Forget taxes, Warren Buffett says, the real problem is health care

OMAHA, Neb. >> “The tax system is not crippling our business around the world.”

That was Warren E. Buffett, the chairman and chief executive of Berkshire Hathaway, over the weekend at the company’s annual meeting, known as the “Woodstock of capitalism.”

Buffett, in a remarkably blunt and pointed remark, implicitly rebuked his fellow chief executives, who have been lobbying the Trump administration and Washington lawmakers to lower corporate taxes.

In truth, Buffett said, a specter much more sinister than corporate taxes is looming over American businesses: health care costs. And chief executives who have been maniacally focused on seeking relief from their tax bills would be smart to shift their attention to these costs, which are swelling and swallowing their profits.

It was clarifying to hear Buffett frame things this way. The need for corporate tax relief has become the lodestar of the corner office, with CEOs rhapsodizing over President Donald Trump’s plan to try to stimulate growth by cutting tax rates for businesses.

But as Buffett pointed out, these chief executives are missing the bigger issue — the one that should be their Holy Grail. As a percentage of our gross domestic product, the cost of maintaining our health care system — hospitals, HMOs, doctor visits, prescription drugs, medical devices, insurance companies, Medicare, Medicaid — is rising at an alarming rate. And Corporate America pays a big (and growing) chunk of the bill.

We’re not talking about the cost of health insurance, which is a fraction of the overall cost.

Today’s corporate tax rates, Buffett seemed to suggest, are a distraction, not a true impediment to growth.

“If you go back to 1960 or thereabouts, corporate taxes were about 4 percent of GDP,” Buffett said. “I mean, they bounced around some. And now, they’re about 2 percent of GDP.”

By contrast, he said, while tax rates have fallen as a share of gross domestic product, health care costs have ballooned. About 50 years ago, he said, “health care was 5 percent of GDP, and now it’s about 17 percent.”

His is one of the most cogent arguments for renewing attention on the underlying costs of our health care system — an issue far beyond the debate around the Affordable Care Act and what it is going to look like if it is repealed and replaced.

Buffett said our global competitiveness had fallen largely because our businesses were paying far more for health care — a tax by another name — than those in other countries.

At his annual shareholders’ conference, which drew tens of thousands of people to Omaha, he gave a virtual seminar on the economics of health care that chief executives and lawmakers would be helped by hearing. He demonstrated in stark terms that the constant refrain from the business community about taxes should probably be redirected toward trying to bend the cost curve of health care.

“When American business talks about strangling our competitiveness, or that sort of thing, they’re talking about something that as a percentage of GDP has gone down,” Buffett said. “While medical costs, which are borne to a great extent by business,” have swelled.

He is right: In 1960, corporate taxes in the United States were about 4 percent of GDP, which is probably the best way to measure the burden on businesses. Then the percentage fell steadily, reaching its bottom in 1983 before rising slightly during the last several decades. Today, it is 1.9 percent.

In the meantime, health care costs as a percent of GDP have skyrocketed, significantly diverging with those of other industrial countries. Our health care costs stand at 17.1 percent of GDP, up from 13.1 percent in 1995.

The figure in Germany is only 11.3 percent, up from 9.4 percent during the same period. Japan’s is 10.2 percent, up from 6.6 percent. Britain’s health care costs are 9.1 percent of GDP, up from 6.7 percent in 1995. And China’s is only at 5.5 percent, up from 3.5 percent.

That puts the United States at a material disadvantage far beyond the tax differential. And it harms U.S. companies in particular, since they bear such a big share of those costs. Corporations spend $12,591 on average for coverage of a family of four, up 54 percent since 2005, according to a study by the Kaiser Family Foundation.

“Medical costs are the tapeworm of American economic competitiveness,” Buffett said, using a metaphor he has employed in the past to describe the insidious and parasitic costs of our health care system.

Buffett is a Democrat, but his business partner, Charles T. Munger, is a Republican — and a rare one who has advocated a single-payer health care system. Under his plan, which Buffett agrees with, the United States would enact a sort of universal type of coverage for all citizens — perhaps along the lines of the Medicaid system — with an opt-out provision that would allow the wealthy to still get concierge medicine.

Our bloated health care system, Buffett asserted, is the true barrier to America’s world competitiveness as well as “the single biggest variable where we keep getting more and more out of whack with the rest of the world.”

But people don’t talk about it enough. “It’s very tough for political parties to attack it, but it’s basically a political subject,” Buffett said in reply to a question I had posed.

That’s not to say corporate tax reform won’t help, but it is tiny relative to fixing health care.

Indeed, Buffett said, even if Washington put in place a tax credit for capital investment, he did not think that BNSF — the railroad company he owns, which spends billions on fixing rail tracks — would do its job faster or better because of the potential tax credit.

“I can’t recall sending anything out to our managers saying, ‘Let’s do this because the tax law is going to change,’” Buffett said.

Munger, the vice chairman of Berkshire Hathaway, added: “We’re not going to change anything at the railroad just for some little tax jiggle.”

Neither man, however, is expecting the bigger tax — health care — to be fixed anytime soon.

“On this issue, both parties hate each other so much that neither one can think rationally, and I don’t think that helps, either,” Munger said.