Why shouldn't you get the same tax break your boss gets for purchasing health insurance?
President Bush recently proposed to eliminate the tax codes bias toward employer-provided health insurance. His plan would provide a standard deduction of $15,000 for families who purchase health insurance, $7,500 for individuals. The more you think about it, the more sense it makes.
Employer-provided health insurance was the result of government interference in labor markets during World War II. The tax deduction for health insurance, available to businesses but not individuals, has contributed mightily to the waste and unfairness in our health-care system today.
Through tax deduction rules, the government in effect subsidizes employer provided health insurance. As John Goodman of the National Center for Policy Analysis points out, this means that the federal government pays an average 42 percent of the cost of a health insurance premium, but only if provided by an employer. The result is the benefits are not distributed evenly. Households earning over $100,000 per year, because higher earners generally are provided more lavish policies and pay income taxes at graduated rates, receive an average benefit of $2,780 while those earning less than $30,000 receive only $396.
Employer-provided insurance encourages extravagant health spending. Employees are incentivized to negotiate for more benefits, like high dollar health plans, rather than wage increases. Wasteful and unnecessary health services are perceived as free, thus driving up consumption and costs for all.
Under the presidents plan, individual purchasers would receive the same tax benefit as employers. The White House estimates that this would result in 3 million to 4 million additional insured, but other analysts believe that number is extremely conservative. Around one-third of the 42 million uninsured Americans have family incomes above $50,000. The opportunity to buy a bare-bones policy for as little as $5000 and deduct $15,000 from taxable income would be a very attractive option. Even lower-income families paying 15 percent federal income tax and 15.3 percent payroll tax would get a $4,545 subsidy for buying health insurance.
The tax incentive to overconsume would vanish since the benefit would be the same no matter what the premium. Consumers could select policies based on value and cost rather than with the purpose of maximizing tax incentives to spend freely.
The plan has been favorably reviewed by think tanks on the left and right but its critics are undeterred. Paul Krugman in the New York Times, among others, claims its a sop to the rich, when the opposite is clearly the case. He also opines that few of the uninsured would obtain insurance in spite of the substantial financial benefit.
Some profess to worry that Bush's plan would spell the end for employer provided insurance. That may or may not be true. But what would be so bad about disconnecting health insurance from the job? Workers would simply get more of their compensation in cash rather than benefits. Millions more would be insured and no longer subsidized by the rest of us. Meanwhile, we could make career decisions without having to worry about losing or changing health insurance. Finding new doctors every time we changed jobs would no longer be necessary.
U.S. Sen. Hillary Clinton, D-N..Y., with the reliably anti-Bush Times in agreement, charges that they plan would harm safety net hospitals that provide uncompensated care to the indigent. Well, yes. To the extent the plan results in fewer uninsured patients, the demand for uncompensated care would decrease. And that's a bad thing? Maricopa County Medical Center has been striving for years to become a fee-for-service rather than a charity institution. The Bush plan would help it along.
Some from the right have charged this is a covert tax hike. But it doesn't raise net taxes. It simply shifts the tax benefit from those now deducting over $15,000 a year for health insurance to those who currently get no benefit (and in most cases have no insurance) at all.
The plans main defect is probably its sponsor. To partisanship blinded politicians, it seems unthinkable the president could have a sound idea and it panics them to think he may get credit for it. For those with a more pragmatic bent, the plan is worth a hard look.