A Note on Financing Health-Care Reform: Some Simple Arguments Concerning Marginal Tax Burden

In Germany economic experts and politicians are proposing a fundamental reform of the health-care system by which the current wage-dependent contributions are replaced by flat-rate insurance premiums. One major reason behind this proposal is the wish to avoid the distortion effects caused by the present form of levying the fees, which works like a wage income tax. The purpose of this note is to show by some simple axiomatics that these hopes may be exaggerated. As social compensation is required, the reform as such does not automatically reduce the distortion effects of the current system. Welfare gains will only be generated by some additional features of the proposed system change, which are briefly discussed at the end of the paper.