is around $11,000. The government funding for each private school student is around $6,000. So a family that chooses to send their child to a private school effectively pays $5,000 in taxes which is used for public school services that the family does not use (i.e. $11,000 per student tax less the $6,000 per student that goes back to private schools). Overall about one third of Australian students use the private system (about 1.1m students) so the double taxation for families who choose to use the private school system is about $5.5b. 

    So, if we moved to a system where all students were equally funded through the tax system, regardless of the school they attended (i.e. we avoid the double payment) it would cost the government $5.5b on top of the current approximately $31b education budget (shared by federal and state governments). Current total government expenditure in Australia is around $300b so the extra expenditure is less than 2% of total govenrment expenditure. In terms of the total budget, it will not cost much and could be raised by a modest increase in the top marginal income tax rates. So we can easily avoid taxing the wrong people (and getting the wrong incentives) and start taxing the right people. 

    Now, I have picked education because the numbers are much easier to get. But I suspect a similar result would occur for the PHI. (Further, the PHI is ‘clearer’ as every tax payer pays every year. The above calculation hides all the other cross subsidies in education such as from single people to families. However, these do not change the bottom line number). A modest increase in income tax progressivity would yield enough revenue to avoid a system that makes the elderly and the ill pay twice for health cover.

    Finally, Stephen W – no, you are not being thick. I am obviously not being clear enough. The easiest way to see what I am advocating is to think of a situation where the money follows the patient (or for schools, the student) regardless of where the operation occurs or who carries it out. So for health care this is a very different approach to our current system. it means changing the nature of PHI. Medicare would be truly universal in the sense that it would cover a certain range of procedures subject to waiting times etc. PHI would purely be for the add-ons (e.g. paying to avoid the waiting times). 

    Note that I am not against Medicare and public health insurance. Rather I want it expanded and the ‘overlap’ (which is just a way for the government to hide revenue savings)to be eliminated. I want a clean tax system that is more progressive to fund this. And I want a clear role for PHI to provide cover for the extra services above the medicare level (It does this at present but ALSO has an overlap – it is the overlap that is the problem).

  10. Stephen,

    If I understand correctly, you support the rebate of private health care, and government funding of private schools. You argue that even with these provisions, individuals utilising private health insurance and pirate schools would have an ‘extra tax burden’.  Correct?

    So in your mind maybe a better way would be for the cost of private schooling in total to be tax deductible? The cost of private health insurance tax deductible? A way to avoid the ‘extra tax burden’ of these choices?

    I see a few problems.  
    First, everyone benefits from the public health system.  Pharmaceutical subsidies, emergency departments (which you will be taken to even if you have private insurance) etc.  By having private health insurance you don’t remove your demand on the public system completely, and many of the services covered in the cost of private health insurance wouldn’t be necessarily incurred in the public system at all (e.g. dental, chiropractic etc).

    Also, anybody who does not have private health insurance but simply pays for te private provision of any medial procedures as required (aka self-insured) does not get any tax rebate. 

    In this way I see the choice to engage private security in a housing estate as analogous to the choice to take out private health insurance.  It may decrease your demand for police services a little, but it won’t eliminate it. Should we get a 30% rebate for private security services?  Would I have an ‘extra tax burden’ if I did choose to have private security?  I don’t see this situation as a ‘strange and regressive approach’ to tax policy’.

    For schooling, private and public schools are complete substitutes.  However, we need to think about this more clearly.  In an urban area where the bus and rail system is subsidised, should I get a refund for not using it? If I decide to cycle instead of catching the bus, reducing my demand on the public transport network, am I paying an ‘extra tax burden’?

    The social choice we appear to have made is to provide free schooling for children until year 12 (free meaning that the children don’t pay for their use of the system, but the tax system in its entirety generates the revenue to pay for all children).
    We haven’t made the social choice to align the tax paid by parents and carers with the cost of the provision of schooling for their own children.  
Think about all the other services provided by government at all levels. Try parks and open space.  If I don’t use my local parks I am decreasing demand, and likely decreasing the need for the council to expand parklands, and I save costs in cleaning BBQ areas.  I value relaxing at home rather than in the park – why should I pay twice?  I could go on, but you get the point.

  11. Stephen, your proposal sounds basically like a school voucher / medical voucher system to me.  Why then the need for public provision of these services altogether.  Just give everyone their $11,000 per child and send them on their way. 

  12. Why can’t health insurers currently offer cover for just the ‘add-ons’ instead of the ‘overlap’.  Eg, we cover dental, a few other specifics, plus a list of procedures if your wait time exceeds some threshold?


  13. Stephen,
    As much as I would like to agree with you out of personal interest, I think your arguments are completely wrong. It is perfectly legitimate to have progressive non-cash benefits and subsidies. There is no double-taxation going on here. (And as others have pointed out, most PHI does not actually substitute for Medicare – it is really just hospital accommodation costs and not much more where there is the ‘double-up’ you worry about. Also, on education, I think it is fair to say that no OECD country subsidises private education more than Australia, and these subsidies do not depend on parental income (at least directly).)
    As for your sad tale, you really need to get a better handle on the true hardship and deprivation that exists in our community, and which is implicitly neglected by subsidising private health insurance and private education of high-income families.
    Where you may have an argument is adverse incentive effects, particularly for secondary earners in couple families, but that brings into the discussion the whole suite of government taxes and benefits.

  14. Stephen’s example is merely an apology for keeping existing parts of middle class welfare in existance. Do not worry if you have the resources to pay for health insurance or private education yourself. We will get the State to help you out. No medicare is not a substitute for  private insurance. It is as Roger says. I have had two minor operatins over the last 6 months.

  15. One can argue about figures and percentages till the cows come home. Whether there should or should not be publicly funded education and health care is a matter of principle in the first instance. In a commonwealth public education has served to even out discrepancies of opportunity into which a child has been born. The devil take the hindmost attitude which derides public education ignores the benefits enjoyed by those who hold it that have accrued over generations thanks to effects of such civil institutions.

  16. To an extent this misses the point.  Income is a screwed up basis for taxation in the first place.  Until we get away from the idea of taxation based on what you make and back to the idea of taxation based on what you take, this sort of issue remains utterly convoluted.

  17. Stephen I really think Cameron is right. It’s not just loose terminology but also very inaccurate to say that the payments people choose to make to private schools and hopitals are taxes. They are not. Medicare and public schools are funded by taxes. The taxes are levied on income (and other things), not on the number of children you have produced or the cost of your health needs.

    As a healthy childless taxpayer I impose no education costs on the government and low costs for health care, but I still pay taxes towards the provision of these goods under the public systems. This is fine by me. If I want private healthcare I should pay for it. If I choose to reproduce and want to send my child to a school other than those paid for by the government, I should pay for that too.

    If your argument is really that all education should be paid for by the government (i.e. that parents who send children to private schools should get not just the current generous subsidy but an increased subsidy to match the full cost of sending a child to a private school), it would be hugely expensive and regressive. Why I should increase the subsidy I pay for your private consumption choice to have a child and send it to a private school is beyond me.

  18. This is an extraordinarily dumb argument.
    Cameron’s point should be expanded on: if I buy a house with a large yard that reduces my usage of publicly provided parks, should I have the cost of the large yard rebated?

  19. I think the author is missing an important point. To debate something, people debating should have no bias,or at least prepared to let go of their biases once a logical and factful presentation is made. However in Australia there is a class warfare mentality.

    People with low education and skills have extraordinary living standards in Australia. Only in Australia a laborer with no education can earn more money than a senior engineer with at least four years of university education. That is the reason thousands of people are taking risk to come to Australia in leaky boats.

    These people do not care about fairness, or double taxation, or whatever else you can throw at them. They are only interested in keeping their extraordinary living standards maintained.

    They see how rich people live and they want to have the same material living standards. These people vote and political parties take notice. So everything is distorted to please these people.

    They will be even happier if they see snobs who are better educated or have established a successful businesses are taken advantage off as the author is explaining in this article using health and education as examples.

  20. How about we get rid of the “progressive” tax system all togther along with free health, free education, dole checks etc. Why should I have to pay for somebody’s else’s kids to be educated in a state school or their poor health because they have not bothered to look after themsleves? State schools are inefficient, as are public hospitals – and they will continue to be whilst sucking 100% off the taxpayer teat.

    I have worked hard all my life for what I have, only to be declared “rich”, have my money stolen by the gov’t to pay for people who couldn’t be bothered working hard at school or in their jobs (the so called ‘disadvantaged’). Once I am rich enough – I am leaving the country with my young family in tow. All you socilaists can enjoy growing old in an aging population in your Utopia.

    There is a reason why countries that were destroyed by war only 60 years ago now have better economies than ours (eg Sth Korea – and they have no minerals). The non welfare states are surging ahead. Leftard states like the EU are crumbling.

    Those of you who argue that there should be no funding for PHI or Private schooling – well it cuts both ways. I shouldn’t have to pay for the education of others. Make all education private (as it once was), in fact get rid of the social welfare state altogether. Then get rid of Income Tax (it all goes to the welfare state anyway – pork barrelling).  If you don’t work – you starve. Simple really. I am sick to death of socialists saying I have to pay for the ‘poor and disadvantaged’, when most of those people are there in the first place because they are lazy. Let charities distribute charity – they do it more efficently than gov’t; and nobody votes for them.

    As for the Leftards/ Socialists who say Stephen’s point is wrong – the West is crumbling under the welfare state. This will get worse as our societies age (hence the reason I will encourage my young family to leave – why should they pay?). Australia is no longer a top 10 economy. Pathetic really. It will all come to an end – as all socialist / communist Utopia’s do.     


  21. Cameron Murray, all your objections merely demonstrate the distortions introduced into the economy when the government forcibly makes people cross-subsidise others.  It does not show that King’s argument is wrong, jsut at odds with an inefficient system we have become all too used to.

    I am all for a voucher system for education. Give each child exactly the same amount and let the parents choose which school they send their child to.  At the very least, it should force the public schools to become responsive to the needs of their clients and just to the Teachers Union.

    We all pay compulsory superannuation.  Why not have a similar set-up for personal health funds ie a real fund, not insurance where you may never see that money again.  This could piggy-back on your existing super to reduce administration costs.  Payments would be done by direct debit by yourself from your fund to the service provider.  The huge admin costs of PHI could be slashed.  And it could actually earn money!

  22. Education is central to equality of opportunity.  Inequality of opportunity is not simply unfair, it is highly inefficient too (a mind being a terrible thing to waste).  A rational social planner should thus be very willing to trade static allocative efficency for equity in this field.
    Now if Pat wants to send her kids to “the best private school” she is doing it to give them a head start over others.  Fair enough, but that is a zero-sum game in which there is no net social benefit for the government to interefere.  Especially as, paying out that money, Pat is going to say “I’m alright Jack” and no longer going be willing to pay taxes to ensure other kids aren’t left way behind (leaving them behind being the whole point).  The cost of subsidies to private education is not only the opportunity cost of alternate use of the funds – it includes the undermining of voter support for quality mass education.

    Similarly, a private and public health system with both heavily subsidised is not a stable equilibrium – it tends to results in the destruction of one or the other.  Market failures in the health industry are so severe that, around the world, single-provider public health systems consistently outperform private ones on a bang-for-buck basis, so fully privatising health would likely carry a massive efficiency cost. 

    I’m sorry, but economists who don’t think about positive political economy (not just “political feasibility”, but the dynamics of that feasibility) frustrate me. 

  23. @ On your Marx: Middle class welfare? Really? Why should I get discriminated against because I earn more than your fellow marxists? The ALP only know how to look after their voters – the so-called poor. I have worked hard and worked my way up just to be slogged at every corner. Flood levy – poor don’t have to help with that. Carbon tax, the poor apparently don’t emit so I have to pay for them too; private health care – let’s really put the boot in. At the end of all of this, and if you add everything together, then I’m hundreds of dollars out of pocket a month just for these few things, all the while the government wastes billions on their little pet projects. They support the car industry, whilst that same car industry raises salaries 22% off of MY taxes – I don’t see them stopping that subsidy. Just how much more must people be taxed to make you and the ALP happy? Just remember its TAXES that they take from me to give to you so you can whinge at people who earn more than you. You are so short sighted. If the government stopped the private school subsidising, kids will mob the public schools like they’re going to do the public hospitals. And finally, when am I allowed to keep the money I earn??

  24. If you go to hospital undr private insurance as I have recently then the insurance only pays for the hospital charges. You have to pay for the specialist’s charges. There will be at least two bills here possibly three. Only people with means can afford that yet you want lower incme types to subsidise you. Yes the poor do not halp with a lot of things. THe reason is they are poor. That is why they get government support. what is usually the case the more the middle class sucks on the public teat the less the more deserving get

  25. Steven,

    People have budget constraints. When you say ‘people who put a high value on education and healthcare are required to pay extra …’, you’re actually equating value with wealth. There may be poor parents who would like to send their children to the same quality institutions that wealthier parents do but can’t afford to, does that mean the poorer parents ‘value’ education less than the wealthier parents?

    The whole point in having universal education is to remove the dependence for the people who will benefit most from education, i.e. children, from the capacity or willingness of their parents to provide for that need.

    A mix of private/public system where ‘funding follows the student’ (I’m assuming funding per child is fixed but private schools set fees and parents have to make up the shortfall) will result in an equilibrium where the wealthy can afford the best education and the poor the worst which undermines the purpose of having public education in the first place, to remove the dependence on educational outcomes on parental income.

    Like derrida says if parents want to give their children a leg up then let them pay for it, there is no need to refund taxes because those taxes are their serve a different purpose, namely, removal of dependence of education outcomes of children on parents income or willingness to spend on education. 

  26.  “But let’s tax those who are rich, not those who happen to value education and health.”

    The main issue with this statement is that “rich” means different things to different people. To the left-leaning, communists and most Australians, “rich” simply means “slightly above the average”. If the average is too low, then bad luck.

    On the other hand, if you increase taxes on the really wealthy, they will simply move to Singapore. And who would blame them?

    What the whole issue boils down to, in the end, is that government has no business running things like “education” or “health care”. Whenever government gets involved, services magically become totally unaffordable. Just like the pink bats and set top boxes bought with our money by a utterly irresponsible and incompetent government.

  27. Why do we even have medicare, public schooling or other welfare programs?  If we get rid of these, then we can almost eliminate income tax.  Think of all the extra money you’d have in your pocket to choose an appropriate PHI policy, schools for your children, and put money away for retirement.

    Every day there seems to be another story about some group getting a free ride from the taxpayers (ie you and me).  This week alone, we’ve had stories about Holden, Alcoa and other “polluters”, and PHI Funds.  I spent the morning listening to dentists argue that we should have an $11b dental scheme to provide universal dental care.  Yesterday, it was refugee groups calling for taxpayer funded holidays back to their homeland.

    Its got to stop somewhere!

    The solution is simple.  Cut tax rates and let people spend their own money on what they think is important.

  28. Thanks for this Stephen, I agree entirely with your piece.  However, I would go further and argue that efficiency, not just fairness, dictates that those who take out PHI should be subsidised.
    The purpose of the government providing public health insurance was to ensure that all individuals are covered by some minimum level of health care.  It was not the intention to take those who otherwise would have been privately insured and put them in the public system.  Yet, by providing the public level of care for free the government distorts decisions because those who have PHI can now receive a public bundle of health services (for free) if they opt out of PHI.
    To restore the relative prices of public and private health care, and therefore minimize the distortion, the government should provide PHI rebates to those who remain with a private insurer.  Only then could the government guarantee a minimum level of care to those who would not have health insurance while not distorting (by as much) the actions of those who otherwise would have.
    Thus, both fairness and efficiency would champion a rebate, while only a strange notion of equity (given the progressive tax system already in place) would support removing the rebate.

  29. Stephen, one last thought before you respond.

    Say I join a health club, where the membership cost is determined be your level of income, in a progressive manner, as per income tax.

    The club has a pool.  It is not heated.  I prefer  a heated pool so I join a swimming club elsewhere, or build a pool at my house.  Am I paying twice for my club membership?

    The rules of the club have evolved to avoid the cost of policing and monitoring part memberships.  I can’t a pay a tiny membership to be allowed to only use the treadmills.  It’s all or nothing.

    Maybe that is not the ultimate example of efficiency according to economic text books, but that’s how the real world operates. 

    The equity argument in favour of the current system derives from a view that education and health are ‘merit goods’. That is, consumption of these goods should not fall below some minimum. We might think (I do) that strong public education assists social solidarity and that even the poor should be able to receive adequate health care.
    More generally, this implies that consumption of education and health should be made more equal than other forms of consumption. A policy that ‘taxes’ people who consume large amounts of education or health makes sense in this context. (As noted by some above, the rich still get their school education and health subsidised – just not as much as the poor).

  31. Someone who knows more about the healthcare sector can correct me if I’m wrong but isn’t the main expense in healthcare (apart from drugs) the fees paid to healthcare professionals?

    So as an alternative how about expanding the supply of doctors/surgeons instead of exacerbating inequality? The professional bodies act like typical rent-seeking groups by inhibiting entry to the profession so there is already grounds for reform based on competition.

    We can expand supply through international students via immigration policy.

    The advantage of increasing supply through international students over already qualified foreign professionals is it solves the adverse selection problem in recognising foreign educational credentials and english proficiency and any objections the professional bodies have based on adverse selection. Furthermore, professional bodies can’t complain that we are lowering the quality of potential doctors/surgeons as supply of top students from around the world is greater than the amount of top students produced locally.

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